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Recent tax changes affect how assets are transferred to heirs

One of the most challenging aspects of estate planning for Massachusetts residents is deciding how best to protect heirs from hefty tax bills associated with an inheritance. Certain assets may be best passed on after death while others may provide the maximum benefit to the heir while the individual making the bequest is still alive. For many people, these decisions may not be difficult since the new federal estate tax exemption was raised to $5.34 million per person for this year.

Further, a married couple may share their exemption through a concept known as portability, for a total exemption of $10.68 million. The amount is expected to continue rising over the next 20 years. Most people will not need to consider federal estate tax issues at this level. Other assets that could appreciate significantly may not be subject to estate tax, but they may be subject to capital gains tax.

Making the determination of when to pass on such an asset and when the heir may elect to sell it for maximum value can be tricky. The tax laws allow an heir to use what is called a “step-up basis” to minimize, if not eliminate, capital gains tax. Otherwise, heirs could pay capital gains taxes of up to 40 percent. The value of the asset when it is inherited also becomes the asset’s value for capital gains tax purposes. If it is sold immediately, no tax may be due.

The goals of estate planning may be different for individual Massachusetts residents, but two goals seem to be universal — the desire to provide for family members and to help heirs avoid taxes on the assets they inherit. The new laws passed by Congress could change the way these tasks are accomplished. For many people, the process may well have become less difficult.

Source: Forbes, Freebasing Your Estate, Deborah L. Jacobs, Feb. 12, 2014


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