Estate Tax Basics
The estate tax is a tax levied on the transfer of wealth at death and is based on the total value of your property owned at death. Each person currently has a federal estate tax exemption of $10,000,000, indexed for inflation. For 2020, the amount is $11,580,000. That means that the tax is assessed on assets in excess of that amount. The exemption amount will be reduced to the extent of any taxable gifts you make during your lifetime. If you are domiciled in Massachusetts at the time of your death, you have a $1,000,000 state exemption amount (which means that Massachusetts will levy a tax on all assets included in your estate above that amount, albeit at considerably lower tax rates).
Gift Tax Basics
The gift tax is a tax levied on the transfer of wealth during lifetime which is completed for no consideration. Each person currently has a federal gift tax exemption of $10,000,000, indexed for inflation. For 2020, the amount is $11,580,000. That means that the tax is assessed on transfers in excess of that amount. Any taxable gifts you make during your lifetime will reduce this exemption amount, which will also reduce the estate tax exemption amount. Importantly, if you are a Massachusetts resident, Massachusetts has no gift tax.
There are two key exceptions to the gift tax:
- Each person can make annual gifts of up to $15,000 to any number of people he/she wishes without the imposition of any tax. For example, if you have three children, you can make a gift of up to $15,000 to each child every year and no gift tax will be due. In addition, if you are married, your spouse can also make a gift of up to $15,000 to each child every year. These gifts do not reduce your estate tax exemption amount.
- There is no tax on any transfer to a US citizen spouse (whether during lifetime or at death).
