Estate Tax In The State Of Massachusetts

In this article, you will learn…

• How estate tax works in Massachusetts,
• Why Massachusetts estate tax can be tricky, and
• How you can minimize estate tax.

How Does Estate Tax Work In Massachusetts?

In Massachusetts, there are technically two estate taxes:

• Federal estate taxes, and
• Massachusetts estate taxes.

On a federal level, the exemptions are so high that most people don’t really get caught up in them. In 2022, the exemption amounts to $12.06 million. In 2023, that’s going to go up to $12.92 million. You also have portability between spouses on the federal level, which means that only you and your spouse have double the exemption amount, you’re really not going to be taxed.

If you do end up going over the exemption amount on the federal level, you only pay tax on the marginal amount which is over the exemption. Even if you did die with 25 million, you’re only paying tax on the last $880,000. So, most people aren’t going to have an issue with the federal estate tax. If you do, there are ways to help you minimize that.

A lot of people more commonly get caught up with the state estate tax. In Massachusetts, the limit is only $1 million. Additionally, there’s no so-called portability between spouses. If a couple has $1.5 million between them, they are actually going to have to pay state estate taxes on the entire $1.5 million. That’s because you’re not only taxed the marginal amount over the limit in Massachusetts – you’re taxed the entire amount.

If Spouse A dies and leaves everything to Spouse B, when Spouse B dies, all $1.5 million is going to be taxed, which isn’t ideal. One of the benefits of the trust is that you can actually use it to help minimize this estate tax. It can help you use both exclusion amounts – yours and your spouse’s.

That’s generally how estate tax works and, of course, both the federal and state estate taxes are based on the total value of the estate minus liabilities at the date of your death.

Can You Give Assets Away To Avoid Paying Estate Tax?

On a federal level, we have a gift tax. It’s a unified exclusion amount for both gift and estate tax, so if you give away the money, it’s actually not very helpful at all on a federal level unless you’re under the annual exclusion amount of $16,000.

If you’re under the annual amount of $16,000, then it can help you minimize the federal estate tax. Most people don’t get caught up in the federal estate tax, so it isn’t too much of a benefit.

On the state level, though, we actually don’t have a gift tax. We only have the state tax, so giving gifts can actually be very helpful. If you had $3 million and you know you’re going to die in the next five days, you could give it all away because there would be no gift tax and then you wouldn’t have to pay anything.

There are two drawbacks to making lifetime gifts, though:

• They get added back for determining your eligibility for having to file a Massachusetts state tax return.

If you have an estate under the $1 million exemption amount, you don’t even have to file a tax return so no estate tax is owed. However, if you give $300,000 as a gift and have $900,000 on your estate, that $300,000 will be added back to your estate for the purpose of determining your state taxes. You will only have to pay estate taxes on the $900,000, but if not for that gift, you wouldn’t have had to pay any at all.

• You lose the basis step up to fair market value.

Making a lifetime gift may not be beneficial for tax minimization because you lose the basis step up. Usually when you inherit an asset, you get a full basis step up to fair market value. As an example of this, let’s say  you buy a property for $100,000 and then, at the date of your death, it’s worth $500,000. If you make a lifetime gift to your child of this asset, they’re going to get carryover basis, which means that if they sell the asset for $500,000, they’re going to have to pay capital gains tax on $400,000 of the proceeds. With the full basis step up, their basis becomes the fair market value of $500,000 and then they don’t have to pay any capital gains tax.

How Do You Avoid Or Limit Estate Tax In Massachusetts?

There are various things that you can do to minimize your estate tax in Massachusetts. For a more in depth discussion to meet your personal needs, you would really need to speak with an experienced estate planning attorney about your specific estate.

One thing you could potentially do is set up an eyelet for life insurance policies. If you have term policies, you don’t have to worry about the income tax consequences of life insurance. You can also put a term life insurance policy into an irrevocable trust that you can’t touch because there is no cash value that you’re going to need during your lifetime.

The most common way to minimize estate tax is, of course, to set up a revocable trust. You can set up a revocable trust so that you can use both your and your spouse’s $1 million exclusion amounts. This is a big way to avoid estate tax in Massachusetts and definitely worth discussing as an option with your estate planning attorney.

Those are the two easiest ways to minimize your estate tax, but there are several others which can become far more complicated and involved. To explore your options and get more in depth information, requesting an initial consultation with an experienced estate planning attorney is your next best step. For more information on Estate Tax In The State Of Massachusetts, an initial consultation is your next best step.