2022 TRANSFER TAXES: A VERY BRIEF AND BASIC PRIMER

Federal Summary:

  • 2022 federal estate, gift, and generation skipping exemption = $10 million for every taxpayer, indexed for inflation
  • 2022 federal estate, gift, and generation skipping exemption as indexed = $12.06 million (Up from $11.7 million in 2021)
  • 2026: The above exemptions “sunset” and revert to $5 million indexed for inflation.
  • 2022 federal annual gift exclusion = $16,000 per year, per donee. (Up from $15,000 in 2021)
  • 2022 federal unlimited gift exclusion for qualified tuition payments and qualified medical expenses payments paid directly to provider

Federal Explanation:

The federal government taxes gratuitous transfers of wealth. If the transfer is made during lifetime, the “gift tax” is applied. If the transfer is made at death, the “estate tax” is applied.

But not all lifetime transfers are subject to the gift tax. Some lifetime gifts are not considered “taxable gifts” at all under federal law. A federal gift! Small outright gifts to an individual during any year are exempt from the gift tax under the “annual exclusion” rule if the amount of the gift falls under the “gift tax annual exclusion amount“. This annual exclusion amount is indexed for inflation. Gifts to certain (but not all) trusts can qualify for the annual exclusion, too. Additionally, certain payments made directly to an education institution for a person’s qualified education expense or to a medical provider for a qualified medical expense are also not taxable gifts. If “qualified”, there is no annual limit to those education and medical expense gifts.

The federal government only wants to impose the gift and estate tax on wealthy people, as that term is defined by federal law. To exempt most people from the gift and estate taxes there are “exemptions” applied to shelter transfers from these transfer taxes.

Over your lifetime, you can make taxable gifts in a total amount equal to the gift tax exemption amount and not reach into your pocket and pay a gift tax (although you do have to report the taxable gift to the federal government – IRS Form 709). The gift tax exemption is $10 million, indexed for inflation. In 2022 the lifetime gift tax exemption is indexed to $12.06 million. The exemption is scheduled to “sunset” and revert to $5 million in 2026, also indexed for inflation.

The estate tax lifetime exemption is also $10 million, indexed for inflation. And the 2022 estate tax exemption is also $12.06 million. This also is subject to the same sunset.

The two exemptions – gift and estate – are inter-related. The relationship is complex, but here is a very simple way of looking at it: For every $1 of gift tax exemption you use to shelter a taxable gift from the gift tax, the estate tax exemption available at your death decreases by $1. If you make $2 million of lifetime gifts, then at your death in 2022 your available estate tax exemption would be $10.06 million ($12.06 million estate tax exemption – $2 million use of gift exemption).

But wait. There’s more! The federal government seeks to impose the gift and estate tax at each generation. So, the “generation skipping transfer tax” is a third transfer tax. This tax is imposed when a gratuitous transfer is made at life (gift) or at death (inheritance) which “skips” a generation: grandparent to grandchild (or a trust for grandchildren). For example, if you gifted $2 million to a grandchild, this transfer would be subject to the gift tax (40% rate) as well as the generation skipping transfer tax (40% rate). Very punitive. So punitive, in fact, that the federal government provides another exemption, the generation skipping transfer (“GST”) tax exemption. This, too, is $10 million indexed for inflation. And the 2022 GST tax exemption is also $12.06 million. In this example, assuming available exemptions, the $2 million gift to the grandchild can be sheltered from the transfer taxes by applying $2 million of gift tax exemption and $2 million of generation skipping transfer tax exemption on a timely filed gift tax return.

Since the GST tax only applies to certain lifetime or death transfers depending upon the generation assignment of the person (or trust) who receives the transfer, it is possible to use up your entire gift tax exemption (such as by making a $12.06 million lifetime gift to a trust for children) and then die with your entire GST tax exemption available to shelter from the GST tax up to $12.06 million of transfers at death to a trust for grandchildren. The estate tax would apply (since the estate tax exemption was reduced dollar for dollar by the lifetime gift), but the GST tax would be defeated by application of the GST tax exemption.

Finally, the concept of “portability” applies to the federal estate tax exemption. If at the death of the first spouse the deceased spouse’s estate does not use up its exemption to shield the estate from the federal estate tax, the remaining spouse can add the unused exemption to its own exemption (by electing to do so on an estate tax return). So, in 2022, if “spouse one” dies and only uses $7.06 million of its available $12.06 million exemption, “spouse two” (in certain circumstances) can port the unused exemption for its own use, and now have a total of $17.06 million of exemption ($5 million unused exemption + $12.06 million of its own exemption) to use during lifetime or at death.

Massachusetts Summary:

  • Massachusetts does not have an estate tax exemption; it has a “filing threshold.”
  • 2022 Massachusetts estate tax filing threshold = $1 million. It is not indexed for inflation.
  • Once the threshold is met, a Massachusetts estate tax return must be filed (Form M-706).
  • The estate tax rate is a graduated rate that starts at 0.8% and caps out at 16%. Rough rule of thumb is average tax rate is 10%.
  • Massachusetts does not have a gift tax or a generation-skipping tax.

Massachusetts Explanation:

Massachusetts’s estate tax applies to both residents and non-residents. Residents are taxed on real property situated in Massachusetts, and personal property wherever located. In some cases, a resident may also be taxed on non-Massachusetts real property. A non-resident is subject to the Massachusetts estate tax only as to property that has a “situs” in Massachusetts, such as Massachusetts real estate owned individually.

A Massachusetts estate tax has to be filed if the value of decedent’s wealth at death plus the value of past gifts exceeds a $1 million filing threshold. Once that threshold is met, a return must be filed. For example, if a Massachusetts resident dies owning a $200,000 securities account and a Massachusetts home valued at $400,000 and had made prior lifetime federally taxable gifts of $500,000 then the filing threshold has been exceeded ($200,000 + $400,000 + $500,000) and return must be filed.

Massachusetts bases its estate tax on what is known as the federal “credit for state death taxes” as the credit was in existence on December 31, 2000. To calculate this credit, a federal estate tax return (Form 706) with a revision date of July 1999 must be completed and attached to the Massachusetts return (Form M-706).

There is an automatic Massachusetts estate tax lien which attaches to Massachusetts real estate. The lien is released by signing and recording an “Affidavit of No Estate Tax Due” if a Form M-706 is not required to be filed, or by recording a “Certificate Releasing Massachusetts Estate Lien” issued by the Department of Revenue if a Form M-706 is filed.