The federal gift and estate tax is (virtually) dead. The recently enacted Tax Cuts and Jobs Act of 2017 has essentially doubled the gift and estate tax exemption to $11.2 million for individuals and $22.4 million for married couples. Estates that exceed these amounts will be subject to a flat tax of 40 percent on every dollar over the cap. Last year only 0.2% of estates were large enough to be subject to federal estate tax. With the new exemption levels that number is expected to shrink even further.
The annual gift exclusion has also been raised, to $15,000. This means you can make that gift to as many individuals as you would like, and spouses can each make individual gifts. (Gifts beyond the annual exclusion amount count toward the combined gift/estate tax exemption.)
So, it is all good, right? Right. Unless you live in Massachusetts, which has its own estate tax that applies to estates which are over $1 million. Estate tax rates in Massachusetts range from 0.8 percent to a maximum of 16 percent. Keep in mind that the calculation of the value of an estate includes such items as the value of your home (or homes), life insurance, and retirement accounts. Many Bay State residents can easily find themselves breaking through the $1 million barrier.
In addition, Massachusetts estate tax applies to the entire value of any estate valued over $1 million – not just the amount above the threshold. Even if you exceed the limit by just one dollar, the entire value of the estate is taxed. As a result, a Massachusetts resident with a $1.2 million estate would end up paying more in estate taxes than someone with an estate of $11 million, who lives in a state without an estate tax.
One more caution: The federal gift and estate tax exemption is temporary, and will revert to pre-2018 levels in 2026. Even that is not guaranteed, as the estate and gift tax has frequently been the subject of political wrangling and could be changed again if the balance of power in Congress shifts.
The Tax Cuts and Jobs Act of 2017 is a complex and comprehensive overhaul of our federal tax laws. We urge you not to make changes to your estate plan unless and until you have discussed it with a qualified tax professional. If you have any questions about how the new tax law will affect you please contact our Tax Department at (781) 407-0300.