What You Need to Know About Massachusetts Estate Tax

Everyone has an estate. It may not look like a sprawling mansion in the countryside, complete with a butler and a carriage driver, but in the eyes of Massachusetts law, if you have any assets to your name (even just a bank account), you have an estate.

It’s highly likely that your estate makes you richer than you think, and here’s why: your estate is more than just your home and your current bank account balance. It includes life insurance, annuities, business interests, retirement accounts and more.

This is why you should consider estate planning: lowering the tax burden on your estate could help your family save tens of thousands in taxes, significantly adding to the inheritance of your loved ones. And whether you realize it or not, your assets likely add up to more than $1 million, which is when Massachusetts estate tax will begin to affect you.  Under the current Massachusetts graduated estate tax rates, if all of your assets combined are worth even just a little over $1 million, your family will pay approximately $36,000 in estate taxes.  If your assets combined are worth $999,999, they will owe nothing.  This means the time and money (far less than $36,000!) invested in planning is well worth it if you can bring your taxable estate below that threshold.

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The $1 Million Threshold in Massachusetts

If your assets are worth more than $1 million, your estate will owe Massachusetts estate tax when you die. And you won’t just owe taxes on the amount above $1 million – you’ll pay taxes on all of your assets over $40,000.

Massachusetts has graduated tax rates that range from 0.08% to 16%. You’ll pay about $36,500 in taxes on an estate just over $1 million, but you could pay nothing if you were able to keep your total estate at $1 million or less.  That's a big difference, and far more than you will have to pay an attorney to draft a comprehensive estate plan and help you avoid or minimize this liability.

Are you close to the taxable threshold?  Most people are closer than they think.

For example: If you have a $400,000 life insurance policy, stock holdings, an average 401(k) retirement and you own a home, chances are, you’re definitely close if not over the limit. And most of these assets will only grow in value as time goes by.  It’s worth it to explore the tax saving benefits you could employ with conscientious estate planning. You may not think of yourself as “rich,” but Massachusetts will take its share upon your death unless you structure your assets in a way to benefit your heirs the most.


Giving Is a Great Solution

What’s a great way to reduce estate tax burden in Massachusetts? Give it away.

If you plan on leaving money to your children after your death, and you know your estate is over the $1 million Massachusetts exemption amount, why not begin to impart financial gifts now? You will get to see the benefits your money can provide to your heirs and you will actively reduce the amount they would have to pay in taxes after your death.

Giving is a sensible way to expedite the inheritance process without having to pay estate taxes, but state and federal laws have been established to put a limit on your ability to exercise this option.

In Massachusetts, any gifts in excess of $15,000 per year per receiver that were gifted after December 31, 1976 will reduce dollar for dollar the amount of assets you can have in your estate before incurring estate tax. You can give away up to $54,000 per year, per receiver without paying a federal gift tax, but if you die within three years of any size gift, even one within the $15,000 limit, it will remain part of your estate for tax purposes.  Who counts as a "receiver?" Anyone.  If you have an adult child who is married, you can give $15,000 to your child and another $15,000 to their spouse.  If they have children, you can give $15,000 for each child into a trust or education savings plan.

Married couples can give away $30,000 per year to their heirs. They could conceivably gift $30,000 per year to each of their three children and reduce the value of their gross estate by $270,000 over the course of three years, without having to reduce their allowed exemption amount (the $1 million per person described in the section above.)

If you own a business or an interest in a closely held company (closely held means it is not publicly traded, which is the case for most small businesses), there are ways to leverage your giving limits.  The IRS permits a discount on the valuation of a business because it is not publicly traded, and if you gift minority interests, there is an additional allowable discount.  What this means is that you can give away an interest that may have a real value of more than $15,000, but can be valued for gift and estate tax purposes at $15,000 or less.  It is also worth considering this kind of asset in a gifting strategy, because it does not necessarily take liquid assets that you may need in your own lifetime out of your pocket, and helps facilitate the transfer if you intend for family members eventually to take over the business.

Using Trusts to Minimize Tax Liability

There are many ways to use trusts to minimize your estate tax liability.  If you are married, you can use trusts to basically pool your $1 million exemptions, making it effectively a $2 million exemption.  You can also use irrevocable trusts as another way to give away assets but maintain some kind of say about how they are used.  For example, you could place assets into a trust that allows you to receive income from the assets but earmarks the assets themselves for a beneficiary (a child or grandchild, for example).  

What Else Can You Do to Reduce Your Tax Burden?

There are many additional estate planning strategies we recommend at slnlaw. From opening a credit shelter trust to establishing a Family Limited Partnership, you have options and we have explanations.

Find out if you’re close to the $1 million threshold – schedule a free consultation with our estate planning team to figure out what you’ll owe and how to lower (or erase) your projected Massachusetts estate tax bill.

Even though it’s not a topic you like to think about on a day-to-day basis, you know you need to prepare for your family’s life after your death.
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A will is one of the most common estate planning documents, but surprisingly, this legal document probably doesn’t suffice and won’t guarantee your wishes are carried out. If you’re relying on a will as your sole estate planning document, you could be leaving your family unprotected. While writing a will is a great start, it isn’t comprehensive enough to account for all of the complexities of your finances and your life.

Here are the top five reasons you need more than a will when it comes to planning your estate:
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1. A will is just a suggestion of your wishes and must be validated by a judge through a process known as probate.

Probate is public, lengthy, expensive, and leaves your will and wishes open to contest or challenge by parties who think they should be included.  The more assets that pass automatically to your heirs outside of the probate process the better. Probate could prevent your family from gaining possession of your assets for up to a full year following your death, when they may have immediate needs for cash to take care of themselves, pay the bills, pay any estate tax you may owe, and much more.

The probate process is estimated to eat up between 3% and 8% of the value of your estate, which could be a significant sum.  You may not be able to avoid the probate process entirely, but a careful and comprehensive estate plan can help ensure as many assets as possible pass outside of probate, and that to the extent you need to go through the probate court the process is streamlined and simplified.


2. A will is often inflexible.

Once a will is written and signed, it is set. It can only be revoked by destroying the original document, leaving you without a will, amending the will through a document called a codicil which still requires the same formalities as a will in order to be legally valid, or going through the entire will drafting process again and signing a new will.

At your death, a valid will, once probated, is set. There can be no changes. A will drafted 15 years ago does not have the flexibility to deal with the unexpected.

On the other hand, while a trust is also indelible, a trust has an appointed trustee. This living person who you trust to follow your wishes is also able to react and deal with the unexpected more appropriately and with more finesse than an aged document that is unable to contemplate every potential circumstance.


3. A will alone won’t fully protect your estate from taxes.

Alone, a will is unable to shield your assets from federal and state taxes, which can significantly reduce the total left to your descendants. This is most likely more relevant to you and your family than you might think: if you have a life insurance policy, equity in your home, and typical retirement savings, your taxable estate could easily exceed the $1 million exemption under Massachusetts estate tax laws, which could cost your family $36,000 or more in taxes.  There are additional documents and strategies, including trusts and family gifting plans, which can help you minimize or avoid altogether this additional tax burden on your family. 


4. A will is limited to property that does not already pass automatically to beneficiaries.

Simply because you choose to distribute your property equally to your three children, does not mean that all your property will go to your three children. Only property passing under your will and included in your estate will go to your children. Other assets, such as retirement plans, life insurance proceeds, and certain property held jointly, pass automatically to whoever is named as the beneficiary or who owns the property jointly with you. Your will cannot override deeds or beneficiary designations.  Whether you have a will or not, it is important to periodically check your beneficiary designations to make sure they have kept up with changes in your life and are consistent with what you want.


5. A will names who will take care of your minor children, but is limited in describing how your children should be raised.

A will can name a conservator and guardian for your children, but the details of how you want your children raised, such as education and religion, are not topics people typically feel comfortable including in a public document.

A will is just a note with your basic wishes expressed. But a comprehensive legal document like a trust has the power to do more than state your expectations. You can delay monetary distributions until your children are old enough to handle such distributions. You can provide more direction for your chosen guardian in terms of education, religious upbringing, and more. You can also protect your children from misuse of trust funds.

Another thing a will cannot do is protect you and your family if you are incapacitated.  A will only takes legal effect upon your death, so it cannot control who makes medical decisions for you, or financial or legal decisions, if you are alive but unable to do so yourself.  This is why most comprehensive estate plans include two key documents: a health care proxy and a durable power of attorney.  These two documents allow you to designate decision makers ahead of time.  

Protect Your Family

Estate planning may not be as straightforward as drafting a simple will, but an experienced estate planning lawyer can help you find peace of mind by creating the set of documents, including wills and trusts, that will address your specific situation and goals. Get the confidence that comes with knowing your loved ones are protected – contact slnlaw today for a free estate planning consultation.