Tick Tock Goes the Federal Estate Tax Clock

Tick tock goes the federal estate tax clock, but in Massachusetts the alarm went off and so many people hit snooze hours ago!

If you live in Massachusetts and you and your spouse have: life insurance, a couple minor children, a home you own, some retirement accounts, household furnishings (including cookware and appliances, computers, televisions, collections), cars, and so forth, but you haven’t already established a trust, your estate tax clock is ticking. If you turn down the other noise in your life for a minute, can you hear it?

Let me explain. Back in 2001, the U.S. Congress, in its infinite wisdom, passed a law called the Economic Growth and Tax Relief Reconciliation Act (a.k.a. “EGTRRA” pronounced “egg-terra” because it makes about as much sense as that). Under EGTRRA, effective January 1st, 2010, there is to be no more federal estate tax, meaning anyone who dies can leave her estate completely free of federal estate tax liability – “die in 2010 and pay nothing!” it seems to say sardonically!

That’s why 2010 is being referred to tongue-in-cheek as “the Throw Mama From The Train year” (remember that movie!?!). A friend just informed me he’s even in a pool betting to see which wealthy politician or celebrity will die first in 2010 and become a pop culture test case. Who’s your best guess? Yes, as with my past professional life, my current line of work does require both a thick skin and a somewhat twisted sense of humour at times, I do not actually wish ill on anyone!

Anyway, EGTRRA goes on (I hear Jon Stewart saying that in my head, “go onnn!”) to say that unless Congress takes definitive action before New Year’s 2010, the federal estate tax rate will revert back to it’s 2001 enactment level, which was $1 million per person, instead of the $3.5 million we’ve had under 2009 law. Estate planning lawyers, tax nerds, and politicos are on the edge of our seats watching and waiting to see what Congress will do and enjoying the ivory tower type mental exercise.

But here’s the practically interesting part for Massachusetts residents that is so often overlooked in the national discourse on the subject – in 2002 Massachusetts saw the federal exemption increase and raised it by “decoupling” from the new federal level and reverting to the preexisting, 2000, federal level. In Massachusetts $1 million has been the benchmark to watch. Mind you, this does not mean you need to have a million or more in cash lying around liquid in your bank accounts. This is the part most people completely misunderstand and why we all start out saying “we don’t really have anything.”

Life insurance policies, a totally essentially piece of the puzzle for parents of young children, are usually what push most of my clients to the state filing threshold. You have to ask yourself what it would take to ensure your family is not financially ruined in the event of your untimely death. If you are a wage-earner, what would it take to replace your income to continue to provide for your family and pay your mortgage? If you are working your tail off for no monetary compensation (as most “stay at home moms and dads” are) you need to ask yourself how much money it would take to hire people to do all the things you are doing right now for $0. I’m not exactly sure where those numbers are and I don’t sell life insurance, but I’ve seen the value of domestic child and homecare work estimated around a minimum of $80-100,000 annually (so be sure to at least say “thank you” and hug your stay-at-home-spouse early and often!). Once you factor in the amount of life insurance and retirement accounts and your home, you’re probably near, at, or over the threshold for filing and paying Massachusetts estate taxes.

Given that and depending very much on the client’s individual financial priorities, preferences, and goals, our challenge as estate planning lawyers to address our clients’ financial goals often becomes how to delay payment of estate taxes following the first spouse’s death so that money can directly benefit the surviving family members instead. And then after the second spouse’s death, how to preserve as much of that accumulated, hard-earned family wealth as possible for the benefit of the deceased couple’s children and grandchildren.

And it’s really counterintuitive, but if you think about it – those who have very large estates have a whole lot to leave their loved ones, so shaving some off that off the top in estate taxes probably won’t hurt too much practically (maybe they’ll buy a ski chalet but not that villa on the beach), whereas those who have smaller estates really ought to take the necessary steps to preserve what they have for their loved ones for whom they worked so hard in the first place. That is unless, of course, they would prefer their money go to the government to be used for whatever purposes the government of the time sees fit. And that’s fine, that’s the choice each of us has to make in terms of our own personal priorities. Of course, many of us vehemently prefer some government policies and spending choices to others, and your estate plan is another way you get to vote to do just that.

When you do decide you want to create a plan to preserve your financial wealth for your surviving spouse, children, grandchildren, or other loved ones, there are several different ways to go about doing so, ranging from fairly straightforward to relatively complex, depending on your personal choices and preferences, your unique family situation, and the tax laws in effect and likely to be in effect at the time. That is why it is critically important for you to sit down with an estate planning attorney who will carefully review *your* personal circumstances and really listen to what is most important to you and then help guide you through your options so you can make the most informed and best possible choices for your family. As with most everything in life (and as a petite woman, just trust me on this one!) there really is no one size fits all approach and anyone who tells you differently is trying to sell you an invisible coat (or a will and/or trust package online for the legal DIYers out there).

As she designs your plan with you, keep in mind that there are at least 3 critically important variables your estate planning lawyer will never know: (1) how old you’ll be when you die; (2) how old your kids will be when you die; and (3) what the tax laws, both at the state and federal levels, will be when you die. So your lawyer has quite the task in front of her to try to design a plan that will adjust to fit your situation as best as possible when your plan needs to take effect and accomplish your wishes for your family.

While this whole federal estate tax uncertainty makes for good drama (and good blog post fodder), the most important part to remember is that no matter what happens with the federal estate tax this year, next year, or beyond, you need to make sure you have a lawyer who is careful, responsive, thorough, on top of changes in the law, keeps in touch with you regularly, and has a good system in place to ensure that whatever plan you create remains effective or is updated as necessary so it does what you want it to, when your family needs it. Perhaps finding her should be one of your New Year’s Resolutions…

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About Danielle G. Van Ess

Danielle G. Van Ess is a Massachusetts (born and raised), experienced estate planning and small business attorney who helps her clients protect and preserve what matters most to them. To learn more, please visit: dgvelaw.com or call: 781-740-0848