Estate taxes in 2016: Tips for Massachusetts residents

Federal and state estate taxes can apply when assets are transferred. These rates can change every year.

Estate planning is a way to help organize your estate. It allows the owner to review all of his or her assets and determine the best way to protect them for future generations. In some cases, this can include opportunities to reduce tax obligations. One tax to plan carefully for is the estate tax.

Estate taxes are applied to the gross estate upon the owner's death. The gross estate includes all property, such as annuities, life insurance proceeds, real property and other tangible items as well as certain gifts. Proactive planning can reduce the taxes that are taken from the estate during this transfer.

Federal estate tax changes in 2016

The federal estate tax is applied on estates that exceed the exclusion amount. The exclusion rate increased from $5,430,000 in 2015 to $5,450,000 in 2016. This means estates with assets under this amount are not required to pay the federal estate tax. For estates valued over this exclusionary amount, the tax applied ranges from 18 to 40 percent, depending on the details of the estate. One way for estates valued over this exclusion amount to reduce their tax burden is through gifting.

Gifts can be used to reduce federal estate tax obligations

Gifting allows the owner of an estate to reduce the assets within the estate. This is a valuable practice to high net-worth families, allowing the estate owner to transfer wealth to future generations while reducing the overall tax burden on the estate. Gifting must be done wisely, as taxes can apply. In order to avoid taxes, the gifts must fall under the annual exclusion amount. The annual federal gift tax exclusion amount for 2016 is set at $14,000. This means each individual can gift this amount tax-free. For a married couple, this translates to $28,000 in gifts per person, per year. These gifts can take a range of forms, including cash or a direct payment to a loved one's medical or educational providers.

As noted above, certain gifts are considered part of the estate. This applies to gifts that are made over the exclusion amount. As a result, it is wise to be aware of the changing exclusion amounts and gift accordingly.

Be wary, state estate taxes may also apply

In Massachusetts, an additional state estate tax can also apply. This tax is independent of the federal estate tax, and applies for estates that are valued over $1,000,000. Estate planning tools are available to reduce this obligation as well.

Those who are interested in reducing their estate tax obligations are wise to seek the counsel of an experienced tax lawyer. This legal professional can review the details of your estate and discuss the many legal tools that are available that can help you reduce your tax obligations.