By: John P. Napolitano, CFP®, CPA, PFS, MST

When the Federal government raised the death tax threshold to over $5 million, many people rejoiced and let the tax portion of their estate plan rest. According to the 2017 Market Insights Report released by the Spectrem Group, there were over 9 million individuals with net worth between $1 million and $5 million. There are another 1.45 million people whose net worth exceeds $5 million.

Hopefully, those with net worth greater than $5.49 million (the current amount that is exempt from federal estate or gift taxes) understand that their estate needs work to avoid or minimize the consequences of estate taxes on their heirs. But here in my home state of MA, the state limit is only $1 million. That means that any amount over $1 million will be subjected to MA death taxes. This turns out to be quite a surprise to many unsuspecting beneficiaries as they see how the estate is subsequently administered.

Just to clarify, your net worth at death includes any asset that you owned or had what the taxing authorities call a life estate. If you own something, the answer is simple. Use the fair market value on date of death as the amount to be includable in the estate. You may be eligible to use what the IRS calls the alternate valuation date. The alternate valuation date is 6 months after date of death and can be helpful for assets whose value drops materially in the 6 months following the decedents passing.

The life estate, however, is a little trickier. For example, if you give your elderly parents home to the children to possibly avoid health care entanglements, but you left the parents the right to live in the home rent free, that is a life estate. As such, the home should be includable in the decedent’s estate.  Most people miss this, only to later find out that it may not have been in their best long term interests to omit that asset from a death tax return.

The first issue is simply that the estate filing (or lack thereof) was not correct. That life estate asset should have been included. The second issue may relate to future income taxes because of basis problems. Your tax cost (basis) for assets received by gift is the same as it was in the hands of the grantor. For a home bought many decades ago, that number may be quite low.  When you ultimately sell that home there could be significant capital gains taxes to pay. If the home comes to you through the estate, you’ll receive a stepped up basis meaning that the fair market value on the decedent’s date of death becomes your new basis. 

The intention here isn’t to deliver a lesson on death taxes and life estates, it is to wake up all of you who may have been led somewhere with consequences that you may not have considered. Make sure that your estate is set up to also minimize state death taxes.

Making Cents is published weekly in Gatehouse Media publications, including Patriot Ledger

John P. Napolitano CFP®, CPA is CEO of U. S. Wealth Management in Braintree, MA.  Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

This information is not intended to be a substitute for individualized legal advice.

John Napolitano, U.S. Financial Advisors, U.S. Wealth Management and LPL Financial do not provide legal advice or services. Please consult your legal advisor regarding your specific situation

U.S. Wealth Management, U.S. Financial Advisors, and LPL Financial do not offer tax advice. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through U.S. Financial Advisors, a Registered Investment Advisor. U.S. Financial Advisors and U.S. Wealth Management are separate entities from LPL Financial. John can be reached at 781-849-9200.