When a Massachusetts resident dies, the Massachusetts estate tax may come into play on that person’s estate. It’s basically a transfer tax on the entire estate before it can be distributed to any heirs. Currently, 33 U.S. states don’t have any estate tax. The bad news is that Massachusetts does have an estate tax. The good news is that the Massachusetts estate tax exemption has recently increased.
The New Law
As of October 4, 2023, the Massachusetts estate tax exemption increased from $1M (million) to $2M for people dying on or after January 1, 2023.
- When you die, if your estate is valued at $2M or under, your estate pays no estate tax.
- If the estate is valued at one dollar over $2M, your estate is taxed only on the amount over the $2M.
This is a much better scenario than it was when the exemption amount was $1M, and if you had just one dollar over the $1M you had to pay estate tax on the entire amount, even the portion under the $1M. The Massachusetts estate tax is a progressive rate of 7.2% to 16%. The top bracket applies to taxable estates of $11,000,000 and over.
Does This Affect You?
As a Massachusetts resident, you may think your assets won’t grow to be over the 2M mark, but many people find that due to the high value of real estate today, their assets are over the $2M threshold. To figure out whether a deceased person’s estate owes an estate tax, the government will look at the fair market value of everything you own at the time of your death, including cash, securities, real estate, business interests, trusts, annuities, 401(k)s, and other assets. Life insurance proceeds are also part of your estate even though the payment goes to another person.
Also, keep in mind unlike the federal estate tax exemption, the Massachusetts exemption isn’t “portable” between spouses, So, if the first spouse who dies doesn’t use that full $2M exemption, the unused portion can’t be transferred to the surviving spouse. This non-portability of the Massachusetts estate tax exemption has an important effect on how Massachusetts estate plans are drafted when the intent is to minimize Massachusetts estate tax.
There’s also a Federal estate tax. In 2023, the current Federal estate and gift tax exemption is imposed only on estates valued over $12.92 million, while married couples can have over $26 million. The tax rate for this bracket is 40%. Since the exemption limit is so high, most Americans aren’t subject to the federal estate tax.
Do You Have to Do Anything?
If there’s a chance your estate could be over the $2M when you pass away, an effective estate plan can work to minimize estate tax exposure for individuals and couples. If you’re a married couple and previously did an estate plan using an AB trust to minimize your estate taxes based on the previous estate tax exemption limit of $1M, should you change your estate planning? You don’t need to as the trust will still work under the new threshold and your estate may grow to exceed $2M over time.
You’ll also continue to be able to enjoy the many other benefits of the trust, including probate avoidance, asset management if you become incapacitated, protection of some assets from scams and creditors after the first spouse passes away.
The new law is retroactive to the estates of any person who died on or after January 1, 2023. If you’re an estate representative and you’ve filed an estate tax return and/or paid taxes for someone who passed away after January 1, 2023, you should contact your tax accountant about submitting a filing to the Department of Revenue to request a tax refund. If you’re an estate representative for a person who died in 2023 and you haven’t yet filed an estate tax return, your tax accountant should use the new estate tax return form when it’s available from the Department of Revenue.
As a Massachusetts estate planning attorney, I’d be happy to talk to you and help you by determining if you should update your estate plan based on the new law. If you have no estate planning, I’ll work with you to create an estate plan that’s right for you, minimizing estate taxes if needed. Contact us today.