Friday, April 1, 2016

April 15 a Good Reminder to Avoid the Estate Tax Trap

By Robert Deschene, Esq

During tax season, I’m reminded of Ben Franklin’s old saw:  nothing is certain in life but death and taxes.  As we approach the dreaded April 15, many of us are focused on our income tax returns.  Still, many people also wonder or worry about whether, upon their deaths, “estate tax” will be due.

What is the Estate Tax?

When we hear the words “estate tax,” we might think they can’t possibly apply to us, but only to very wealthy people, like Warren Buffett.  Not necessarily.  The government imposes a tax on the transfer of your wealth at death.  Estate tax is the amount that your estate will owe the government, and is calculated by the value of all the property you owned at your death.

Right now, the federal government’s estate tax does not apply unless you own at least 5.45 million at death.   Relatively few of us have to worry about this.

Massachusetts’ Separate Estate Tax

The bad news is that Massachusetts is one of the states which impose its own separate estate tax, which is imposed if you die owning $1 million or more.  The graduated tax rate can run as high as 16%, which can be a significant sum that you will not be leaving to your family.  Massachusetts seniors with taxable estates often migrate to Florida, not only for the warmer weather, but because Florida has no state estate tax.

Who Pays? – Your “Taxable Estate”

Some people ignore the issue of estate tax because they don’t think of themselves as a “millionaire”.  But remember that this tax is imposed on your “taxable estate,” which includes your home and/or vacation home, death benefits payable on any life insurance policies you own (i.e., not the cash surrender value), and any balances paid out of your retirement accounts (e.g., IRAs, 401ks) when you die.   If you total up these assets, or project their future value, you may easily exceed the $1 million threshold for paying estate tax, even though we don’t feel like millionaires.  So do the math.

Ways to Reduce your Taxable Estate