Attorney Maria Baler discusses a Christmas message, your video ideas, and gives a gift tax exemption reminder, for our Smart Counsel for Lunch Series. Please watch and if you have any questions or want to learn more please call us at 781 461-1020.
GIFT tax
‘Tis the Season for Gifting
The end of the year is often a time when people think about making gifts to loved ones for the holidays or for year-end tax planning. Since we are in December, what better time to talk about the Gift Tax?
Here are a few things to know about the gift tax.
- Since there is no gift tax in Massachusetts, residents of the commonwealth need only be concerned about the federal gift tax.
- There are two ‘exemptions’ or ‘freebies’ under the federal gift tax law:
- The Annual Gift Tax Exclusion is the amount that each person may gift to any number of other individuals without any impact on the giver’s Lifetime Gift Tax Exemption. In 2022, the Annual Gift Tax Exclusion amount is $16,000. As of January 1, 2023, the Annual Gift Tax Exclusion amount will be $17,000. Gifts to any one person in a calendar year in excess of the Annual Gift Tax Exclusion amount will reduce the giver’s Lifetime Gift Tax Exemption by the amount in excess of the Annual Exclusion.
- In addition to the Annual Gift Tax Exclusion, each person has a Lifetime Gift Tax Exemption. This Lifetime Exemption is the amount that each person may gift over and above the annual exclusion gifts. In 2022, the Lifetime Exemption is $12,060,000. As of January 1, 2023, the Lifetime Gift Tax Exemption will be $12.9 million.
- There is no limit on the amount you may give to your U.S. citizen spouse free of any federal gift tax. There is an annual exclusion limitation for gifts to non-U.S. citizen spouses. This amount is $164,000 in 2022 and $175,000 in 2023.
- There is no limit on the amount you may pay on behalf of any individual for tuition or medical expenses, provided these payments are made directly to the educational or medical institution.
- There is no gift tax payable on gifts to qualified charities.
The gift tax is not the only tax to take into consideration when thinking about making large gifts; there may be income tax, estate tax, and capital gain tax consequences. And of course, taxes are not the only concern when making large gifts – there may be long-term care ramifications, concerns about a recipient’s ability to handle a large sum, and worries about potential threats to the gift by the recipient’s creditors (divorcing spouse, failed business, lawsuit, etc.). If you are considering making large gifts to family members, talk with your estate plan attorney to make sure you have a good understanding of all of the consequences.
Attorney Suzanne R. Sayward is a partner with the Dedham 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 www.ssbllc.com or call 781/461-1020.
December, 2022
© 2022 Samuel, Sayward & Baler LLC
As the Massachusetts Estate Tax Turns
The Massachusetts estate planning world watched with bated breath this summer as we came closer than ever to increasing the Massachusetts estate tax threshold from $1 million to $2 million. But alas, it was a false alarm.
As you may know, Massachusetts is one of only 11 states plus the District of Columbia to have a separate state estate tax. Among those states, Massachusetts and Oregon are the two states with the lowest estate value that is subject to estate tax – $1 million. If you die a resident of Massachusetts and own assets valued at $1 million or more, you will currently pay tax on the entire value of your estate.
Every year there are bills filed in the Massachusetts state legislature to increase the Massachusetts estate tax exemption. This year, both the Massachusetts House and Senate passed bills that would raise the estate tax threshold from $1 million to $2 million, and it looked like the bills would be reconciled and become law. However, at the last minute, the Governor raised the possibility that a 1986 law would trigger a requirement that the state return to taxpayers over $2 to $3 billion due to the state’s large budget surplus. Needless to say, that put the brakes on any other form of tax relief until things are sorted out.
In the meantime, what’s a middle-class Massachusetts family to do about saving estate taxes? As we all know, if you own a home in this state you are probably at least halfway to the $1 million estate tax threshold without even trying. Add to that the value of some life insurance, bank accounts, investments and/or an IRA or 401k and you are likely over $1 million without even trying.
For married couples in Massachusetts, credit shelter trusts are a go-to estate tax planning strategy which allows up to $1 million of assets to be “sheltered” in trust at the death of the first spouse to die such that those assets will not be subject to estate tax in the estate of the second spouse to die. The surviving spouse can serve as Trustee of the trust and use the sheltered assets, as needed, for the surviving spouse’s health care and living expenses after the first spouse’s death. If a credit shelter trust is created and funded appropriately, and depending on the size of the estate, the estate tax savings is significant. For example, a married couple with $2.5 million in assets would pay $139,000 in Massachusetts estate tax at the death of the second spouse without any tax planning. If a credit shelter trust is in place and funded with $1 million at the death of the first spouse to die, the estate tax payable at the death of the second spouse would be reduced to $64,000, saving $75,000 in estate tax.
For single individuals, estate tax savings involves giving up control of assets, usually in the form of giving assets away to family members, charities or other beneficiaries. Annual exclusion gifts of $16,000 per year per person can be given to as many individuals as desired each year without the need to file a gift tax return or pay any gift tax (unless these gifts exceed $12 million in total under current law). These annual exclusion gifts, especially if given consistently over time, can reduce the value of the assets that will be subject to estate tax at death, and the corresponding tax that will be paid. Gifts can also be given in unlimited amounts to pay tuition or medical expenses for another person. However, before making gifts during life, the gift giver must carefully consider whether they can afford to do so. Future living expenses and care costs are difficult to predict. It may be smarter to retain control of assets to be sure living expenses and care costs in the preferred care setting can be paid, rather than worry about saving estate tax for heirs. If the value of a person’s assets is diminished at the time of death due to spending on living and care expenses during life, the estate tax will be reduced naturally.
However, for single individuals with assets in excess of the estate tax threshold who are confronted with a terminal illness or a situation where death is imminent, deathbed gifts are a useful strategy to reduce estate taxes payable at death. Gifts made immediately before death will reduce the value of the assets on which Massachusetts estate tax will be paid after death. These gifts are possible only if the gift-giver is competent to make the gifts, or has a Durable Power of Attorney that specifically permits gifts to be made.
A few things to keep in mind when contemplating deathbed gifts:
- If checks are written for gifting purposes, those checks must clear the bank account before death in order for the gift to be effective for estate tax purposes, and therefore it is better to make such gifts using bank checks that will withdraw the funds from the account immediately when the check is issued.
- As with any lifetime gift, gifts of appreciated assets transfer the gift-giver’s basis to the gift recipient, which will result in a capital gain tax if the gift recipient sells the gifted asset at a later date. Holding appreciated assets until death under current law will provide a step-up in basis, eliminating any unrealized capital gain. Consideration of the estate tax savings as compared to any future capital gain tax that would be paid is an important consideration in determining whether gifts of appreciated assets make sense.
- A gift tax return may need to be filed post-death to report any gifts made in excess of $16,000 per person.
- Even if gifts are made that reduce the value of the gift-giver’s assets below $1 million, there may still need to be a Massachusetts estate tax return filed and estate tax paid, although the assets given away will not be subject to tax. This is because gifts over $16,000 per person are considered when determining whether the value of the deceased person’s assets was $1 million or more at the time of death and whether an estate tax return must be filed. However, the estate tax due is calculated only on the value of the assets not given away. Although an estate tax return may still need to be filed, the estate tax paid will be less than if the gifts were not given.
Deathbed gifts are a difficult subject, and something that a family may not wish to discuss at such a sensitive time. However, they are a useful strategy for a single person who may have held off on gifting during life for the reasons mentioned above, and whose estate will be subject to estate tax if gifts are not made. It is important to get advice from an estate planning attorney if such gifts are contemplated, to make sure they are made the right way and using the right assets to achieve the most tax savings.
Stay tuned as we remain hopeful that the Massachusetts legislature will move forward to increase the estate tax exemption sometime soon, and make estate tax planning unnecessary for many residents of the Commonwealth.
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 the immediate past President of 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.
August 2022
© 2022 Samuel, Sayward & Baler LLC
Five Proposed Changes to the Estate and Gift Tax Laws
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.
- 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.
- 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.
- 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.
- 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.
- 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