Federal estate tax exemption rises in 2014, but no change at state level
Last December, the U.S. Congress came to a last-minute agreement on the federal estate tax while the nation faced down the fiscal cliff crisis and exemption amounts were about to expire. The deal included a permanent (absent further Congressional action) estate tax exemption in a historically high amount; the new permanent estate tax exemption was in line with the temporary exemption amounts that had been set to sunset at the start of 2013.
Currently, individuals are permitted a $5.25 million federal estate tax exemption. This means that when someone dies, if the value of his or her estate (all assets the decedent leaves behind) falls under $5.25 million and the decedent has not offset the estate tax exemption with gifts during life, the estate will owe no federal taxes. If someone dies with a larger estate, federal taxes will only be due on the amount in excess of $5.25 million. For married couples who elect to combine their exemptions, up to $10.5 million can pass free of federal tax at the death of the second spouse (bequests between spouses are not taxed).
These may seem like very large estate tax exemption amounts, and they are, in fact, historically high. Since the federal estate tax exemption is now indexed for inflation, the exemption amount will continue to grow for the foreseeable future, reaching $5.34 million in 2014. But, just because the federal exemption seems generous does not mean you can neglect estate planning efforts if you believe your estate will come in below the federal exemption amount.
Currently, 19 states as well as the District of Columbia levy an estate tax, an inheritance tax, or both (inheritance taxes are paid by the heirs rather than being paid directly by the estate, and often vary in rate depending on the relationship of the heir to the decedent). Massachusetts has only an estate tax, with a top tax rate of 16 percent.
While the Massachusetts top tax rate of 16 percent is not as high as the federal estate tax of 40 percent, the state-level exemption is significantly lower. Currently, Massachusetts taxes all estates valued at more than $1 million. Unlike the federal estate tax, which taxes only the value of the estate in excess the exemption amount, the Massachusetts estate tax applies to every dollar of the estate if the full value crosses the $1 million threshold. In addition, the Massachusetts estate tax exemption is not currently indexed for inflation, and is unlikely to increase in the near future.
For anyone who owns a farm or a small business, it is deceptively easy to cross the $1 million dollar threshold. For that matter, with single family homes in Massachusetts selling at a median price of $282,450 as of a year ago, according to the Massachusetts Association of Realtors, it would not even take much for the average homeowner’s estate to exceed the $1 million exemption.
With the federal estate tax exemptions at such a high amount, it can be easy to overlook the state-level estate tax. But, without careful estate planning, even the Massachusetts estate tax can take a substantial bite out of savings accumulated over a lifetime that you wish to pass on to your heirs.
A Massachusetts estate planning attorney can help you minimize estate taxes and ensure that your property is distributed according to your wishes. You should talk to an estate planning lawyer as soon as possible if the value of all your assets, including your home, is close to the $1 million threshold.