Leading up to the New Year one of the hottest topics in the estate planning world was how the pending fiscal cliff and the negotiations to avoid it would affect gift and estate taxes. In 2012, the Federal estate tax exemption was just over $5 million, meaning that Massachusetts residents with estates under that amount didn’t have to worry about the Federal government raiding their estate when they passed. However, this exemption was scheduled to decrease to $1 million in 2013 as the Bush tax cuts expired. Naturally, this had many Massachusetts estate planners and their clients concerned.
A $1 million estate is much more achievable for many people when they consider the value of their home equity, investments and life insurance pay outs. While planning for this amount is still extremely important thanks to the $1 million Massachusetts’ estate tax exemption, adding the Federal estate tax to estates over $1 million would have meant that quite a large chunk of one’s estate would end up going to the government if not planned for carefully.
The gift tax exemption, also set at $5 million at 2012, was similarly scheduled to decrease in 2013, leading many wealthy Massachusetts residents to make large gifts before the New Year. Luckily, the Senate and House of Representatives passed a bill just in the nick of time designed to avert these changes.
While the bill did raise certain taxes, mostly on the very wealthy, and punted on a few budget cuts which will still need to be sorted out, the effect on estate and gift taxes was minimal. As drafted, the bill permanently keeps the Federal exemption level at $5,000,000 (indexed for inflation), and increases the top estate, and gift tax rate from 35% to 40%. The bill also continues the portability feature allowing a deceased spouse’s estate to transfer his or her unused exclusion to the surviving spouse.
Now that we have a clear picture of where these exemptions will be for the foreseeable future, estate planners can more accurately gauge the planning devices necessary to maximize an estate’s value and protect clients from avoidable taxation. Massachusetts residents need to keep in mind, however, that our state exemption has also stayed the same at $1 million. The difference between having a $999,000 estate and a $1 million dollar estate in Massachusetts can be a $100,000 tax bill if not planned for appropriately.