Fiscal Cliff Averted, but MA and RI Estate Taxes Remain Palpable for Middle Class

With passage of the American Tax Payer Relief Act last month, Congress left federal estate tax laws relatively intact.  Under the Act, the lifetime gift exemption and estate tax thresholds hold steady at $5 million and remain unified.  In other words, each citizen is allowed a $5 million credit which can be applied as an estate tax deduction at death and/or as a gifting exemption during life.  The Act also increased the maximum federal estate tax rate from 35% to 40%.

Since the $5 million threshold made national and local news, many of my new Massachusetts and Rhode Island estate planning clients express surprise when learning that they are subject to estate taxes with an estate valued at as little as $1 million (Massachusetts) or $910,725 (Rhode Island).   Indeed, Congress’s actions had no bearing whatsoever on state estate tax rates.  Thus, the Massachusetts estate tax threshold remains at $1 million, and the inflation-indexed Rhode Island estate tax is now $910,725.

As I’ve explained in a previous blog (see my post of 10/11/12 – “Middle Class Also Feels Pinch of Rhode Island and Massachusetts Estate Tax), the state limits are relatively low and hit large portions of the middle class.  Since home equity, personal possessions, savings, and the death benefits of certain life insurance policies are all included in one’s taxable “estate,” even those who don’t consider themselves wealthy will need to consult a Rhode Island or Massachusetts estate planning attorney for estate tax planning.  The state thresholds have remained relatively steady for many years and are unlikely to change substantially anytime soon.  So while we can all be thankful that the federal government has – at least for now – granted most of us a likely federal estate tax reprieve, many of us still have much estate tax planning work to accomplish.

This article was co-written by Thomas J Marks and Stacy M. Norrell.