You do not need to be exceedingly wealthy to be impacted by the estate tax. Many of our clients are surprised to learn that tax is imposed on Massachusetts estates exceeding $1 million in value. When considering a home, retirement accounts such as IRAs and 401(k)s, and life insurance, an estate can reach this number fairly quickly.
In Rhode Island, the applicable threshold is roughly $1.5 million. Currently, a federal estate tax is not imposed until an estate reaches $11.7 million (often referred to as the “exemption amount”). But that amount is scheduled to be reduced to $5 million in 2026, and Congress could act to reduce it even sooner (and to an even lower amount).
It is imperative for anyone who may have a taxable estate to implement proper planning. Below is basic information about the estate tax and planning steps anyone with a taxable estate should consider.
- What is the “estate tax”?
The estate tax is a tax imposed on all assets that a decedent owns or in which they hold an interest at death. There is a federal estate tax, and many states, including Massachusetts and Rhode Island, also impose their own separate estate tax. Many assets that people generally think of as “tax-free” – such as a home, retirement accounts and life insurance – because of certain income tax advantages, remain subject to estate tax.
- How much will I have to pay?
Compared to income taxes, generally a lot. People are often surprised to learn how much they will have to pay in estate taxes. Once beyond the thresholds discussed above, the Massachusetts and Rhode Island estate tax rates range from 1-16%, and the federal estate tax rate is a flat 40%. That is, a combined federal and state estate tax could approach 50% of assets exceeding the exemption amount. The Massachusetts and Rhode Island estate taxes alone can generally be estimated at 10% of the gross estate value.
- What steps should I take now if I may have a taxable estate?
Planning is key. There are many strategies available to minimize or even eliminate estate taxes. Certain trusts can help ensure that both spouses of a marriage fully utilize their exemption amounts at death. Transfers can also be made during life to reduce estate taxes.
Taxable estates require planning beyond simply reducing the amount of tax due. Among other considerations, thought must be given to ensuring there is sufficient cash to pay estate taxes (which are generally due nine months after date of death) and how to apportion taxes among beneficiaries.
Because every family’s financial and personal circumstances are unique, there is no one-size-fits-all estate plan. Be sure to work with an experienced and trusted attorney to develop an estate plan that effectively addresses your situation.