The new tax law was a gift to wealthy Americans, but taking advantage of the change requires a review of your estate plan. With the federal estate tax exemption now at little more than $11 million per person, a couple can leave $22 million to their heirs with no gift or federal estate tax due.
In states that have an estate tax but no gift tax, gifting during life for estates that are under $11 million per person or $22 million for married couples, may make sense. Please note that if gifts are made in a state like Massachusetts, just prior to death, the donor could dramatically decrease his state gross estate and thereby dramatically reduce his state estate tax. For example, if someone in Massachusetts has an estate of $9 million dollars and gifts the full amount prior to death, then they could save potentially upwards of approximately $450,000 of Massachusetts estate taxes. This results from the fact that there is no Massachusetts gift tax and that gifts of up to $11 million by that person would not be subject to gift tax. Please note, however, that we must be very careful that any gifts that were made just prior to death should be gifts of assets that are high basis. This is because any gift that is received will carry over the basis of the donor. Therefore, in the event any low-basis stock transfer which was sold after received by the donnee, would result in a 20 to 25 percent federal and state capital gain tax. Therefore, while making gifts just before death may be advantageous for reducing state estate taxes, know that only that high-basis assets can be transferred. Since in a state like Massachusetts the highest estate tax rate is 16 percent, while the highest federal and state capital gain rate could be as high as 25 percent, you must gift the right asset so that a client's overall tax liability to themselves and their heirs will be reduced.
In Massachusetts, we advocate preparing a Massachusetts standby gifting trust whereby an irrevocable gifting trust is created with a very small gift upfront. The ideas is that in the event the client at a future date wants to make gifts when they are older or very ill, the gift can be made into the standby gifting trust and immediately reduce the estate tax. An analysis by both the accountant and estate planning attorney would be required in order to make sure that the overall tax liability to the family will be reduced.
Nevertheless, based on the new estate tax law, you should review your estate plan with your attorney and ask about potential trusts that maybe available to reduce estate state taxes. Your estate planning attorney will be able to help you take advantage of the new tax law.
Office provides regular seminars to our clients and to our advisors regarding potential estate tax savings and especially regarding the Massachusetts standby gifting trust. Please visit our website for more information about these seminars or contact us today for more information on how the new tax law impacts your estate plan.