If you have a modest to large estate, or you hope to have one eventually, you need to consider the impact federal gift and estate taxes will have on that estate when you die. Without planning ahead for the possibility that your estate will be subject to the tax, your estate could lose a significant portion of its value to taxation. Ultimately, it will be your beneficiaries who pay the price for your failure to plan ahead. The good news is that there are a number of estate planning tools and strategies that can help you keep your assets in the family and avoid estate taxes in Massachusetts.
Understanding Federal Gift and Estate Taxes
Federal gift and estate taxes are potentially levied on the combined value of all applicable gifts you made over the course of your lifetime couples with the value of the assets owned by you at the time of your death. Almost all gifts you made during your lifetime count toward federal gift and estate taxes. Likewise, all assets you own at the time of your death, including both real and personal property as well as tangible and intangible assets, count toward the value of your estate. As a general rule, the more you own at the time of your death, the larger your potential tax obligation will be. By way of illustration, imagine that you gifted assets valued at $3 million prior to your death and left an estate valued at $7 million at the time of your death, you would have $10 million potentially subject to federal gift and estate tax at a tax rate of 40 percent. Without any further exemptions, exclusions, or deductions, your estate would lose a whopping $4 million to federal gift and estate taxes. Because that tax obligation must be paid before estate assets can be transferred to the intended beneficiaries or legal heirs of the estate, your loved ones are the ones who will ultimately lose out if your estate gets hit with a large estate tax obligation.
Massachusetts Estate Taxes
Along with the threat of a hefty federal gift and estate tax obligation, if you are a resident of the Commonwealth of Massachusetts your estate is even more likely to incur a state bill for estate taxes. Massachusetts is one of a handful of states that imposes a state level estate tax on estates probated within the state. Although the tax rate is lower (8-16%) than its federal counterpart, the exemption limit is also much lower in Massachusetts, meaning more estates are subject to the tax.
How Can You Avoid Paying Estate Taxes in Massachusetts?
Working with an experienced Massachusetts estate planning attorney is the key to reducing your estate’s tax liability. Some common estate planning tools and strategies used to accomplish that goal include:
- Lifetime Exemption – every taxpayer is entitled to exempt from federal gift and estate taxes up to the lifetime exemption limit which was set at $5 million back in 2012 but is adjusted annually for inflation. For 2016 the lifetime exemption limit is $5.45 million, meaning only estate assets that exceed that amount will be subject to federal estate taxes. The exemption limit for Massachusetts estate taxes, however, is just $1 million and it is not indexed for inflation. In the example above, $4.55 million would remain vulnerable to federal taxes after applying the lifetime exemption while $9 million would incur Massachusetts estate taxes.
- Annual Exclusion – this is an excellent tax avoidance strategy for federal estate taxes; however, it requires you to think ahead. The early you start using the annual exclusion the more assets you can shield from estate taxes. The exclusion allows a taxpayer to make annual gifts valued at up to $14,000 to an unlimited number of beneficiaries tax-free. Married couples may use “gift-splitting” to make gifts valued at up to $28,000 each year. Best of all, gifts made using the annual exclusion do not count toward your lifetime exemption limit. If you started using the exclusion now to make gifts to your two children and four grandchildren for the next ten years, you could transfer $840,000 out of your estate tax-free.
- Trusts – trusts can also be used as part of a tax avoidance strategy; however, the type of trust you will need will depend on a number of factors which is why you should work closely with your Massachusetts estate planning attorney when creating your estate plan.
If you have additional questions or concerns regarding estate taxes in Massachusetts, contact the experienced Massachusetts estate planning attorneys at Debruyckere Law Offices by calling (603) 894-4141 or (978) 969-0331 to schedule an appointment.