Estate & Gift Taxes

A critical part of estate planning is minimizing potential liability for Estate and Gift Taxes. The estate tax, sometimes referred to as the “death tax”, is a tax that is imposed by State and federal governments after the death of an individual, if the total value of the assets owned by the individual exceeds a certain amount. If the total value of the decedent’s assets does not exceed this amount, no estate taxes are due. This tax is referred to as the estate tax because the Executor of the estate is responsible for paying it out of estate funds before distributions are made to the beneficiaries of the estate.The estate tax is due nine months from the date of death.In some cases, the Executor must sell estate assets, such as real estate or stock, to raise the money to pay the estate taxes.If you have been appointed as the Executor or Administrator of an estate, you must take this responsibility very seriously.You cannot make distributions to the beneficiaries of the estate until you have paid the estate taxes.If you distribute the estate assets before the estate taxes are paid, and you have not held back sufficient funds to pay the taxes due, you are personally responsible for paying the taxes. You can ask the beneficiaries to give back some of their distribution to pay the estate taxes, but if they refuse to do so, the money to pay the taxes comes out of your pocket.

The Basic Rules. Most estate taxes are paid after the death of a single, divorced, or widowed individual. Under federal estate tax laws and the laws of most States, there is an unlimited marital deduction that exempts all assets passing from one spouse to another from estate taxes, as long as the surviving spouse is a United States citizen.There are different rules that apply to assets passing to a non-citizen spouse. The marital deduction will be applied to assets passing to a non-citizen spouse, as long as they are held in a marital “Qualified Domestic Trust”, referred to as a QDOT Trust.With proper planning, no estate taxes will be due from the estate of a surviving spouse, no matter how much the surviving spouse inherits from the deceased spouse. In addition to the marital deduction, there is an estate tax exemption. This is the amount of assets that can pass to your beneficiaries free of estate taxes, no matter what their relation is to you. The federal estate tax exemption is determined by federal law, and each State has its own laws. Some States, such as New Hampshire and Florida have no estate tax at this time.Other States, such as Massachusetts and Maine, have an exemption that is based on federal estate tax laws that were repealed in 2002.The Massachusetts and Maine exemption reached the maximum amount of $1,000,000 in 2006.There have been no increases since 2006 and there are no plans for future increases.The laws of the State in which you reside at the time of your death will determine how much must be paid to that State for estate taxes.If you own real estate in another State, you may have to pay estate taxes to that State. As explained below, the amount of the federal estate tax exemption is based on your date of death.The federal estate tax is assessed against your entire estate, no matter where your assets are located. The tax due from the estate of a non- citizen who resides in the United States (a “resident alien”) depends on a number of factors, including the terms of any tax treaties between the United States and the country of which you are a citizen. The federal estate tax is due in addition to the estate tax that may be due to the State in which the decedent resided or owned real estate. The estate of a Massachusetts resident who owned real estate in Maine may have to pay estate taxes to the Commonwealth of Massachusetts, the State of Maine, and the IRS, depending on the size of the taxable estate.The Massachusetts estate tax exemption for a Massachusetts resident who is not survived by a spouse is $1,000,000. If the taxable estate exceeds $1,000,000, the entire estate is subject to Massachusetts estate taxes, with tax rates ranging from 1% to 16%. So technically, Massachusetts has a disappearing estate tax exemption.The estate tax due from the estate of a Massachusetts resident with assets of $999,999 is zero.An estate of $1,000,001 (just two dollars more) will pay $33,200 in Massachusetts estate taxes.Massachusetts does not have a gift tax, so gifting is always a good strategy for a Massachusetts resident.

The Shifting Federal Estate Tax Laws.For a decedent who died in 2009, the federal estate tax exemption was $3,500,000, and the tax rate for an estate that exceeded $3,500,000 was 45%. In2009, an estate of $4,500,000 would have to pay a federal estate tax of $450,000 (45% of $1,000,000). In 2009, the annual tax-exempt gift was $13,000 per person.In addition to unlimited yearly tax-exempt gifts, an individual could gift an additional $1,000,000 during his or her lifetime without liability for gift taxes.The 2009 gift tax rate for gifts in excess of $1,000,000 was 45%.All inherited assets, no matter what the size of the estate, received a “stepped up” cost basis, to the date of death value.In 2010, there is no federal estate tax.An estate of $4,500,000, or even $45,000,000, will owe no federal estate taxes in 2010. The 2010 gift tax rules are the same as the 2009 rules, with the exception of the gift tax rate, which has been reduced from 45% to 35%.In 2010, the cost basis rules for inherited assets changed to limit the amount of inherited assets that can receive a “stepped up” cost basis.See the Article titled “The Shifting Federal Estate and Capital Gains Tax Laws” for more information about this rule.Unless Congress acts this year, the federal estate tax will be back on January 1, 2011, with an exemption of $1,000,000 and a top tax rate of 55% . Using the 2011 tax table , an estate of $4,500,000 will pay $1,770,000 in federal estate taxes.This amount is due in addition to estate taxes due to the State in which the decedent resided at the time of death. The old cost basis rules will be reinstated, with all inherited assets receiving a cost basis step up to the date of death value.

Your Taxable Estate. After your death, the following assets are included in your taxable estate.Your Executor must establish the date of death value of each asset, so that he or she knows whether or not estate taxes will be due.If you are married, one-half of your joint assets are included in your taxable estate and one-half are included in your spouse’s taxable estate.Your Executor must retain a professional appraiser to establish the date of death value of real estate, an interest in a business, corporation or partnership, and collectibles, such as antiques, coin and stamp collections, and other items with a value of $3,000 or more.For bank and investment accounts, the Executor may rely on bank and investment statements.

• Tangiblepersonal property, including all motor vehicles, boats, trailers, jewelry, clothing, the contents of your home, and other real estate, and collectibles
• All real estate, including your home, vacation home, a timeshare, rental properties, and commercial properties, held in your name alone, joint names with another, in a Trust, or in a partnership, LLP, LLC, or any other business entity
• The funds or assets held in any type of bank, investment, or brokerage account, held in your name, joint names with another, or in a Trust
• Stocks, government and corporate bonds and notes, and savings bonds;
• The funds or assets held in all types of retirement accounts, such as IRA’s, 401-K and 403(b) plans, and profit-sharing and similar plans
• The death benefits payable under your life insurance policies and annuities after your death (the total amount paid to the beneficiaries of the policies)
• Your interest in a sole proprietorship, partnership, corporation, LLC, LLP or the business venture
• Assets held in most trusts in which you are named as a beneficiary, except for certain irrevocable trusts
• Lifetime gifts in excess of the tax-exempt gift (currently $13,000 per person per year), whether or not reported on a federal Gift Tax Return (Form 709)

Planning to Minimize Estate Taxes. The good news is that you can reduce, or eliminate, liability for estate taxes with advance planning.A couple with combined assets of $2,000,000 can eliminate liability for Massachusetts estate taxes in 2010.Each spouse can create a separate taxable estate by establishing a Revocable Trust and funding the Trust with one-half of the couple’s combined assets.This will allow each spouse to make use of the Massachusetts estate tax exemption of $1,000,000.Without the two Trusts, all of the couple’s combined assets ($2,000,000) will be included in the taxable estate of the surviving spouse.Under laws in effect in 2010, the couple’s children will have to pay Massachusetts $99,600 for estate taxes.If the couple establishes and funds two Revocable Trusts with assets of equal value, they can eliminate liability for Massachusetts estate taxes.Each spouse will have a taxable estate of $1,000,000, the amount that is exempt from Massachusetts estate taxes. In 2011, this type of planning will be even more important.If the federal estate tax returns in 2011 with an exemption of $1,000,000, it will be possible for a married couple with assets of $2,000,000 or less, to eliminate liability for both Massachusetts and federal estate taxes by establishing and funding two Trusts with assets of equal value.If the couple dies in 2011 without establishing and funding two Trusts, the federal estate tax for an estate of $2,000,000 is $435,000 and the Massachusetts estate tax is $99,600.The couple’s children will pay more than $500,000 for state and federal estate taxes.With proper planning, the children will not have to pay Massachusetts or federal estate taxes.Establishing and funding two Revocable Trusts is a relatively simple technique that can save your family hundreds of thousands of dollars.A single person can reduce estate taxes by making yearly tax-exempt gifts, which are currently $13,000 per person, and making additional gifts of up to $1,000,000.Other options to reduce estate taxes include:

• Establishing Marital Deduction, “Q-TIP”, Credit Shelter, “Q-DOT”, and Generation-Skipping Trusts
• Funding 529 Education Savings Accounts for children and grandchildren
• Making gifts to pay for medical and educational expenses (there is no limit for this type of gift).
• Charitable gifting through outright gifts, Charitable Remainder Trusts, Charitable Lead Trusts, and Charitable Foundations
• Establishing an Irrevocable Life Insurance Trust (ILIT) to exclude life insurance proceeds from your taxable estate and provide funds to pay for estate taxes
• Formation of Family Limited Partnerships, LLC’s, and LLP’s to allow a business owner to make “discounted” gifts to family members
• Changing legal residence to another State to avoid the Massachusetts estate tax

For more than thirty years, Roberta A. Schreiber has worked with clients to implement estate plans that reduce, or eliminate, liability for estate taxes.Roberta will help you determine the value of your taxable estate.If your estate exceeds the applicable estate tax exemptions, she will explain how taxes are calculated and make recommendations to reduce liability for estate taxes.As you can see from the example above, you can save hundreds of thousands of dollars with a relatively simple estate plan.After your documents have been signed, Roberta and her staff will assist you in completing the paperwork to fund your Trusts.If it is not possible to eliminate liability for estate taxes, Roberta will make recommendations for providing the funds to pay for estate taxes, so that a family vacation home or family business will not have to be sold to pay estate taxes.If you would like more detailed information about the current federal and Massachusetts gift and estate tax laws and planning techniques, please call Roberta’s assistant, Jeanne Carabello, to schedule an appointment.