The estate tax is a tax that’s levied on a person’s estate when they die and their assets are transferred to their heirs. How much of what you’ve earned will go to estate taxes when you die? These taxes may cost some immigrant families more than they do other American families, so it’s critical to understand what’s at stake.
Only an estate that is worth above a certain threshold at the time of the owner’s death owes estate taxes, so many estates owe no such taxes. But for others—including many immigrant families living in Massachusetts—estate taxes will take a big bite out of their earnings. I want to help ensure that these families are aware of all factors that may contribute to their estate tax liability.
Non-Citizens Have Estate Tax Obligations
Anyone who has assets in the United States could be required to pay estate taxes, even if they’re not a citizen at the time of their death. Because the U.S. has different estate tax treaties with different countries, there’s a lot of variation in how this could play out. Non-citizens can work with their estate planning attorneys to anticipate their estate tax obligations, making things easier for their executors later on.
It’s also worth noting that non-citizens have a much lower estate tax exemption threshold than is provided for citizens under federal law. If you’re not a citizen and own U.S. property at the time of your death, a 40 percent tax will be assessed on any amount in your estate above $60,000.
Estate Tax Varies By State
When we talk about the U.S. estate tax, we’re talking about a few different things. Estate tax is governed by both federal and state laws.
The federal estate tax applies to all American residents. It can be anywhere from 18 to 40 percent of an estate’s value at the time of the owner’s death. However, federal law allows for an exemption—and an estate with a value below that exemption amount does not owe estate taxes. The exemption amount is raised each year in keeping with inflation. For 2020, the federal estate tax exemption is $11.58 million per person. This is why most American estates don’t owe any federal estate taxes.
However, states are also able to impose their own estate taxes on residents. Many don’t, but Massachusetts does. The Massachusetts estate tax threshold is just $1 million. When a resident dies and leaves an estate valued at $1M or more, the estate will be taxed. Massachusetts uses graduated rates, with a maximum tax of 16 percent of the estate.
Estate Tax is Different Than Inheritance Tax
Especially for immigrant families who are new to the U.S., the difference between the estate tax and the inheritance tax may be a little confusing. The key difference is that an estate tax is paid by the estate of the deceased, while an inheritance tax is paid by the person who inherits property from the deceased.
There is no federal inheritance tax in the U.S., though six states (as of 2020) impose this tax on residents. Those states are Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. If you own property in any of those states, know that the heirs who inherit it could be required to pay inheritance taxes.
Your Spouse’s Citizenship Status Matters
In some immigrant families, one spouse becomes a citizen while the other does not. This arrangement can complicate your estate tax situation. Federal estate tax law allows for the marital deduction, meaning a married couple can combine their individual exemption amounts.
It works like this: When spouse A dies, the marital deduction means that all their assets can be transferred to spouse B without spouse B incurring estate taxes. Spouse A didn’t use their personal exemption because they used the marital deduction. Spouse B’s estate may be much larger now, and may be large enough to trigger estate taxes.
But there’s also a benefit called portability, which allows one spouse to give their unused exemption to their surviving spouse. In 2020, when the individual exemption is $11.58 million, the marital deduction essentially allows a couple to shield up to $23.16 million in assets from estate taxes.
All that said—the surviving spouse is generally only allowed to use the marital deduction if they are a citizen. For immigrant families with substantial wealth, this loophole can be very expensive. A surviving non-citizen spouse may still be able to avoid estate taxes if the couple makes the proper estate plans in advance. Arranging for property to transfer to the non-citizen spouse via a trust may eliminate these tax obligations.
Worldwide Property May Count Toward Your Estate
Immigrants who move to the United States may continue to own property and other significant assets in other countries. The IRS says that American citizens have an estate tax obligation for all of their worldwide assets. Someone who moves here but continues to own property in their home country may owe estate taxes on all of their assets. (Again, American estate tax treaties are relevant here—every case is different.)
It’s important to take all your property into consideration when estate planning. The IRS may collect any unpaid estate taxes from the beneficiaries who inherit your assets, so failing to plan for your full estate tax obligation could trigger an expensive headache for the loved ones who survive you. Owning property in multiple countries can certainly complicate your estate planning process, so families in this situation are especially helped by working with experienced estate planning attorneys.
In my many years as an estate planning attorney, I’ve helped many immigrants navigate the American estate tax system. We work together to identify their future tax obligations and minimize the impact on their loved ones. I’m here to help your family navigate these same issues. Contact me today.
Jessica Pesce specializes in estate law and elder law. She has helped many people with their estate planning and tax planning since joining Ladimer Law in 2017.
Copyright © 2023 Ladimer Law Office PC
209 West Central Street
Natick, MA 01760
Ladimer Law specializes in estate planning. We protect our clients, their heirs, and their assets by listening closely, knowing the law, and executing estate plans that fit and evolve.