Questions about estate taxes are among the most common I get when talking to people about what I do. Everyone wants to know: “Do I have to pay estate taxes?" The quick answer is: probably not, but it’s much more likely if you live in Massachusetts than if you live in New Hampshire. (I have only covered these two states, as they’re where I’m licensed to practice law. If you live in another state, check here to see if your state has an estate tax.)
The Short Answer
If you are a Massachusetts resident, your gross estate must exceed $1 million for your estate to pay the estate tax. Federally, your gross estate must exceed $5.46 million (in 2016) for your estate to pay the estate tax. New Hampshire does not impose a state estate tax on its residents.
(Meeting these numbers can be easier than you’d think, as your gross estate includes real estate, the face value of your life insurance policies, retirement accounts and annuities, and any property over which you have a power of appointment, among other things. And be careful- even if you live in New Hampshire, you may also be liable for estate tax on property, such as vacation or rental property, held in another state that does have an estate tax.)
If you think you might have a taxable estate, you should contact an estate planning attorney to make a list of your assets and develop an estate plan designed to minimize your tax exposure. There are a number of strategies, including trusts and lifetime gifting, that can be used to reduce or eliminate the amount of tax your estate will have to pay.
The Long Answer
Estate taxes are imposed on estates- that is, the property of someone who has died- by many states and by the federal government. (There are also inheritance taxes in some states, which are slightly different and only imposed in a handful of states.)
a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death… [t]he total of all of these items is your "Gross Estate." The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets.
The modern American federal estate tax was instituted in 1916 in an effort to curb the concentration of immense wealth in a few families and companies. The tax has raised many billions of dollars over the past hundred years, but the revenue brought in by the estate tax is a very small percentage of the federal government’s overall revenue. Because you will not pay federal estate tax until the value of your gross estate exceeds $5.46 million (as of 2016),
Very few estates have to pay federal estate taxes. The 2016 exemption amount is $5.46 million per person- which means your estate would only pay estate taxes on assets over $5.46 million. This means that a couple can, with proper planning, pass on almost $11 million to their children without paying estate taxes. You can also give an unlimited amount of money to your spouse. Because of the high exemption amount, the spousal exclusion, and the available deductions, the federal estate tax affects as few as two out of every 1,000 estates.
Massachusetts imposes a state estate tax on estates valued at over $1 million. That’s certainly a lot of money, but as the tax includes the the face value of life insurance policies, retirement policies, and often a home, many Massachusetts estates are subject to the tax. The Massachusetts estate tax, unlike the federal tax, applies to the entire value of the estate, not just the amount over the threshold. So if you have an estate worth $1.5 million, the entire $1.5 million will be taxes, not just the $500,000 over the threshold amount. Although the Massachusetts estate tax applies to more families than the federal estate tax, the tax rates are a lot lower, topping out at 16%.
(I am personally of the opinion that this threshold amount is too low, but that’s another issue.)
New Hampshire does not have a state estate tax, so New Hampshire residents only have to worry about the federal estate tax. As I explain below, the federal estate tax affects only very large estates. (New Hampshire did have a state estate tax for the estates of people who died in 2004 or prior; however, the state has not imposed an estate tax since the repeal of the estate tax death credit.)
If you have a taxable estate, what do you do?
If you do have a taxable estate, there are many planning strategies you can use to minimize or eliminate the amount of taxes you will have to pay, such as trusts and lifetime gifting. If you are concerned about estate taxes, an estate planning attorney can design a plan tailored to your specific situation.
This is all as of March 2016. The federal estate tax has had a much lower exemption amount in the past and has been higher (in 2010, the year George Steinbrenner died, it was unlimited, potentially saving his heirs hundreds of millions of dollars), and it could change in the future. Right now, however most estates are not taxable.
If you want to read more about the estate tax, I recommend this excellent article at Vox.com.
Addendum, April 4, 2016: This article applies to U.S. Citizens. The estate tax laws apply differently to non-citizens.