The Massachusetts estate tax exemption is currently set at $1 million, while the Federal estate tax exemption is $5,000,000. However, in 2013, the Federal estate tax exemption is scheduled to decrease to $1,000,000 resulting in Massachusetts residents with estate in excess of $1 million to pay both state and Federal estate taxes. To avoid this outcome people whose estates will be taxable at the state and/or federal level have several options to reduce their estate tax bill.
Spend down assets.
Of course this is the quickest and easiest way to reduce the value of an estate. The obvious problem with this approach is that no one knows how long they will live and how much money they will need. Thus, drastic spending is only an option for people who have accumulated a significant amount of wealth and aren’t afraid of running out of money before they die.
Gift assets directly to family members or charity.
This option will only work well for those who feel comfortable giving away part of their estate while they’re still alive. As mentioned above, often times people are resistant to give anything away because they’re afraid they’ll run out of money before they die and once they decide to give it away, they can’t get it back. Giving away control of assets can be a risky strategy and can result in unintended gift taxes if not done carefully. As with spending down, gifting directly to family members or charity will only work well for those who aren’t afraid of running out of money.
Create a foundational estate plan.
For married couples, the use of basic Trusts, either revocable or irrevocable, as part of their estate plan can significantly reduce or even eliminate both federal and state estate taxes assessed against their estates. For both married couples and individuals, the use of an Irrevocable Life Insurance Trust (or “ILIT”) to hold and own life insurance offers two benefits: (1) life insurance owned by an ILIT will remove the value of the insurance proceeds from the insured’s taxable estate; and (2) the insurance proceeds can provide immediate cash to pay bills, expenses and taxes.
Planning ahead to reduce or avoid estate taxes can have significant benefits for you and your family. Call the Heritage Law Center for a free consultation on how you can develop an effective estate plan for your family.