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Think you Don’t Need to Worry About Estate Taxes? Think Again.

Think You’re Estate Tax Exempt? Maybe Not.

You might think that only the “rich” need to worry about the estate tax.  In fact, many unsuspecting middle-class people are exposed to the tax, which at the federal level is a painful 35% currently.

SmartMoney recently ran a reminder to all possible victims of the estate tax. The fact is that you could have a taxable estate, and not even realize it.

Most people assume that since they don’t “feel” wealthy, they don’t have to worry about estate taxes — but they don’t actually do the math. Your “taxable estate” includes (minus liabilities): proceeds from life insurance policies; your primary residence and any vacation and/or rental properties; retirement accounts, investment accounts; cars, furniture, collectibles, and the rest of your “stuff.” Plus any private business ownership interests (such as shares in a family business or partnership).

Smart Money offers a hypothetical example:

Stephanie is a divorced single parent. Since she earns a healthy salary, she has a $4 million term life policy to provide for her three teenagers. She also has $800,000 of equity in her home, $1 million in retirement plan accounts, and $500,000 worth of assorted personal assets (cars, clothes, furniture, jewelry, and so forth). Stephanie has no significant debts beyond her home mortgage. Since she has never considered herself to be anything close to “rich” she has never done any estate-tax-avoidance planning. However, if she died tomorrow, her estate would be worth a whopping $6.3 million for federal estate tax purposes ($4 million + $800,000 + $1 million + $500,000), and her estate would owe the Feds $455,000 ($6.3 million estate – $5 million exemption) x 35% tax rate). Yikes! There may be a state estate tax bill too.

The bottom line is that estate planning means planning for contingencies. Consulting an estate planning attorney will not only help you plan for a potential estate tax liability, but also deal with important non-tax issues like probate avoidance, distribution of your hard-earned assets, providing for your own care in the event of long-term illness or disability, and the naming of guardians for any minor children.

You can learn more about the estate tax, by visiting the Determining Your Estate Tax page or read some of our past blogs on the Massachusetts Estate Tax.  If you are interested in other Estate Planning Strategies, sign up for a free workshop on Trusts, Estates & Asset Protection.