Estate Tax in Massachusetts
You May Be Richer Than You Think
Watch this video to see how quickly most families reach the $1 million estate tax threshold in Massachusetts.
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Many people believe they do not need to worry about the estate tax because the federal tax exemption is so high. But the Massachusetts tax affects many middle class families, because the state tax exemption is much lower than the federal.
The assets that count toward this amount also include things you might not have considered to be part of your taxable estate, like life insurance and your residential real estate. Under Massachusetts laws, if your estate is worth more than 1 million at your death, even by a little bit, your heirs will owe $36,000 or more in taxes, while if you plan properly to protect more of your assets, they will owe nothing. |
What Is the Estate Tax?
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Estate Taxes (sometimes called the Death Tax) are taxes collected from your estate if your assets or at or over a certain value. Your heirs do not pay taxes directly on money or assets they inherit from you. But your estate itself may have to pay taxes if the value of your estate exceeds a certain amount. Federal tax reform laws in 2017 raised the federal estate tax threshold to over $11 million. This means anyone whose estate is worth less than eleven million dollars in their estate does not have to worry about federal taxes. For Massachusetts residents, however, there will be taxes owed if your estate exceeds $1 million, even by a little bit. This means indirectly your heirs do pay taxes, because that money comes out of the estate before it is distributed to them. In Massachusetts, this tax is really not just for the rich, and affects many more regular and middle class families than most people realize. You could be struggling to meet your mortgage payment every month but still in danger of owing taxes. Below is some information about what assets are counted in your taxable estate, and how a comprehensive estate plan can help you avoid or minimize the tax burden. Estate Taxes vs. Inheritance taxesSometimes people refer to the estate tax as inheritance tax. Inheritance taxes are actually something different- they are state taxes imposed on beneficiaries on the assets they receive as inheritance.
These taxes only come into play if the person who passes lives in a state that has an inheritance tax, and Massachusetts does not. You can learn more about inheritance taxes and how they might affect your Massachusetts estate plan here. What Assets Count for Estate Tax?Even things that pass automatically without probate, like your home or life insurance, count toward calculation of the $1 million threshold. If you have transferred real property subject to a life estate, that may still be a countable asset. Many people believe that these things are not part of their taxable estate, but they do.
Imagine, for example, that you own a house with $250,000 in equity, a $500,000 life insurance policy, and $250,000 in a 401k or other retirement fund. Just like that you have reached the $1 million threshold for Massachusetts residents. How Much Estate Tax Will You Owe?What is the estate tax rate in Massachusetts? The amount of tax that will be applied depends on the overall value of your estate. What you need to know is that even if your estate is worth even just barely over $1 million, your entire estate will be subject to the tax, not just the amount over $1 million.
The Massachusetts tax rate is a graduated tax rate starting at 0.8% and capping out at 16%. Taxes on a $1 million estate applying these graduated rates are approximately $36,000, but there are no taxes on an estate that is $999,999. This is why it is so important to consult an estate planning lawyer even if you do not feel rich at all. It may still be necessary to take steps to bring your total taxable estate below the $1 million mark. |
Need Help Planning for Estate Taxes?
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What Can You Do About It?
Though you may not be able to avoid taxes entirely, there are many ways of estate planning to shelter as much as possible and minimize or eliminate the burden on your heirs.
For Massachusetts residents who are married couples, you can set up trusts to allow you and your spouse to essentially combine your exemptions. This makes the threshold $2 million instead of $1 million. Special rules apply if you or your spouse are not United States citizens, but there are still ways to take advantage of this exemption.
You can also create irrevocable trusts to take assets entirely out of your estate for the benefit of your family.
Finally, you can take advantage of gifting strategies to reduce the size of your estate. This means moving assets to your family members over time within the annual gift tax limitations. If you want to give away a large amount of money in a single year and avoid these being taxable gifts, remember that the limit applies to each individual recipient. So, for example, if you have children and grandchildren, you can give a gift to each adult child and a gift into a trust for each grandchild, and apply the gift tax-exempt limit to each one.
If you already have an estate plan in place, but have recently come into an inheritance or other increase in your net worth, you should contact an attorney. Your original estate plan may have been drafted on the assumption that you were not near the estate tax threshold, and may not appropriately protect your family from taxes.
For Massachusetts residents who are married couples, you can set up trusts to allow you and your spouse to essentially combine your exemptions. This makes the threshold $2 million instead of $1 million. Special rules apply if you or your spouse are not United States citizens, but there are still ways to take advantage of this exemption.
You can also create irrevocable trusts to take assets entirely out of your estate for the benefit of your family.
Finally, you can take advantage of gifting strategies to reduce the size of your estate. This means moving assets to your family members over time within the annual gift tax limitations. If you want to give away a large amount of money in a single year and avoid these being taxable gifts, remember that the limit applies to each individual recipient. So, for example, if you have children and grandchildren, you can give a gift to each adult child and a gift into a trust for each grandchild, and apply the gift tax-exempt limit to each one.
If you already have an estate plan in place, but have recently come into an inheritance or other increase in your net worth, you should contact an attorney. Your original estate plan may have been drafted on the assumption that you were not near the estate tax threshold, and may not appropriately protect your family from taxes.
How Can We Help?
Our lead estate planning lawyer, Jenna Ordway, has been helping families prepare their estate plans since 2013. In addition to her law degree, Jenna has a masters degree (LLM) in taxation, and has written a book "The Road to Peace of Mind- What You Need to Know About Estate Planning") to help you better understand the issues and your options as you consider your estate plan.
Our founder and owner, Emily Smith-Lee, has been practicing law for 22 years, and has operated her practice as a local small business for the past ten years. She has been named on the Massachusetts Super Lawyers List every year since 2013, and was named a 2018 Lawyer of the Year by Massachusetts Lawyers Weekly. Emily is committed to the community, and has been a local elected official in Sharon for nine years, eight as a School Committee member and currently as a member of the Board of Selectmen.
Our founder and owner, Emily Smith-Lee, has been practicing law for 22 years, and has operated her practice as a local small business for the past ten years. She has been named on the Massachusetts Super Lawyers List every year since 2013, and was named a 2018 Lawyer of the Year by Massachusetts Lawyers Weekly. Emily is committed to the community, and has been a local elected official in Sharon for nine years, eight as a School Committee member and currently as a member of the Board of Selectmen.
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