Estate Taxes – A Taxing Situation
As the saying goes, “nothing is certain except for death and taxes”. While this may be true, it is uncertain at this time as to what the estate tax situation will be both for Federal and Massachusetts purposes.
In 2022, the Federal Law is that there is no estate tax due between spouses so long as the spouses are U.S. Citizens. This is called the unlimited marital deduction which allows a spouse to leave unlimited amounts of funds to another spouse without any tax being due at the first death. Each spouse has an exemption of $12.06 Million that can be left to non-spouses at death, and this amount is in addition to what is left to a charity since the charitable deduction reduces the amount that would be assessed in an estate. Basically, this gives a married couple a total exemption of over $24 Million that may be left to their children or other friends or relatives. Also, at the current time, if a person dies leaving all assets to their spouse, due to the marital deduction, there is no tax due, but if an estate tax return is filed within certain time limits, the surviving spouse may claim the exemption of the predeceased spouse so that when he or she dies, the exemption will be the full $24 Million. This is called portability, and this portability exemption is available so long as the estate tax return is filed for the first spouse to die within five years of the predeceased spouse’s dated of death. This time frame has recently been extended, but it always is best to file the return as soon as possible relative to the determination of the values of the estate upon the first death.
Filing for portability is important in estates even if the estate is not in the range of $24 Million. This is because the current Law of the $12 Million exemption is planned to be reduced to $5 Million (adjusted for inflation as of 2010), so an estimate would be that a person dying in 2026 will have the exemption of approximately $6 Million. It is unknown as to what will happen in 2026 based on what the Congress, the President, and tax laws are going to be at that time, but it is hopeful that if a person does claim the portability exemption at this time, after 2026, that exemption would carry over to the surviving spouse even if the exemption is reduced in 2026 and thereafter. Of course, there have been proposals in the past to eliminate estate taxes, but it is unknown as to what will occur between now and the time of the enactment of a new law.
Until 2026, the exemption is indexed for inflation, so the exemption in 2021 was $11.7 Million which increased to $12.06 Million in 2022, and it would be estimated that the exemption would be increased again in 2023 based on the current cost of living indicators.
The Massachusetts exemption differs significantly than that of the Federal Government. While similar to the Federal Government, there is no tax between spouses, the similarities end there. There is no portability election for Massachusetts, and the exemption is quite different. Unlike the Federal Government, the tax is assessed on assets only above the threshold (currently $12.06 Million), Massachusetts provides an exemption of $1 Million. If the estate is less than $1 Million, there is no tax, but once the exemption of $1 Million is exceeded, taxes are assessed on all assets back to the first dollar. The rates in Massachusetts rise from 3% up to 16% on a multi-million-dollar estate. Therefore, the exemption basically disappears, and the exemption will be lost once the threshold is exceeded. If a single person has more than $1 Million, there will definitely be an estate tax if all assets are included in the estate and the person dies as a resident of Massachusetts. However, if the person were to gift assets away, since Massachusetts has no gift tax, the assets are then excluded from the estate, but the remaining assets that the decedent owns will be taxed, but perhaps at a lower rate on fewer assets, thus reducing the tax liability. In some cases, however, it may be beneficial to pay an estate tax, as when a person dies, the value of the assets includable in the estate receive what is known as a step-up in basis, thus the beneficiaries receive the property at a higher value. For instance, if Apple stock is purchased at $10.00 a share and the stock is currently $150.00 a share, upon death, the beneficiaries receive the Apple stock at the date of death value of $150.00 a share, so if the stock is sold, there will be capital gains or losses based on that amount, not on the original purchase price. However, the trade off is that there will be an estate tax due (perhaps only to Massachusetts) on the value of all assets as of date of death.
In addition, if a married couple has greater than $1 Million, they can shelter a significant portion of their estate. If all assets pass from one spouse to the surviving spouse at death, there is no estate tax due, but the exemption of $1 Million on the first spouse’s estate is lost, and the second spouse will have greater than $1 Million so there will also be a tax due on all assets on that time. By having each spouse create a Trust for the other spouse, if each spouse has $1 Million or less, then the funds can be held in Trust for the benefit of the surviving spouse so that their surviving spouse will in fact have access to the assets during their lifetime. Upon each spouse’s death, so long as each spouse has less that $1 Million, they can shelter the $2 Million from being taxed, thus saving approximately $100,000.00 in estate tax for the beneficiaries.
In early 2022, it was proposed to increase the exemption in Massachusetts to $2 Million per decedent and provide the obligation to pay tax on only the amount above $2 Million. Unfortunately, at the end of July, the law was not passed, and we are still dealing with the antiquated exemption of $1 Million which disappears, thus making Massachusetts one of the least favorable states in which to die. It is hopeful that Massachusetts will in fact pass legislation increasing the exemption bringing our state into the majority of states which have lower estate or inheritance taxes and higher exemptions. Nevertheless, there are many opportunities to save on taxes by gifting, setting up charitable Trusts, or divesting life insurance, and perhaps acquiring assets that will not be taxable by Massachusetts. As always, it is best to consult with a lawyer, accountant, and financial advisor to be sure that the plan which is established will be flexible and provide the tax savings for the beneficiaries.
Hyman Darling, Esq.