The Massachusetts estate tax is a little-understood tax that impacts middle-class families in our fair state every year. If you live (and die) in Massachusetts and own a home, a retirement account, and a life insurance policy, there is a good chance that your “estate” is large enough to be subject to estate tax. Here are answers to five common questions about the Massachusetts estate tax.
- What is the estate tax and when do I pay it? The good news is that you will never have to pay an estate tax, but your estate will. The estate tax is a one-time tax due on the value of your taxable estate calculated as of the date of your death. An estate tax is payable by your estate before estate assets are distributed to your heirs. This is different from an inheritance tax, where the heirs pay the tax rather than the estate. Your taxable estate consists of all of the assets owned by you (your home, your bank and investment accounts, your retirement accounts) and assets that you can’t necessarily use when you are alive, but that you are able to control the distribution of at your death (think term life insurance). From now until at least 2025 (when the current federal estate tax law sunsets), your estate will not owe a federal estate tax unless your taxable estate is worth more than $11 million ($22 million combined for you and your spouse). However, the Massachusetts estate tax threshold is considerably lower. If your taxable estate (including any taxable gifts made during your lifetime) totals $1 million or more, your estate must file a Massachusetts estate tax return and you may owe Massachusetts estate tax. The return must be filed and the tax paid within 9 months from the date of your death.
- How much estate tax will my estate have to pay? Massachusetts estate tax brackets range from 0.8% to 16% (for estates over $10 million). The estate tax is computed in graduated rates based on the total value of the estate. In general, an estate of $1.1 million will pay about $40,000 in Massachusetts estate tax; an estate of $2 million will pay about $100,000 of tax; an estate of $5 million will pay about $400,000.
- Are there deductions available to reduce the estate tax? Like the income tax, there are deductions available to reduce the value of your estate that is subject to tax. The two largest are the unlimited marital and charitable deductions that allow any and all assets left to your spouse or to charity to pass free of estate tax. Deductions are also available for funeral expenses, estate administration expenses, and debts (mortgages, car loans, credit card debt, income taxes, etc.) owed by you at the time of your death.
- Can I give assets away to avoid paying estate tax? Giving away your assets during life will reduce the Massachusetts estate tax payable at your death. Making large gifts (over $15,000 per year per person in 2018) will likely not allow you to avoid filing an estate tax return if your estate is worth more than $1 million to begin with, which means that you will end up paying estate tax on the assets that you don’t give away, even if those assets are less than $1 million at the time of your death. The gifting rules and how they impact the estate tax are complex. You should seek advice before making large gifts if you are doing so for estate tax reduction purposes. Keep in mind that gifting to reduce the estate tax can end up having significant capital gain tax implications to the recipient if you are not thoughtful about the type of assets you give (like the family vacation home or highly appreciated stock) and the likely disposition of the asset by the recipient. In many cases the capital gain tax rates are higher than the estate tax rates.
- What can I do to save estate taxes at my death? Although avoiding the estate tax altogether is difficult if your estate is over $1 million, reducing the tax is not difficult with proper planning. One tax planning strategy commonly used for married couples is to create Credit Shelter Trusts. In Massachusetts, these trusts are used to shelter up to $1 million of assets in trust for the benefit of the surviving spouse at the first spouse’s death. If properly drafted and funded, Credit Shelter Trusts can save $100,000 or more in Massachusetts estate tax at death. If you have a large life insurance policy that you intend to keep in place until your death, transferring that policy to a properly drafted and administered Irrevocable Trust can prevent the death benefit from being subject to estate tax at your death. Of course, taking a great vacation or spending your money in other ways is also a good way to reduce the amount of assets that will be subject to estate tax at death.
Take a moment and consider the value of the assets you own, and whether your estate will be subject to Massachusetts estate tax at your death. Don’t be so quick to say you are not worth $1 million – take the time to add up the value of your home, your bank and investment accounts, your retirement accounts, your life insurance, and anything else of value you may own. If you find your estate is over $1 million, speak to an experienced estate planning attorney about the planning steps you can take to reduce the tax your family will have to pay at your death. They’ll thank you for it.
Maria 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). 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.
© 2018 Samuel, Sayward & Baler LLC