When people think about estate taxes, they often picture a tax on the ultra-wealthy. But your taxable estate may be larger than you think.
Estate tax is a tax owed on the value of certain assets you own or control at the time of your death – even those that may have a beneficiary named. In other words, just because an asset has a named beneficiary or transfers directly to someone after your death does not necessarily mean it is excluded from the estate tax calculation.
While the federal estate tax exemption is $15 million, the Massachusetts estate tax exemption is only $2 million. That means that if the total value of your assets exceeds $2 million when you die, your estate may owe estate tax to the Commonwealth.
But what counts toward that $2 million? The answer may include more than you think. Here are five assets that are includable in your Massachusetts taxable estate – and one type of asset that generally is not.
- Life Insurance Death Benefits
Life insurance is often intended to provide financial support to loved ones after someone dies. Life insurance benefits are not income taxable to the recipient, and because the proceeds are paid directly to a named beneficiary, many people assume the death benefit is not subject to estate tax.
That is not always the case.
If you owned the life insurance policy or retained certain rights or control over it at the time of your death, the death benefit is included when calculating the value of your taxable estate. The life insurance proceeds may avoid probate by naming beneficiaries, but avoiding probate and avoiding estate tax are two different things.
Life insurance benefits can be substantial, and many people don’t take this into account when considering their estate tax exposure. For example, if you own a $2 million life insurance policy and $100,000 equity in your house, your taxable estate is already over the threshold without even taking into consideration your other assets.
If you have a substantial life insurance policy and a taxable estate, you may want to consider owning the policy in an irrevocable life insurance trust, which can shelter the death benefit from being subject to estate tax in your estate.
- Tax-Deferred Retirement Accounts
Retirement accounts are another asset that may be easy to overlook. Accounts such as traditional IRAs, 401(k)s, and 403(b)s typically have beneficiary designations, allowing the funds to pass directly to the people you name.
However, passing outside of probate does not necessarily mean the account is excluded from your taxable estate. The value of retirement accounts will still be included as an estate asset when calculating your Massachusetts estate tax.
There may also be income tax considerations for the beneficiaries who inherit these accounts. Because estate tax and income tax are separate taxes, it is important to look at the full tax picture when deciding how retirement assets fit into your estate plan.
- Tangible Personal Property
Your estate is not limited to real estate and financial accounts. It also includes the physical property you own, known as tangible personal property.
This may include vehicles, artwork, jewelry, collectibles, furniture, boats, and other valuable belongings. While many household items may have limited value, some assets can be worth much more than their owners realize. A classic car, a collection of artwork, or valuable jewelry could add a meaningful amount to the value of an estate.
Keeping an inventory of valuable property and obtaining appraisals when appropriate can help you better understand the total value of what you own, and plan for the impact on any estate tax due. This is especially important if you own high value assets that you would not want to be sold to pay estate tax following your death.
- LLC Interests
If you own an interest in a limited liability company, or LLC, that ownership interest may also be includable in your taxable estate.
This can be easy to miss because the LLC itself may own business assets, investment property, or other property that is separate from your personal assets. However, your ownership interest in the LLC may still have value and may be included when the value of your estate is calculated.
Valuing an LLC interest can be complicated, especially if the company is privately held and there is no public market for its ownership interests, or if the LLC has multiple owners. The LLC’s operating agreement may also affect what happens to your interest after your death. Reviewing your business interests as part of your estate plan can help avoid surprises, ensure your succession plans work as intended, and understand how your family may be impacted by having to pay estate tax on an asset that is illiquid or that cannot easily be sold.
- Massachusetts Real Estate Owned by a Nonresident
You do not have to live in Massachusetts for Massachusetts estate tax to be a factor.
If you are a resident of another state but own real estate in Massachusetts, that property may create a Massachusetts estate tax filing obligation. For example, you might live in New Hampshire but own a Massachusetts vacation home or investment property. If you have more than $2 million in equity in that Massachusetts house, then this equity will be taxed. If you own multiple properties in Massachusetts, then the total value of your equity across all the properties would be includable for an estate tax calculation.
The rules for nonresidents can be complex. The important point is that owning real estate in Massachusetts can have estate tax implications even if Massachusetts is not your home state.
- The One That Isn’t: Real Estate Located in Another State
On the flip side, real estate located outside Massachusetts is generally not included in your taxable estate as a Massachusetts resident.
For example, if you live in Massachusetts but own a vacation home in Florida or a rental property in another state, that out-of-state real estate may be excluded when calculating Massachusetts estate tax. The caveat is that out of state property held, for example, in an LLC will be part of the owner’s Massachusetts taxable estate since the asset is now a business interest rather than a real property interest,
Even if the property is owned as a real property interest, that does not necessarily mean the property is free from all estate-related taxes. The state where the property is located may have its own state estate, inheritance, or other tax rules. Furthermore, the value of that property is still part of your federal taxable estate. Still, the location of real estate and how it is owned can make an important difference when evaluating your potential Massachusetts estate tax exposure.
Understanding Your Estate Is the First Step
Estate tax planning is about more than adding up the value of your home and financial accounts and hoping for the best. Understanding estate tax exposure is simply one factor in a well-rounded estate plan.
The good news is that understanding what may be included in your taxable estate gives you an opportunity to plan. By working with your estate planning attorney, you can review your assets, identify potential estate tax exposure, and explore strategies that can minimize or eliminate estate taxes while supporting your goals. Starting the conversation now can help you make informed decisions, protect what you have built, and create a more confident plan for the people you care about.
Attorney Leah A. Kofos is a senior associate attorney with the Dedham firm of Samuel, Sayward & Baler LLC, which focuses on advising its clients in the areas of Trust and estate planning, estate settlement, and elder law matters. This article is not intended to provide legal advice or create or imply an attorney-client relationship. No information contained herein is a substitute for a personal consultation with an attorney. For more information visit ssbllc.com or call 781-461-1020.
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