A new year means new resolutions, new calendars, new deductibles on your health insurance – and, of course, new tax law. The nuances of the current estate tax laws might not affect your daily life. But if you or a loved one die this year, the estate tax exemption for 2020 will suddenly become incredibly relevant. It’s the threshold that determines how much tax, if any, is owed by the estate of a decedent (person who dies).
The estate tax exemption has recently changed on a federal level, though that change may not affect many Massachusetts residents personally. We have our own estate tax threshold, and it’s much lower than the federal threshold.
Estate Tax Exemption 2020: Federal Level
The IRS increases the federal estate tax exemption each year to account for inflation. The estate tax exemption for 2020 is $11.58 million per decedent, up from $11.4 million in 2019. Estates valued above the threshold may be taxed on a graduated scale of up to 40 percent.
This means that, if a married couple were both to die this year, their estate would only owe estate taxes if it were valued at more than $23.16 million. Under federal law, taxes are only levied against the portion of the estate that exceeds the exemption amount. Say a California resident dies this year and leaves behind an estate valued at $12.58 million. Their estate would owe taxes on the $1 million in excess of the current $11.58 million threshold.
The same would not be true for a Massachusetts resident, however. California is one of the states that does not currently have its own estate tax. In Massachusetts, even relatively modest estates can be required to pay estate taxes. Understanding the laws around estate tax exemptions in Massachusetts is critically important if you’re planning to pass your assets to your heirs.
Estate Tax Exemption 2020: Massachusetts
About a dozen states levy their own estate taxes on residents, of which Massachusetts is one. These state thresholds are all considerably lower than the federal threshold. (In fact, Massachusetts has the lowest estate tax threshold used by any state.) And while the federal tax threshold is generally increased each year, state thresholds tend to be steady. The estate tax exemption in Massachusetts has remained unchanged since the early 2000s.
Currently, the estate of a Massachusetts decedent is entitled to an estate tax exemption of $1 million. Again, this means that if a Massachusetts resident dies and leaves behind an estate valued at less than $1 million, it would not be subject to the estate tax. Estates valued at greater than $1 million may be taxed on a graduated scale of up to 16 percent.
What This Means for You
The higher federal estate tax exemption for 2020 may be relevant to some Massachusetts residents. Say, for example, that you’re a named beneficiary of a wealthy loved one who lives in a different state and dies this year. The high federal threshold could have an impact on how much of the estate you ultimately inherit.
That said, nothing around the estate tax exemption is set to change in 2020 for Massachusetts decedents. Each individual may shield up to $1 million in assets from estate taxes, just as was allowed in prior years.
The state’s relatively low estate tax threshold may be of special importance to married Massachusetts residents. Because of the marital deduction provision, when spouse A dies, surviving spouse B does not have to pay estate taxes on spouse A’s estate. Federal estate tax law also provides portability. In states that use the federal exemption threshold, portability allows spouse B to use spouse A’s $11.58 million exemption as well as her own $11.58 million exemption. When spouse B dies, her estate can shield the full $23.16 million from estate taxes. Massachusetts doesn’t have portability, so unless a married couple plans ahead, they can only shield a total of $1 million. Couples that do plan ahead may be able to shield the full $2 million through the creation of trusts.
Though the increase in the federal estate tax exemption in 2020 may not directly affect you, Massachusetts estate tax law could cost you and your loved ones quite a bit of money. By the time a person dies, it’s too late to put into place any plans that could protect their assets from taxes. Working with estate planning attorneys now can give you the peace of mind that comes with knowing your heirs will be taken care of when you die.
How can the team at Ladimer Law help you prepare for estate tax eventualities? We know these issues are personal and complicated, and we’re here to help. Contact us today to talk about your estate planning needs.
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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.