What Are Estate Taxes?
If you exceed a certain amount of wealth, the government reserves the right to take some of your hard-earned assets upon your death. The estate tax is a tax imposed when someone passes away prior to property being transferred to their heirs. In the state of Massachusetts, people have to worry about estate taxes because the state’s estate tax threshold is $2 million. Because of this, some clients in Massachusetts discover that they are in the territory of having estate taxes taken out of their estate upon their deaths, which could factor into their estate planning.
When it comes to avoiding estate taxes in Massachusetts, we use a few strategies for our clients. To learn more about how you may avoid or reduce estate taxes and leave more behind for your surviving loved ones, please get in touch with our law office to schedule your initial consultation today.
Is Your Estate Subject to the State’s Estate Tax?
As of October 4, 2023, the Massachusetts estate tax exemption increased from $1 million to $2 million for people dying on or after January 1, 2023. That means that typically when a person dies owning $2 million or less in assets, they pay no estate tax. However, if it’s valued over $2 million, the estate is taxed on the amount over the $2 million.
To establish whether you owe an estate tax, the government will look at the fair market value of everything you own at time of death, including cash, securities, real estate, business interests, trusts, annuities, life insurance proceeds, 401(k)s, other assets, plus taxable gifts.
The Massachusetts Department of Revenue requires an estate to file estate tax returns and pay estate taxes when the decedent’s gross estate, plus taxable gifts, exceeds the $2 million threshold.
In order to avoid estate taxes in Massachusetts, your estate must not exceed $2 million. Our law firm can help you determine your taxable estate value and develop effective strategies to minimize or eliminate your estate tax burdens.
How Much is the Massachusetts Estate Tax?
The Massachusetts estate tax is a progressive rate of 7.2% to 16%. The top bracket applies to taxable estates of $11 million and over. For example, if an estate is $2.1 million, $100,000 over the new $2 million threshold, the estate tax due would be $7,200–an effective rate of 7.2% of the amount over $2 million. Here’s more information on how you can calculate your Massachusetts estate tax.
In Massachusetts, there are three primary ways to avoid or minimize estate taxes: gifting, creating trusts, and making charitable donations.
How to Avoid or Reduce Estate Taxes in MA?
By putting your assets into a trust, gifting property and assets to family members and close friends, or donating to charities of your choice, you’re essentially reducing the size of your estate. By reducing the size of your estate, the result is that your estate will pay less in terms of estate taxes, possibly even avoiding estate tax entirely if your estate’s value gets below the threshold.
There are many factors to consider when seeking to minimize estate taxes and not every strategy will work for every individual’s situation. We recommend contacting our law firm to speak with our attorney about your unique needs as you seek to avoid or reduce your vulnerability to estate taxes.
Should You Create a Trust to Minimize Estate Taxes?
You could create a credit shelter trust (also known as an AB or bypass trust) or an irrevocable trust.
Married couples may opt to set up an AB trust, which divides a joint trust into two parts (Trust A and Trust B) upon the death of the first spouse. It’s designed to minimize estate taxes for married couples.
Let’s say Mike and Sharon are a married couple. When Mike dies, a portion of the assets goes into Trust A (Sharon’s trust) and a portion goes into Trust B. In this scenario, no estate tax would be due. For the rest of Sharon’s life, she owns and uses the assets in her own trust (Trust A). She also receives any income from Trust B and has the ability to access the principal as needed, though she doesn’t technically own the trust. The assets in Trust B are generally shielded from creditors and legal claims against Sharon.
When Sharon dies, only the assets in Trust A will be vulnerable to Massachusetts estate tax. As long as Trust A doesn’t go over $2 million, there shouldn’t be any estate tax.
For single individuals or those with larger estates and more wealth, you may wish to consider setting up an irrevocable living trust. This type of trust provides both tax protection and estate preservation measures. The assets transferred into an irrevocable trust aren’t considered to be owned by you. Therefore, the trust assets aren’t considered part of your taxable estate when you pass away.
Is Gift Giving a Suitable Strategy?
By making occasional or annual gifts to family members and other loved ones, the size of your estate will be gradually reduced. By reducing your estate, you reduce the value of that estate and potentially reduce the estate taxes that could take money out of the estate or even bring your estate below the $2 million threshold. For information about the gift tax exemption, click here.
This strategy isn’t suitable for every person or every situation. You must be careful about your gift-giving to ensure that it’s not above the allowed tax-free amount. The value of a gift is its fair market value. Contact our estate planning attorney for more information.
Can You Make Charitable Donations to Minimize the MA Estate Tax?
There are no annual limits for the amount of donations that you can give to charity. Such donations can reduce the size of your estate and count towards taxable deductions.
One option is to make charitable gifts upon your death to an organization of your choosing. This will provide a charitable estate tax deduction and reduce or potentially eliminate estate taxes.
However, if you wish to keep all estate assets within the family, charitable donations may not be an option.
Schedule a Consultation with Our Law Firm Today
There are several different strategies for reducing estate taxes in the state of Massachusetts. Charitable donations, annual gift giving, and creating different types of trusts could be valuable strategies for you and your loved ones. Before deciding on any option, we recommend you consult our experienced estate planning lawyer to discuss your goals and financial situation.
Our law firm has extensive experience helping clients with estate planning needs in eastern Massachusetts. We’ll use our knowledge to help reduce or eliminate your estate tax vulnerabilities. To learn more about how we may be of legal assistance to you and your loved ones, don’t hesitate to get in touch with our law office to schedule a consultation today. You can reach us at 617-765-9307.
