Smart Counsel,
For Life

Request a Consultation

Wills • Trusts • Elder Law • Long-Term Care Planning • Estates

Estate Tax

Five Proposed Changes to the Estate and Gift Tax Laws

by

After the spending spree necessitated by the Coronavirus (think CARES Act, stimulus payments, vaccine development support, etc.), coupled with President’s Biden infrastructure building plans, it is not surprising that Congress has turned its focus toward revenue raising as we emerge from the pandemic.  Revenue raising proposals usually mean finding a way to collect more tax dollars.  At the end of March, Senators Bernie Sanders and Sheldon Whitehouse introduced a bill they call, “For the 99.5 Percent Act” which proposes sweeping changes to existing estate and gift tax laws.  Read on for five of the most significant proposed changes.  

  1. Reduce the current $11.7 million federal ESTATE tax exemption to $3.5 million.  For the vast majority of Americans, the federal estate tax (the ‘death tax’) has been a non-issue since 2010 when the exemption was raised to $5 million and indexed for inflation.   The exemption is the amount that each person is permitted to pass on free of any federal estate tax at death.  Because $5 million was not high enough for some people, the exemption was increased to $11 million under President Trump, albeit with a sunset provision that reduced the exemption back to $5 million at the end of 2025.  The Sanders/Whitehouse proposal calls for rolling that exemption back to $3.5 million and indexing it for inflation.  While this rollback (if it happens) will mean that more estates will be subject to federal estate tax, the vast majority of estates will not be impacted because most Americans do not have an estate worth more than $3.5 million ($7 million for a married couple).  Those folks whose estate is more than the proposed reduced exemption amount should keep an eye on this legislation and explore their options for undertaking some planning before the end of 2021.
  2. Increase the rate of taxation on federally taxable estates.  Under the current federal estate tax law, taxable estates which exceed the exemption are subject to tax at the flat rate of 40%.  That means that on a $20 million estate there will be federal estate tax payable of $3,320,000 ($20 million – $11.7 million x .40).  Under the Sanders/Whitehouse proposal, the estate tax rate would be increase to 45% for taxable estates valued between $3.5 million and $10 million, 50% for estates over $10 million but less than $50 million, 55% for estates between $50 million and $1 billion, and 65% for estates over $1 billion.  While these rates are super high, the number of estates subject to them will be very small.
  3. Limit total annual exclusion gifts to two-times the amount of the annual exclusion.  The annual exclusion amount is the amount that each person may gift to any number of people in any calendar year without having to file a gift tax return and without reducing that person’s lifetime gift tax exemption.  In 2021 that amount is $15,000 (a base amount of $10,000 indexed for inflation).   For example, under the current law, I can give up to $15,000 to each of my two children, to my seven nieces and nephews, to my two siblings, and to my mailman, if I am so inclined, without any impact on my lifetime gift tax exclusion.  There is no limit on the number of people to whom I can gift up to $15,000 in any calendar year.  To the extent I give more than $15,000 to any one person in any one calendar year, I will ‘chip-away at’ my lifetime gift tax exemption.  For example, if I gave my child $115,000 during the year, I will have made an excess gift of $100,000.  This will reduce my lifetime exemption from its current $11.7 million to $11.6 million ($11,700,000 – $100,000 = $11,600,000).Under the proposed law, annual exclusion gifts would be limited to two-times the amount of the annual exclusion.  That means that if the annual exclusion amount is $15,000, I could give each of my two children $15,000 in one year but could not give any other gifts in that year without reducing my lifetime gift tax exemption.
  4. Reduce the current $11.7 million lifetime GIFT tax exemption to $1 million.   Under the current federal gift tax law, each person has an $11.7 million lifetime gift tax exemption, which is the amount they can give away during their lifetime before any gift tax must be paid.  The proposed law would reduce the gift tax exemption to $1 million, meaning that cumulative excess gifts of more than $1 million during someone’s lifetime will incur gift tax.  The reduction of the gift tax annual exclusion amount coupled with the proposal to reduce the federal gift tax exemption from its current $11.7 million to $1 million is likely to significantly curtail estate tax planning in the future if these provisions are enacted, since tax planning done to reduce the size of your taxable estate often involves gifting assets.  People who have large estates and who want to undertake planning to reduce their federal estate tax should do so before the end of 2021 in order to take advantage of the current $11.7 million gift tax exemption amount, which will be reduced to $1 million under the new law.
  5. Limit generation-skipping transfer trusts to a term of 50 years.  The generation skipping transfer tax (GSTT) is a tax imposed on transfers to ‘skip’ beneficiaries (think grandchildren).  The GSTT is in addition to the federal estate tax and is assessed at the same high rate.   In order to mitigate the harshness of the tax, there is an exemption from the GSTT which is currently equal to the amount of the federal estate tax exemption.  That means that under the current law a person with an $11.7 million estate could leave his entire estate to his grandchildren and there would not be any GSTT payable.  Typical GSTT planning involves creating trusts for multiple generations to shelter family wealth from diminution from the estate tax.  In this way, the inheritance from grandpa may escape estate taxation for 100+ years, preserving family wealth for future generations.  The Sanders proposal would limit the term of such trusts to 50 years, requiring the payment of estate tax every 50 years.

The above changes are only proposals and we don’t know what the final law will be.  The revenue raising plan submitted by President Biden does not contain these provisions so perhaps none of them will be enacted.  However, if you have an estate that you anticipate would be subject to federal estate tax if these proposals are enacted, and if you are interested in exploring options for reducing the tax in the event one or more of th`ese proposals become law, you should take action soon.  

Attorney Suzanne R. Sayward is a partner with the Dedham law firm of Samuel, Sayward & Baler LLC which focuses on advising its clients in the areas of estate planning, estate settlement and elder law matters. She is certified as an Elder Law Attorney by the National Elder Law Foundation, a private organization whose standards for certification are not regulated by the Commonwealth of Massachusetts.  This article is not intended to provide legal advice or create or imply an attorney-client relationship. No information contained herein is a substitute for a personal consultation with an attorney. For more information visit our website at www.ssbllc.com or call 781/461-1020.

May, 2021

© 2021 Samuel, Sayward & Baler LLC

Five Taxes your Heirs May Pay (or not) After your Death

by

Most people understand that estate planning and inheritance planning involves making sure that people you trust can make decisions for you if you become incapacitated during your lifetime, and making sure your assets go where you want them to go when you die.  It should also involve identifying and planning to minimize the five different types of taxes that may be payable by your heirs after your death.

  1. Federal Estate Tax – When a United States citizen or resident passes away, the estate of the deceased person may be required to file a federal estate tax return and may have to pay a federal estate tax. The estate tax is a one-time tax that is payable after death on the value of your “estate”, which is essentially any assets you own or control at the time of your death.  A federal estate tax return is due on the nine-month anniversary of the deceased’s date of death, and any estate tax due must be paid by that time to avoid interest and penalties from accruing.

The good news for most people is that the federal estate tax exemption is $11.58 million as of January 1, 2020 ($11.4 million in 2019).  This means that if the value of the assets you own at the time of your death (your so-called “taxable estate”) is less than the exemption amount, you do not have to file a return or pay a federal estate tax.  Estate tax is also not payable on the value of assets left to your surviving spouse or to charity.  The federal estate tax exemption is adjusted annually for inflation.  On December 31, 2025, the federal tax law that gave us such a large federal exemption amount will “sunset” unless Congress takes action.  Upon sunset, the federal estate tax exemption amount will revert to the prior level, adjusted for inflation, most likely a little more than $5 million.

If your “estate” is greater than the federal estate tax exemption, speak to your estate tax planning attorney and tax advisors about planning steps you can take to reduce or eliminate any federal estate tax your estate may have to pay.  Don’t forget about trusts when it comes to estate tax –  certain type of trusts, as well as gifting strategies, including charitable giving, can be effectively reduce the estate tax payable at death.

Keep in mind that even if you do not owe federal estate tax at death, it may still be advisable for the Personal Representative of your estate (formerly known as your Executor) to file a federal estate tax return so that your surviving spouse’s estate can take advantage of your unused federal estate tax exemption.

  1. State estate tax – If you live in Massachusetts, you live in one of 18 states plus the District of Columbia that has a separate state estate or inheritance tax. If you die a Massachusetts resident, your estate must file a Massachusetts estate tax return if the value of your estate is $1 million or more.  This is a relatively low threshold.  For many residents of Massachusetts who own a home, have a retirement account of significant value, and own life insurance, this is a tax they should be aware of and plan for.

There are several bills pending in the state legislature that would raise the Massachusetts estate tax exemption amount, however none of them has succeeded to date.   Until the exemption amount is increased, as with the federal estate tax, the Massachusetts estate tax can be reduced if not eliminated with thoughtful estate tax planning with the advice of your attorney.  As with the federal estate tax, a Massachusetts estate tax return must be filed and any tax paid within nine months after death.

  1. Personal Income Tax – No matter what time of year you pass away, final state and federal income tax returns will have to be filed to report the income you earned or received during the year of your death from January 1 through the date of your death. It is important to keep good records of your income and deductions, and to keep your tax records organized, so that your heirs or others who are settling your estate will be able to provide your tax preparer with the information necessary to prepare your final personal income tax returns, and so that those returns can be filed timely to avoid penalties and interest that may accrue and be payable by your estate.

It is also important to keep your personal income tax filings up to date while you are alive.  Collecting information necessary to file the deceased’s final personal income tax returns is hard enough.  Trying to reconstruct past years’ records in order to file returns that are past due is difficult, time consuming, and can be very expensive when interest and penalties for unpaid taxes start to add up.  Keep in mind that the Personal Representative of your estate can be personally liable for any unpaid tax liabilities. This is not a legacy anyone should leave.

  1. Fiduciary Income Tax – The fiduciary income tax is a little-known income tax payable by estates and trusts on income earned during the year. For example, if you die owning 1000 shares of Exxon stock and a three-family rental property, those assets are part of your “estate” at your death. The dividend income received on the Exxon stock and the rental income paid by the tenants residing in your rental property after your death is “income” earned by your estate.  This income must be reported on a fiduciary income tax return each year your estate remains open.  If these assets are owned by a trust, income earned on trust assets is also reported on a fiduciary income tax return.

Fiduciary income tax can be very steep, considering that the tax brackets are such that estates and trusts reach the highest federal income tax bracket of 37% at only $12,750 of income.  To avoid paying unnecessary fiduciary income tax, it is best to plan with your attorney to ensure your estate will be administered efficiently, and that any trust you create is structured properly with tax savings in mind, even if assets will stay in trust for the benefit of your heirs.

  1. Income Tax on Retirement Accounts– The government kindly allows us to save money in our retirement accounts – IRAs, 401ks, 403bs – without paying federal or state income tax on the funds contributed to those accounts. The end result is that many people have large “qualified” retirement accounts on which income tax has never been paid.

The tax laws require money to be withdrawn from retirement accounts, and state and federal income tax paid, when we reach a certain age, or within a certain period of time after the account owner dies.  The SECURE Act, signed into law by President Trump just before Christmas as part of the budget bill, makes significant changes to these rules.

If you have large retirement accounts, it is important to understand the changes made to these tax rules by the SECURE Act, how much your beneficiaries will have to withdraw from these accounts and when, and to plan to minimize the income taxes payable on those distributions if possible. This is not as easy as it used to be now that the SECURE Act is law; however, there are still planning options to consider that can have a big impact on how much of those accounts may be lost to income taxes after your death.

Death and taxes (and estate tax and income tax planning!) are not most people’s favorite topic (present company excluded), however you can save your heirs a lot of money, and maximize the inheritance they receive, if you take the time to understand the taxes that are potentially payable at death and take steps to plan to minimize or eliminate these taxes before they become due.

Maria Baler, Esq. is an estate planning and elder law attorney and partner at Samuel, Sayward & Baler LLC, a law firm based in Dedham. She is also a former director of the Massachusetts Chapter of the National Academy of Elder Law Attorneys (MassNAELA), and currently serves on the Board of Directors of the Massachusetts Forum of Estate Planning Attorneys. For more information, visit www.ssbllc.com or call (781) 461-1020. This article is not intended to provide legal advice or create or imply an attorney-client relationship. No information contained herein is a substitute for a personal consultation with an attorney.

January, 2020

© 2020 Samuel, Sayward & Baler LLC

What will the Election Mean for the Estate Tax?

by

Sue_144pxThe federal estate tax, sometimes called the ‘death tax’ is an ongoing topic of political debate, and of course the current presidential candidates all have a position on the estate tax.  First, what is the federal estate tax?  The estate tax is a tax imposed on the value of assets a person owns at the time of death.  A person’s taxable estate may also include the value of assets given away during lifetime.  Currently, the federal estate tax rate is a flat 40% on the amount in excess of the allowable exemption which sounds ridiculously high, right?  However, each person is entitled to pass on $5,450,000 worth of assets free of estate tax in 2016.  Further, the amount of the exemption is indexed for inflation so it goes up every year.  In addition, everything a person leaves to his or her spouse passes free of estate tax regardless of the amount. This means a married couple can leave almost $11 million without any federal estate tax!  Not too shabby.

Here’s how the four major presidential candidates would change that if they had their way. .

Hillary Clinton: the Democratic candidate would reduce the exemption amount to $3.5 million per person and would increase the rate from 40% to 45%.

Donald Trump: the Republican nominee would eliminate the federal estate tax entirely.

Gary Johnson: the Libertarian Party’s candidate wants to eliminate the current tax system (and the IRS!) entirely, including the federal estate tax.

Jill Stein: the Green Party representative would change the name from ‘Estate Tax’ to ‘Aristocracy Tax’ and would increase the rate of tax on inheritances over $3 million to at least 55%.

Keep in mind that each state is free to enact its own estate tax laws and many, including Massachusetts, have done that.  Massachusetts imposes an estate tax on taxable estates in excess of $1 million and applies a graduated tax rate which ranges from 0% to 16%.

Since any change in the federal estate tax needs to be enacted by Congress, I am not going to get too excited about any of these proposals – if past conduct is the best indicator of future performance, then we can be pretty confident that nothing about the current federal estate tax is going to change!

September 2016

Happy Anniversary to the Federal Estate Tax!

by

Maria_144pxIt may (or may not) interest you to know that the federal estate tax has been with us for 100 years, since it was enacted in 1916 by Congress to boost revenues in anticipation of the country’s participation World War I.  Forms of inheritance or estate tax had been around for brief periods prior to 1916 to finance earlier wars, but unlike previous incarnations of the tax, this one stayed in place.

The estate tax is a tax paid at death, by the estate of the deceased, before assets are distributed to heirs.  The estates of deceased Massachusetts residents are potentially subject to both the federal estate tax as well as a separate Massachusetts estate tax.  Whether or not your estate will pay tax depends on the value of the assets you own or in which you have an interest on the date of your death.

Unlike 2016, the 1916 federal estate tax had a top rate of 10% and an exemption amount of $50,000.  Today, the combined federal estate and gift tax “applicable credit amount” is $5.45 million per person (and is annually adjusted for inflation).  This means that every U.S. Citizen can give away $5.45 million, either by making lifetime gifts or leaving assets to heirs at death, without paying a federal estate tax.  If the value of your lifetime taxable gifts and assets left to your heirs at death exceeds this amount, the federal estate tax is imposed at the rate of 40% on amounts over the applicable credit amount.  For a riveting, although dated, history of the estate tax, read the IRS Publication: The Estate Tax: Ninety Years and Counting.

Like 1916, today’s federal estate tax does not affect many people because the estate tax exemption is so high.  In 2013, approximately 2.6 million people died in the United States, but only 4,700 of those people filed a federal estate tax return.

If you are among the lucky few to have an estate large enough to be subject to the federal estate tax, make sure you consult your estate planning attorney about what you can do to minimize the impact of the federal estate tax on your estate and your heirs, as well as ensure that you have a plan for how any estate tax due will be paid at your death.

Coincidentally, 2016 marks the 40th anniversary for the Massachusetts estate tax, which was enacted in 1976 as the successor to the previous Massachusetts inheritance tax.  Stay tuned for a celebration of that anniversary with some interesting facts about the Massachusetts estate tax in my next blog post!

July 2016

Wills • Trusts • Elder Law • Long-Term Care Planning • Estates

©2021 Samuel, Sayward & Baler LLP. All Rights Reserved. The information presented on this website should not be construed to provide legal advice, nor does it constitute the formation of an attorney/client relationship. Read the disclaimer.