Federal Estate Tax — likely here to stay

In 2001, Congress passed legislation which was intended to phase out the federal estate tax — sort of. Over the past six years, the threshold for federal estate taxation increased to its current level of $2 Million this year and $3.5 million in 2009 — and then disappear altogether for 2010 and come back at $1 million on January 31, 2011. Despite morbid jokes about timing one’s death for December 31, 2010, this scheme has caused headaches for estate planning attorneys all over the US. It’s hard to know how to advise a client about federal tax planning when Congress fails to address the sunsetting of a short-term political gimmick.

It seems increasingly likely that sometime next year, Congress will pass new estate tax legislation which will preserve estate taxation at a higher threshold. The only question is what that threshold will be and the tax rates. Barack Obama has stated publically that he is in favor of a $3.5 million threshold; John McCain has been quoted in favor of a $5 million threshold. Since good estate planning with tax-favored trusts allows a couple to pass on an amount equal to double the threshold amount free of federal estate taxes, as a practical matter, it will remain possible for a married couple to pass on at least $7 million free of federal estate tax to your children. Therefore, the VAST majority of estates will continue to never see federal estate taxation. For more — see Kiplinger Retirement Report, June 25, 2008 http://tinyurl.com/3nlmf8

However, many Massachusetts residents must still plan for estate tax minimization. The Massachusetts estate tax threshold is only $1 million, and there are no plans to change it. That tax is applied to the entire estate –including real estate, life insurance, and retirement accounts. A will, by itself, will not prevent Massachusetts estate taxation on a $1 million estate at the death of the second spouse. The tax rate shoots up sharply. A taxable estate of $1,050,000 would owe $36,000 in taxes. A taxable estate of $1,500,000 would owe $64,400.

By creating a Massachusetts credit shelter trust, you can double the amount left to your heirs tax-free. If your create an irrevocable life insurance trust and provide the trust with funds to cover any additional tax liabilities, you can minimize the risk of or even avoid paying any tax liabilities with your estate’s assets while passing on even more money to your children tax-free from the life insurance policy.

Please feel free to call my office at 781-433-8665 if you would like to discuss saving some serious money.