Last month House Rep. Jim McDermott (D-WA) introduced “The Sensible Estate Tax Act of 2011,” the full text of which is now available here: H.R. 3467. Of particular note in this proposed legislation, which could affect many middle-class families, is the reduction of the Federal estate tax exemption.
Currently, the Federal estate tax exemption is set at $5 million and is set to increase to $5.12 million on January 1, 2012. This means that people with an estate valued at less than $5 million do not have to pay any Federal estate tax. However, the new bill, if passed, would reduce the Federal exemption down to $1 million as of January 1, 2012. Furthermore, the estate tax rate, which is now 35%, would be increased to 55%.
How does this affect you?
The Massachusetts estate tax exemption is currently set at $1 million, meaning anyone with an estate valued at less than $1 million does not need to pay any estate tax. However, if your estate is valued at one dollar more than $1 million, you must pay estate taxes on the entire amount, not just the amount over the exemption. The same is true for Federal estate taxes. Should the Federal estate tax exemption be reduced, Massachusetts citizens with estates of $1 million of more would have to pay both Massachusetts and Federal estate taxes on their entire estate. Depending on the size of the estate that could wind up being hundreds of thousands of dollars in taxes, paid by your estate or your heirs when you die.
Many people ignore the changes in estate tax law because they feel they are safe since they don’t have $1 million dollars lying around—in fact few of us do. However, when you consider your entire estate—bank and financial accounts, real estate equity, cars, heirlooms and life insurance policies that will be paid upon your death—that figure is easier reached than you might think. Add in the fact that you must pay taxes on your entire estate if you go just one dollar over the exemption amount, and planning ahead with an estate plan that can to reduce your estate taxes could wind up saving you thousands of dollars or more.
Call the Heritage Law Center for a free consultation on how your estate plan can help to reduce or eliminate the burden of estate taxes for you and your family.