First the good news: thanks to recent tax law changes, you probably won't owe any federal estate taxes. However, it is possible that you will still owe state estate taxes. And if you're a resident of Massachusetts, then your chances are even greater.
Due to the Tax Cut and Jobs Act (TCJA) passed in 2017, you're far less likely to owe federal estate taxes than under prior tax laws. The current federal exemption amount (for 2020) is $11.58 million per individual / $23.16 million per married couple. This means that if you're single and your estate value is under $11.58 million when you die, then you shouldn't owe federal estate taxes (or $23.16 million for a married couple). Barring any additional tax law changes, these federal exemption amounts will remain the same until they revert back to 2017 amounts (adjusted for inflation) for 2026 and beyond.
The threshold (a.k.a. exemption) amount that determines when an estate becomes taxable in Massachusetts is low, relatively speaking. Massachusetts is in the minority of states that impose an estate or inheritance tax at all. And the Bay State is tied only with Oregon for the state with the lowest threshold, currently one million dollars ($1M). That means that if you pass away with an estate valued just over $1M, you'll most likely owe estate taxes to Massachusetts. Additionally, passing away with this slightly over $1M estate means that the entire estate is subject to tax and not just the amount in excess of the $1M. For example, your estate is valued at $1.5M when you pass, then the entire $1.5M is subject to Massachusetts estate taxes and not just the $500,000 that is above the exemption amount ($1M).
State estate taxes are more common in the Northeast than in the rest of the country. Massachusetts has a lower estate tax exemption than all of its neighboring states. The exemptions by state are listed below and as of January 2020:
Maine - $5.8M
New York - $5.85M
Connecticut - $5.1M
Vermont - $4.25M
Rhode Island - $1.58M
New Hampshire - No estate tax
The Massachusetts estate tax rates, just like the Federal income tax rate, are graduated. This means that as the taxable base gets larger, the rates go up. The range for the state's estate tax goes from 0.8% at the low end to to 16% at the top. Roughly speaking an estate valued at $1.5M will pay around $64,000 in Massachusetts estate taxes.
It's important to note that the Massachusetts estate tax will generally only impact the second spouse to die due to the marital deduction. This provision of tax law allows a spouse to leave an unlimited amount estate tax free to the surviving spouse.
With the Federal estate tax exemption amount historically high, it's easy to forget that your estate can still be subject to state taxes. Proper estate planning could help you reduce the amount your heirs will owe.
When is the last time you reviewed your overall estate plan? I would encourage you not to delay in starting this process because as with so many elements of financial planning, starting early will often yield greater results.
Breakwater Financial, LLC is a registered investment advisor. The content of this blog post is for informational and educational purposes only and is not to be considered investment, legal or tax advice. If you have any questions regarding this Blog Post, please contact us.