Tiffany A. O’Connell, 

Esq., LLM, CELA, AEP®

Principal Attorney

O’Connell Law LLC

When you are doing estate planning, you should always consider how taxes impact what you are doing.  Let’s talk about some taxes that impact estate planning.

Estate Tax

An estate tax is a tax that hits upon your death.  People think of it as a ‘death tax’ or an ‘inheritance tax’ but it is called an ‘estate tax’ because it is a tax on the estate of the person who died.  There is a federal estate tax, and Massachusetts has its own estate tax.  

The estate tax will hit based on the person’s taxable estate at the time of their death.  This will include anything the person owned or had control of.  There will be a tax threshold number (technically called an exemption) that must be exceeded before an estate tax will go into effect.  In 2022, while the threshold amount for the federal estate tax is $12,060,000, the Massachusetts estate tax threshold is much lower at $1 million.

Gift Tax

Although Massachusetts does not have a gift tax, there is a federal gift tax.  The gift tax will hit when someone gifts away a certain amount over their lifetime – currently that amount mirrors what the federal estate tax threshold is.  In addition to this lifetime gift amount, there is an annual gift tax exclusion which in 2022 is $16,000 per person, per year.  As long as your annual gifts to a person does not exceed the annual gift tax exclusion amount, the government does not require you to report it as part of the gift tax we talked about above.  This does not mean that you can’t gift more to a person, but annual gift tax exclusion gifts can be a very effective way to gift over time and help lower any estate taxes that may be owed upon your death.

Income Tax

The income tax is a tax you pay for income and profits you generate during the taxable year.  I’m raising it here just so that you realize it is indeed a separate tax.  Don’t forget about getting started on your 2021 income tax return now so that it can be filed timely.  

Capital Gain Tax

A capital gain tax hits when you sell an asset that has appreciated in value from what it cost to acquire it.  There is both a federal capital gain tax and a Massachusetts capital gain tax.

Capital gain taxes are important to consider when doing your estate planning.  Making the gift during life may help lower estate taxes or get an asset out of your name, but you may find that the amount in capital gain taxes that will be owed when the recipient sells the asset in the future is worse than if you held onto the asset during your lifetime.  Sometimes it is better to hold onto appreciated assets during life (at least for tax purposes) in order to avoid a capital gains tax impact for your beneficiary upon your passing.  

 

Bottom line – For all tax planning, you should consult with your professional advisors so that they can talk with you about the pros and cons of what you want to do.

If you want to learn more about estate planning, Tiff O’Connell will be teaching a 3-part workshop based on her book, “Do You Have A Plan? How To Avoid Leaving A Mess” through Kendal at Home’s educational programming.  If you are interested in participating, you will find information on this workshop at www.kendalathome.org/calendar-events.  If you need assistance with registering, just give O’Connell Law a call at 508-893-4935.