Federal Gift and Estate Taxes. The federal estate and gift tax credit (the "unified credit") increased to $5,490,000 in 2017. Under the new federal tax law, the unified credit more than doubled to $11,200,000 effective January 1, 2018. The credit will continue to increase each year, based on an inflation index. However, this increase is not permanent. In 2026, the credit will return to the 2017 levels, adjusted for inflation, unless Congress votes to keep the higher credit in effect. For that reason, many accountants and tax attorneys are advising their clients to make use of the higher credit now by making lifetime gifts. There is still an unlimited marital deduction and Aportability provisions@, which allow the surviving spouse to make use of the deceased spouse's unused exemption. A married couple can now pass up to $22,400,000 to their children, grandchildren, and other beneficiaries free of federal estate taxes. If an estate exceeds the exemption, the tax rate imposed on the excess assets is 40%.
The federal tax-exempt gift also increased in 2018, to $15,000 per person per year. You can make this yearly gift to as many individuals as you wish. As long as the total gifts you make to an individual in a calendar year do not exceed $15,000, there is no need to report these gifts on a federal Gift Tax Return, and these gifts do not use any of your federal unified credit. The person who receives the gift does not have to declare it as income. Tax-exempt gifting is an excellent way to reduce your taxable estate. Since the Massachusetts estate tax exemption is still stuck at $1,000,000, tax-exempt gifting is a very effective planning tool for a Massachusetts resident. You can also make unlimited gifts to pay the educational or medical expenses of your children, grandchildren, or other individuals. One of my clients paid off his daughter's medical school loans. This gift reduced both his federal and Massachusetts taxable estates, but he didn't really care about the tax planning aspect of this gift. What mattered was the look of happiness and relief on his daughter's face when she found out that her loans had been paid off.
Each state has its own gift and estate tax laws. Some states such as New Hampshire and Florida have no gift or estate tax at this time. Maine, Rhode Island and Vermont have an estate tax and Connecticut has both a gift tax and an estate tax. The laws of the state in which you reside at the time of your death will determine if estate taxes must be paid to that state. If you reside in one state and own real estate in another state, you may have to pay estate taxes in one, or both, states.
For Massachusetts residents, there is an estate tax for an estate that exceeds $1,000,000, unless the decedent is survived by a spouse. If the decedent is survived by a spouse, the marital deduction eliminates the estate tax on all assets passing to the spouse. If the taxable estate exceeds $1,000,000 and there is no surviving spouse, the entire estate is subject to Massachusetts estate taxes, with tax rates ranging from 0.8 to 16 percent. This is a "disappearing exemption." If the value of the taxable estate after deductions is $999,999, no estate taxes are due. If the taxable estate is $1,000,001, the estate will owe $33,200. Most people are not aware that Massachusetts has an estate tax. They usually don't learn about it until a family member dies. At that point, it is too late to do any planning to reduce or eliminate liability for estate taxes. Massachusetts does not have a gift tax. That makes lifetime gifting an excellent way to reduce or eliminate liability for Massachusetts estate taxes.
Attorney Roberta A. Schreiber has more than 30 years of estate planning experience. She can help you create an estate plan that reduces your estate and gift tax liability and transfers your assets to the next generation in a financially beneficial manner. Contact our North Reading, Massachusetts office today to schedule a consultation. We represent clients throughout the area in Middlesex, Essex and Suffolk Counties, including North Reading, Reading, Wakefield, Stoneham, Winchester, Wilmington, Tewksbury, Andover, North Andover, Peabody, Salem, Lynnfield, Cambridge, and Boston.
Federal Estate Tax Planning
The federal estate tax is assessed against your entire estate, no matter where your assets are located, with the exception of real estate located outside the country. The federal estate tax is due in addition to the estate tax that may be due to the state in which you reside at the time of your death and any other state in which you own real estate. There are deductions that can reduce your federal taxable estate. The unlimited marital deduction eliminates the gift and estate tax due on all assets passing from one spouse to the other. All amounts paid to charitable organizations are exempt from estate taxes. Estate taxes paid to any State can be deducted from your federal taxable estate. The "portability provisions@ make it easy for a married couple to make full use of the federal exemption available to each spouse. If the first spouse to die does not make full use of the federal estate tax exemption available to his or her estate, the surviving spouse may apply the unused portion of the first spouse's estate tax exemption to reduce estate taxes, in addition to making full use of his or her exemption.
Example: John died in 2017 with a taxable estate of $4,000,000. He had a simple Will, leaving everything to his wife, Grace, so no federal or Massachusetts estate taxes were due. The unlimited marital deduction eliminated estate taxes. His estate used none of his federal or Massachusetts estate tax exemptions. Grace, who had inherited $8,000,000 from her father in 1998, had a taxable estate of $10,000,000. After John's death, her estate increased to $14,000,000. When she died in 2018, no federal estate taxes were due from her estate. She was able to use John's unused federal exemption ($5,490,000), plus her exemption ($11,200,000), giving her a total federal exemption of $16,690,000. Her total federal exemption was more than the value of her taxable estate, so no federal estate taxes were due. Massachusetts was a different story. Grace's entire estate was subject to Massachusetts estate taxes. Her unhappy children had to write a check in the amount of $1,706,800 to the Commonwealth of Massachusetts. What could John and Grace have done to prevent this?
Tax-Exempt Gifting. When Grace inherited $8,000,000 from her father twenty years ago in 1998, she and John could have started a tax-exempt gifting program to their four children, their spouses, and their sixteen grandchildren (24 family members). Under federal gift tax laws, she and John could make yearly tax-exempt gifts to these 24 family members. This would have reduced the size of their taxable estates.
Example: In 1998, the tax-exempt gift was $10,000. If Grace and John made maximum tax-exempt gifts to each of their children, their spouses, and their grandchildren in 1998, together they could gift $480,000 ($10,000 x 24 x 2) without having to report the gifts. If they continued to do this in following years, they could have shifted the entire amount that Grace inherited from her father to younger family members in eight to nine years (the tax-exempt gift increased by $1,000 per person in 2002, 2006, 2009, 2013, and 2018). They could do this in each following year, until they felt that they had reduced their estate enough. If they stopped when their combined assets had been reduced to $2,000,000, the Massachusetts estate taxes due from Grace's estate would have been $99,600.
When Grace and John reduced their combined assets to $2,000,000, they didn't feel comfortable gifting any more money but they didn't like the idea of their children paying estate taxes. They consulted their attorney, who advised them to establish two Revocable Trusts (one for each of them) and to divide their assets equally between the two Trusts. That gave each of them a separate taxable estate of $1,000,000, totally eliminating federal and Massachusetts estate taxes. While most of us do not have this much money to gift, this is an example of how much you can save with advance planning.