Despite the pandemic, many Millennials are graduating from college and paving their way to success. This is a generation of young people who know what they want out of life and have the financial literacy tools – from podcasts to online platforms – to save for retirement, maximize their savings and achieve their goals. Goals.
With their 401K plan and IRAs in place, many Gen Zers focus on their parents’ financial planning. They want to make sure mom and dad have also maximized their tax savings so they can get the most out of their inheritance. Here’s what this savvy generation needs to know about inheritance tax.
Inheritance tax, also known as death tax, is a completely different tax from income tax. Income tax is an annual tax on your income earned during that year. Death tax is a one-off tax on a person’s assets after death. It is due nine months after the death of a person if certain monetary thresholds are reached. There are two levels of inheritance tax, the state level and the federal level. Let’s look at an example of how this works.
Janet and David are married and live in Massachusetts. Their assets total $ 6 million, which includes their home in the suburbs, David’s large life insurance policy, and David’s interest in a family business. Janet and David also have parents who are still alive and each will inherit a few million dollars when their parents die. Additionally, Janet and David are still in asset accumulation mode, so their assets will likely increase in value before they reach retirement age.
If David dies first and leaves all of his assets with Janet, no estate tax is due (although estate tax returns must be filed). In fact, no inheritance tax is due if you bequeath all your assets to your spouse. The government does not want your spouse to be a ward of the state. Your surviving spouse will have access to the funds to live on, and then it will be taxed after the death of both spouses. This is great news for Janet as she adores vacations and has a particular fondness for high end cruises. However, this is not such good news for their two Gen Z children. The inheritance tax will need to be paid after Janet and David die and before the assets are distributed to the children. Mom and Dad live off assets, then the kids pay the taxes.
The Massachusetts estate tax threshold is $ 1 million. If a Massachusetts resident dies with more than $ 1 million in assets, tax will be owed (unless you leave it all to your spouse or to a charity). This tax can be minimized through trust planning if Janet and David each create trusts in their lifetime that will protect the trust funds from estate taxes. They may also consider placing David’s material life insurance in an irrevocable trust that will prevent the proceeds from being taxed if he dies three years or more after the policy is transferred to the irrevocable trust (due to a three-year retrospective). Good fiduciary planning is the keystone of estate tax savings.
Another way to save on property taxes would be to start a donation program. Anyone can give up to $ 15,000 per year to one person without any tax consequences. David could give each of his two children $ 15,000, and Janet could do the same. This would transfer $ 60,000 per year to the next generation without any tax consequences.
Giving gifts doesn’t seem like a good idea for David and Janet. They love their lifestyle and could use that money for cruises and sporting events. A better option would be for David and Janet’s parents to start giving programs as they are all in their early 90s and not spending as much as they used to. Janet’s mother, for example, has three children and six grandchildren, which allows her to donate $ 135,000 a year tax-free.
The easiest way to save on state property taxes, of course, is to move to another state. David would like to move to Florida where he can attend spring training, while Janet wants to move to New Hampshire to ski. Neither Florida nor New Hampshire have state estate taxes, so if they sell their real estate in Massachusetts and move to either state, they will no longer have to pay. Massachusetts Estate Taxes.
David and Janet should also be aware of federal estate tax. In 2021, this tax is imposed on estates with assets equal to or greater than $ 11,700,000. They aren’t too concerned about federal property taxes now, but by 2026 the exemption amount drops to $ 5 million (annual adjustment for inflation). Additionally, Congress might consider reducing this amount before 2026 and possibly to a lower amount such as $ 3,500,000. If this happens, estate tax planning becomes critical for Janet and David. While the Massachusetts tax rate can reach 16%, the federal estate tax rate reaches a whopping 40%.
In states like Washington and Hawaii, estate tax rates can be as high as 20%. There are also several states like Massachusetts where estate taxes can be as high as 16%; these include New York, Minnesota, Oregon, Illinois, Rhode Island, Maryland, Vermont, and DC.
Each state with estate taxes has a different level of exemption, so be sure to consult with your family’s estate planning attorney before any decision – or move – is made.