Two things you need to know about estate tax planning in 2016

Residents of Massachusetts can optimize their estate tax plans with these two pieces of advise.

Estate planning is a legal tool that allows for the preservation of wealth. Proper planning can help reduce current tax obligations as well as future obligations that can apply when assets are transferred during inheritance. Those who are taking advantage of legal tools through estate tax planning can benefit from focusing on these two areas for 2016:

  • Estate tax. The Massachusetts Department of Revenue defines the estate tax as a transfer tax on the value of an estate prior to the distribution to a beneficiary. There are two estate taxes to be aware of: federal and state. The tax does not apply until an estate’s value reaches over a set exclusion amount. The federal estate tax exclusion amount for 2016 has risen slightly from the 2015 amount from $5,430,000 to $5,450,000. The state estate tax in Massachusetts applies to those with a gross value of an estate, plus adjusted taxable gifts, that exceed the exclusion amount of $1,000,000. Estates that are estimated to have a value over these figures can take proactive steps to reduce their tax obligations. This can include the use of trusts and lifetime gifts.
  • Income tax. A recent publication in the National Law Review discussed how a number of tax payers that are attempted to reduce future tax obligations are shifting from a focus on estate taxes to one on income tax planning. More specifically, the piece stated that tax payers are focusing on reducing capital gains taxes that can be due on assets transferred to beneficiaries as a result of the step-up in basis to fair market value that applies at death. This often applies to assets like stocks. The step-up basis refers to the readjustment of the value of the asset for tax purposes upon inheritance. This is done based on the theory that assets are often worth more when inherited than they were when they were initially purchased. One option to avoid taxation at this step is to make use of a trust, as trusts do not allow the step-up in basis.

Although these two tips can provide some guidance, it is important to note a number of other legal tools are available as well. As a result, it is wise to contact an experienced estate tax planning lawyer. This legal professional will aid in tailoring an estate plan to meet your unique needs, while carefully reviewing and discussing any potential tax implications.