YOU’RE RICHER THAN YOU THINK- MASSACHUSETTS ESTATE TAX
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.
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.
slnlaw is a law firm in Sharon Massachusetts providing business, employment law and estate planning services to individuals and small businesses