In October 2023, the Massachusetts legislature enacted a long-awaited update to the Massachusetts estate tax law. Although it did not become law until October, the law’s provisions are retroactive, applying to estates of those who died on or after January 1, 2023.

The new law increases the Massachusetts estate tax exemption amount from $1 million to $2 million, meaning that those who die with an estate valued at less than $2 million will not have to pay a Massachusetts estate tax at death. The law also eliminates the so-called “cliff” effect of the prior law, which taxed the full value of an estate if the estate’s value was over the $1 million threshold. Under the new law, the first $2 million of assets are not taxed. The value of the estate over $2 million is subject to tax at rates ranging from 8% to 16% for estates over $10 million.

Here are a few things to consider with respect to your own estate when thinking about whether and how this new estate tax law impacts you and your family.

1.How Do You Determine if Your Estate is subject to the Estate Tax?

The estate tax is a one-time tax, payable nine-months after death, on the value of the assets in your “estate.” For Massachusetts estate tax purposes, your “estate” consists of all of the assets you own or control. This includes bank accounts, stocks, bonds, investment accounts, retirement accounts such as IRAs, 401ks, 403bs, annuities, life insurance which you own on your own life, the cash value of life insurance you may own on someone else’s life, personal property such as automobiles and jewelry, and real estate, whether located in Massachusetts or in another state. The total value of all of these assets is the total value of your estate that would be subject to estate tax at your death. If that number is above $2 million, your estate will need to file a Massachusetts estate tax return and may have to pay estate tax after your death, depending on the deductions available to your estate. Assets left to charity or to a surviving spouse are deductible. For this reason, for most married couples who leave assets entirely to the surviving spouse at the death of the first spouse to die, there is no estate tax payable until the death of the surviving spouse.

2.What if you did Estate Tax Planning Before the New Law?

Under the old law, when the threshold for the Massachusetts estate tax was $1 million, many Massachusetts residents were impacted by the estate tax and incorporated estate tax planning into their estate plan. This type of planning likely included credit shelter trusts which shelter a portion of assets in trust at the death of the first spouse to die for the benefit of the surviving spouse in order to reduce or eliminate the estate tax payable at the surviving spouse’s death. If you created credit shelter trusts before the change in the law, now is the time to sit down with your estate planning attorney and review your plan. It may be that the complexities of an estate plan that shelters assets from estate tax are no longer necessary. However, you may still benefit from such a plan. The manner and extent to which your trusts are funded should be reviewed and updated to make sure you are taking full advantage of the new $2 million credit. Whereas under the old law we were concerned with funding credit shelter trusts with at least $1 million of assets, now we can shelter up to $2 million of assets at the first spouse’s death, so increasing the funding of those trusts appropriately can reduce or eliminate the estate tax payable at the surviving spouse’s death.

3.What if you are a Massachusetts Resident but own Real Estate in another State?

If you are a Massachusetts resident but own real estate in another state, such as a vacation home in Maine, that property is included in the value of your “estate” when determining if your estate is worth more than $2 million and therefore a Massachusetts estate tax return must be filed. The Massachusetts estate tax is calculated on the full value of your estate, including the out of state property. However, your estate will receive a credit against the Massachusetts estate tax for the proportionate share of that tax attributable to the out of state property.

Keep in mind that 12 other states in the country impose a separate state estate tax. If you are a Massachusetts resident and own real estate in Vermont, Rhode Island, Maine, or several other states, you may have an obligation to file an estate tax return and pay estate tax to the state in which that real estate is located following your death.

It is worth noting that some attorneys believe it is unconstitutional for Massachusetts to consider the value of out of state property in computing its estate tax, even if a credit for a proportionate share of that tax is given. The issue is yet to be conclusively determined under the new Massachusetts estate tax law.

It is common practice to transfer real estate owned for investment purposes, especially rental property, to a limited liability company (LLC) for asset protection purposes. Keep in mind that transferring real estate to an LLC converts real estate into a personal property interest (the membership interest in the LLC) which like any other asset will be part of your “estate” for Massachusetts estate tax purposes, and tax will be paid on the full value of that interest.

4.What if you are not a Massachusetts Resident but own Real Estate in Massachusetts?

Massachusetts also imposes an estate tax on non-residents who own real estate in Massachusetts, based on the value that real estate bears to the owner’s total estate. The estate tax is computed as if the non-resident was a resident of Massachusetts. The share of the tax attributable to the value of the Massachusetts real estate is then determined, and this is the amount paid to the Commonwealth as the non-resident estate tax.

5.How Do You Reduce Your Estate Tax Bill?

For those with assets valued at $2 million or more, reducing the estate tax payable by their heirs after death is often a top planning goal. As mentioned above, certain types of trusts such as credit shelter trusts can be used to reduce estate taxes while still allowing control over assets during life. Transferring assets out of your ownership may be appropriate in some cases and if done properly will reduce the value of the taxable estate. This includes gifts that fall under the federal gift tax annual exclusion, which in 2024 permits gifts of up to $18,000 per person per year without the requirement of filing a gift tax return or reducing the giver’s federal estate and gift tax exemption (currently $13.6 million per person, but scheduled to drop to about half that amount if Congress does not extend the increased exemption amount by the end of 2025). Larger gifts of real estate or other assets may be appropriate, whether directly to individuals or to an irrevocable trust. However, an analysis of the benefits of reducing estate tax versus the advantage of your heirs receiving assets with a stepped-up tax basis should be done before gifting appreciated assets. Transferring life insurance to an irrevocable trust is a way to significantly reduce the taxable estate as it removes an asset from tax that the owner does not typically consider an asset during their lifetime, especially if it is term insurance without cash value. Gifts of tuition or medical expenses may be made in an unlimited amount if paid directly to the institutions providing those services. Finally, gifts to charity, whether directly, via retirement accounts, donor advised funds, or in trust, are a way to reduce the estate tax payable at death while benefiting worthy causes.

If you are a Massachusetts resident with a home, life insurance and a retirement account, you may have a taxable estate without realizing it or planning for it. Review your assets and speak with an experienced estate planning attorney to learn about the estate tax your family may have to pay after your death, consider how it will be paid (and whether further planning is needed to avoid the sale of real estate or a business in order to raise funds to pay taxes), and take whatever steps are appropriate for you to reduce the tax to the greatest extent possible. Your heirs will thank you.

Maria C. Baler, Esq. is an estate planning and elder law attorney and partner at Samuel, Sayward & Baler LLC, a law firm based in Dedham. She is also a former director of the Massachusetts Chapter of the National Academy of Elder Law Attorneys (MassNAELA), and the former President of the Board of Directors of the Massachusetts Forum of Estate Planning Attorneys. For more information, visit www.ssbllc.com or call (781) 461-1020. 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.
March 2024
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