Reducing estate taxes

Credits allow easing of tax burden

By Gina M. Barry, Esq., Partner, Bacon & Wilson. P. C. Special to PRIME When a Massachusetts resident passes away, every asset that he or she owns is subject to estate tax. Estate tax is imposed by both the Commonwealth of Massachusetts (state estate tax) and by the United States government (federal estate tax). While this may seem to create a fairly large burden, both the state and federal estate tax systems provide a credit that allows the deceased individual to pass a certain amount of assets without paying any estate tax. In Massachusetts, the estate tax credit allows a decedent to pass $1 million in assets without owing any Massachusetts estate tax. The maximum tax rate is 16 percent. This tax is a cliff tax, meaning that once your estate exceeds $1 million, tax is paid on the entire estate and not just the amount over the $1 million. There is no ability to pass this credit between spouses.

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Unfortunately, in 2013, the pre-2001 federal estate tax provisions will return.

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You must use your credit, or your credit will be lost. There has been no change in the state estate tax system for several years, and there is no anticipated change forthcoming. With respect to the federal estate tax system, on Dec.17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Under the Act, individuals who pass away during 2011 and 2012 are allowed to pass $5 million without estate tax. The top tax rate is 35 percent. Also, beginning Jan. 1, 2011, the federal Act introduces "portability" of the exemptions between spouses. This means that if one spouse does not use all of his or her $5 million exemption, it may be used by the estate of the surviving spouse, which essentially allows a married couple to pass $10 million without paying any estate tax. Unfortunately, in 2013, the pre—2001 federal estate tax provisions will return. As such, the federal credit will be reduced to allow only $1 million to be passed without paying estate tax. The tax rate will also increase to 55 percent. The temporary quality of the current federal estate tax system means that Congress will need to address the estate tax system again in the near future, hopefully no later than late 2012. Both the federal and state estate tax systems also provide for a Marital Deduction. The Martial Deduction allows for a deduction on a dollar—for—dollar basis of all property left by the decedent to his or her surviving spouse. For example, if a person owned $20 million and left it all to his surviving spouse at his death, his estate would be entitled to a federal and a state Marital Deduction of $20 million. Using the marital deduction would mean that he would not use his credit. The taxable estate would be zero, and no state or federal estate tax would be due. At first, this seems to be an excellent technique; however, it is upon the second death, when the surviving spouse is holding the entire estate, that the government takes a large percentage of the estate. This is especially problematic at the state level, where portability of the credit still does not exist, and thus only one estate tax credit would be available to offset taxes. As a previously deceased spouse's unused credit can not be used at the state level, married couples with a taxable estate often establish sophisticated trusts designed to capture their respective credits. A single person does not have this option available and will need to consider alternative planning, which may include charitable giving. Non—charitable gifting is also an option whether married or single. Massachusetts does not impose any gift tax. Under the federal system, you can gift $13,000 per person in 2011 without having to report the gift to the Internal Revenue Service. Federal estate tax is only payable, in most cases, when you have gifted more than $5 million during your lifetime. Note that for each gift you report, you use some of your federal estate tax credit to avoid paying tax at that time, and your credit will be reduced proportionately upon your passing. If you are a Massachusetts resident and your estate is greater than $1 million dollars, you can take steps now to reduce, or possibly eliminate, any estate tax that would be due upon your passing. As the estate tax system is very complicated, it is highly recommended that you seek the advice of a qualified advisor, who is well versed in the updated estate tax systems, to assist you. Gina M. Barry is a Partner with the law firm of Bacon Wilson, P.C., Attorneys at Law. She is a member of the National Association of Elder Law Attorneys, the Estate Planning Council, and the Western Massachusetts Elder Care Professionals Association. She concentrates her practice in the areas of Estate and Asset Protection Planning, Probate Administration and Litigation, Guardianships, Conservatorships and Residential Real Estate. (413) 781—0560 or gbarry@baconwilson.com.