Like everything else of value, your estate can be subject to state and federal taxes. If you have significant wealth, you can forfeit a great deal financially when you pass. The value of your estate can affect how much your estate is taxed upon distribution. With several qualifications, portability, and exemption rules, it can be easy to lose the thread, which is why it’s so important to understand how estate taxes work.Estate planning documents outlining how estate taxes work underneath pair of glasses and a calculator

What Taxes are Your Estate Subject To?

A licensed elder law attorney can determine what taxes you’re subject to. Depending on the total value of your estate, you could be subject to both federal and state tax or no tax whatsoever.

Federal Tax

In 2020, the IRS increased the estate tax exemption to $11.58 million. If your estate is valued more than this exemption, the value of your assets exceeding this amount is subject to a 40% federal tax. However, if your assets are valued less than this exemption, they will not be taxed at all.

Massachusetts State Tax

Massachusetts levies a tax on estates worth more than $1 million. It’s a progressive tax rate topping off at 16%. However, unlike federal tax, even if your estate is a dollar over the exemption of $1 million, you will be taxed for your estate’s total value.

How Does Estate Tax Work?

Estate tax applies to the gross estate value, including financial, digital, and tangible properties. The executor of the estate must file an estate tax return within nine months of the holder’s passing if the decedent’s estate exceeds the state or federal exempt amount. However, parts of an estate not subject to taxes are assets transferred to a surviving spouse, finances used for funeral, legal, and administrative expenses, charitable contributions, and estate taxes paid to states, making it important you consider updating your estate is you’re over the exemption threshold.

What is the Portability of Estate Tax Exemption?

After being introduced in 2010, portability was finally made a permanent feature of the estate tax exemption between married couples. Portability is an estate tax provision that allows a decedent’s unused exemption amount to transfer to their surviving spouse. For example, if a deceased spouse makes a $2 million taxable gift to their only child, that leaves them with $9.58 million in unused tax exemption. With portability, that exemption can be transferred to the surviving spouse, increasing their estate tax exemption from $11.58 million to $21.16 million.

Understanding how estate taxes work is an important part of estate planning. You want to plan your estate early to know exactly what your beneficiaries can expect during this troubling time. Understanding the metrics of state and federal taxes is the best way to determine how to allocate your estate. If you wish to know more about how to care for your loved ones through estate planning, contact me at the Paula Smith Law Office today.