Estate planning is essential for everyone, but high-net-worth individuals (HNWIs) face unique challenges and opportunities that require specialized strategies. In Massachusetts, with its relatively high state income tax and estate tax thresholds, these strategies must address both state and federal requirements while safeguarding significant wealth.
The Impact of Massachusetts Estate Taxes
Massachusetts is one of the states that imposes its estate tax separately from the federal system. With an exemption threshold of $2 million, many HNWIs fall well within taxable territory, which means estate taxes could take a considerable chunk out of your legacy if not planned for properly. Strategic planning becomes crucial to reduce this burden. Techniques such as gifting assets during your lifetime or creating trusts can help to lower the taxable estate.
Federal Estate Tax Consideration
The federal estate tax exemption is far more generous than Massachusetts’ exemption. In 2024, the federal estate tax exemption amount is $13.61 million per person. While this provides significant flexibility, it’s important to note that this exemption may not be in place forever.
Key Strategies for Asset Protection
When planning an estate, the goal isn’t just to ensure your assets pass seamlessly to your heirs but to preserve as much of that wealth as possible by minimizing taxes and leveraging tools specific to your financial profile. By leveraging tools like trusts, gifting strategies, and charitable giving, you can minimize taxes, protect assets, and ensure your wealth supports your family and values long into the future.
Using Trusts to Safeguard Wealth
Trusts are among the most versatile tools in estate planning for HNWIs in Massachusetts. An AB trust, also called a credit shelter trust, is designed to minimize estate taxes for married couples by splitting into two trusts upon the first spouse’s death. Irrevocable trusts allow you to remove assets from your taxable estate while ensuring they are protected from creditors or lawsuits.
Dynasty trusts, a type of irrevocable trust, are another excellent option, allowing wealth to pass through generations while minimizing estate taxes. In Massachusetts, creating an irrevocable Medicaid trust can also help shield assets from long-term care expenses while allowing you to qualify for Medicaid benefits.
Incorporating Life Insurance Trusts
Life insurance policies can play a dual role in estate planning for high-net-worth individuals. Proceeds from life insurance are generally tax-free for beneficiaries, but they may be included in the taxable estate if the policy is owned outright. By placing the policy in an irrevocable life insurance trust (ILIT), you can remove it from your estate and ensure the proceeds are protected from taxation, providing liquidity for your heirs to cover any estate taxes or debts.
Leveraging Annual and Lifetime Gift Exclusions
One of the simplest ways to reduce your taxable estate is by taking advantage of the annual gift tax exclusion, which allows you to give up to $18,000 per recipient in 2024. That means you can give up to $18,000 to as many people as you wish each year without having to report the gifts to the IRS. Married couples can give up to $36,000 without reporting the gift. For example, if a married couple decides to give $36,000 to each of their two adult children every year, that would reduce their estate size by $72,000 each year. Over time, this can significantly reduce the size of an estate.
If a gift exceeds the annual limit, that doesn’t necessarily mean there will be a gift tax. The amount over the exclusion limit can be taken from the person’s lifetime exemption limit so no taxes are owed, which in 2024 is $13.61 million per person.
The federal gift and estate tax exemption amounts are set to expire on December 31, 2025, under the 2017 Tax Cuts and Jobs Act. If there aren’t any legislative changes, starting on January 1, 2026, the exemptions will revert to $5 million per person adjusted for inflation. High-net-worth families must plan proactively to take advantage of the current higher exemptions through gifting strategies or trusts like Spousal Lifetime Access Trusts (SLATs). These tools allow you to lock in today’s exemptions while still maintaining access to wealth if needed.
Funding Education and Medical Expenses
Massachusetts families can also benefit from direct payments for education or medical expenses, which aren’t subject to gift tax limits. By covering tuition or medical bills directly for a loved one, you can transfer substantial wealth without impacting your gift tax exemptions.
Charitable Giving as a Strategic Tool
Charitable giving offers not only a way to give back but also a powerful estate planning tool for reducing taxes. Charitable remainder trusts (CRTs) and donor-advised funds (DAFs) are popular among HNWIs for their tax advantages. A CRT allows you to provide income to a beneficiary for a set period, with the remainder going to a charity, which not only supports causes you care about but also provides significant income and estate tax deductions. Donor-advised funds, on the other hand, offer an immediate tax deduction while giving you the flexibility to decide later which charities will benefit.
Creating a Legacy Through Foundations
For individuals with substantial wealth, establishing a private foundation can serve as both a philanthropic legacy and a tax-efficient way to manage charitable giving. Foundations allow for control over where your money goes while offering income tax deductions for contributions.
Transferring Business Ownership Strategically
For HNWIs who own family businesses, succession planning becomes a critical component of estate planning. Strategies like gifting shares of the business, creating family limited partnerships, or establishing grantor-retained annuity trusts (GRATs) can help ensure a smooth transition while minimizing tax liabilities. In Massachusetts, where state taxes can complicate transfers, it’s crucial to involve legal and financial advisors to navigate these complexities.
Balancing Family Dynamics
Effective succession planning also requires addressing the personal side of wealth transfer. Open communication with family members about roles, responsibilities, and expectations can prevent disputes and ensure the business remains a source of unity rather than conflict.
Tailoring a Holistic Estate Plan with Legal Guidance
Estate planning for high-net-worth individuals in Massachusetts demands a comprehensive, customized approach. Given the complexity of wealth management strategies and the frequent changes to tax laws, partnering with experienced financial planners and estate attorneys is essential.
Call the Heritage Law Center today at 617-765-9307 to speak with our team. We’ll take a look at your situation and identify how best to protect your assets. By staying informed and vigilant, you can prevent costly mistakes and successfully execute your plan for your family’s future. Start your planning today to secure a legacy that reflects your goals and priorities.
