State and Federal Estate Tax
Here are the 3 most important things to know and remember about estate taxes:
1. They are calculated based on all of the property you own or control at the time of your death. This can include, for example, proceeds from life insurance. This is so although beneficiaries generally do not owe income taxes on life insurance proceeds.
2. Estate taxes are due and payable within 9 months of the date of death. Whether or not your property is liquid (e.g. real estate or a family business) , if you have a taxable estate the IRS and/or Massachusetts Department of Revenue will assess a tax on your estate as of the date of death and payment becomes due in 9 months!
3. These taxes are the only taxes in our system that are purely VOLUNTARY! What we mean by this is that estate taxes can be substantially mitigated, if not entirely eliminated; but doing so requires pro-active planning. You cannot get out of paying income taxes . . . but estate taxes can legitimately be avoided.
Federal Estate Tax and Exemptions
Federal Estate Taxes are currently set at 40% and for 2017, there is an exemption amount of $5,490,000.00. This amount has been indexed to inflation and will adjust accordingly. Federal estate taxes are usually paid on the passing of the second spouse, if married. However, in order to receive the complete amount of federal exemption, an estate tax return may still need to be filed for the first spouse.
Although the future of a Federal Estate Tax is uncertain with the results of the recent election, the Federal Estate Tax only impacts a very small portion of the population. However, estate taxes collected at the state level will not be affected by a substantial modification or repeal of the Federal Estate Tax. Regardless of whether or not you are required to pay a Federal Estate Tax, if you have a taxable estate at the state level you will still be required to file a Federal Estate Tax return.
Massachusetts Estate Tax
MA Estate Taxes are currently ”decoupled” from the Federal law, which means that they are no longer calculated, as they used to be, based on the amount of the federal estate tax. Today, any estate with a value over $1 million (and remember . . . this can include life insurance if it is not removed from your taxable estate) may be subject to estate tax at the State level. The current rate is progressive and graduates up to 16%. Many people forget about the state estate tax or have old trusts that do not account for the current differences between the federal and the Massachusetts estate tax amounts, which may result in an unnecessary state estate tax being assessed upon the death of the first spouse to die. I therefore strongly advise you to have your old trusts reviewed to make sure that your spouse or other heirs will not have to pay any unnecessary taxes.
Other States
Property situated in other states may be subject to that state’s estate or inheritance taxes at death. Each state has different rules. My office works with a network of attorneys nationally to determine whether such taxes may become due and how to plan for them.
Preparing Estate and Gift tax Returns
Attorney Erik W. Boos holds a Master of Laws (LL.M.) in taxation and is knowledgeable regarding estate, generation-skipping and gift tax liability and filing requirements. I prepare Federal and Massachusetts estate tax returns, as well as Gift Tax returns. It has been my experience that the attorneys who draft your estate plans or have counseled you regarding gifting, are often the ones best able to prepare those returns. For more information, please contact my office.