You don’t have to be extremely wealthy to be affected by inheritance tax. Many of our clients are surprised to learn that Massachusetts estate tax is imposed on estates over $ 1 million. When you are considering a home, retirement accounts such as IRAs and 401 (k), and life insurance, an estate can reach that number quite quickly.
In Rhode Island, the applicable threshold is approximately $ 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 expected 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 some basic estate tax information and the planning steps anyone with a taxable estate should consider.
- What is the “property tax”?
Inheritance tax is a tax imposed on all property that a deceased owns or in which he has an interest on death. There is a federal estate tax, and many states, including Massachusetts and Rhode Island, also have their own separate estate tax. There are many assets that people generally think of as “tax exempt” – such as a home, retirement accounts, and life insurance – due to certain factors. Income tax benefits, remain subject to inheritance tax.
- How much will I have to pay?
In relation to income taxes, generally a lot. People are often surprised to learn how much they will have to pay in property taxes. Once beyond the thresholds mentioned above, the Massachusetts and Rhode Island estate tax rates range from 1% to 16%, and the federal estate tax rate is 40%. That is, a combined federal and state estate tax could approach 50% of assets in excess of the exemption amount. Massachusetts and Rhode Island property taxes alone can usually be estimated at 10% of gross property value.
- What steps do I have to take now if I can have a taxable estate?
Planning is the key. There are many strategies available to minimize or even eliminate inheritance taxes. Some trusts can help ensure that both spouses in a marriage make full use of their death exemption amounts. Lifetime transfers can also be made to reduce inheritance tax.
Taxable estates require planning that goes beyond simply reducing the amount of tax owed. Among other considerations, you have to think about ensuring that there is enough cash to pay the inheritance taxes (which are usually due nine months after the date of death) and how to distribute the taxes among the beneficiaries.
Because each family’s financial and personal circumstances are unique, there is no single estate plan. Make sure you are working with an experienced and trusted lawyer to develop an estate plan that effectively addresses your situation.