3 Ways To Avoid Mass Estate Tax
Thanks to the new tax bill, very few will be susceptible to the Federal Estate Tax as the Federal exemption amount now sits at $11.2 million (effectively $22.4 million for married couples).
Unfortunately, for those of you domiciled in Massachusetts, there’s another tax you have to worry about – the state’s Estate Tax – and the exemption amount is currently $1 million. Not only is the exemption amount much smaller, it’s also not indexed for inflation, meaning the exemption value is shrinking in real dollars every year. To make matters worse, unlike our income tax system that uses a progressive tax structure, the Massachusetts Estate Tax applies to your entire gross estate once you cross over the $1 million threshold!
SO WHAT CAN YOU DO TO AVOID THE MA ESTATE TAX?
There are a few common options depending on your situation:
If you are late in your retirement years, are just hovering around $1 million in combined assets, and have a healthy spouse who is likely to outlive you for many years, then you can simply gift the assets to her or him at your death. Gifts to a spouse qualify for something known as the unlimited marital deduction and won’t be subject to estate tax as long as your spouse is a US citizen. If your estimation is correct and your spouse lives for a while longer then he or she will most likely spend down some of your assets as to be below the $1 million threshold. Therefore, no estate tax will apply.
If you are already well above $1 million or expect to be by the time you die, then your next best bet is to create a Bypass Trust. Oftentimes, a well drafted living trust will have a bypass sub-trust within it, so if you already have a living trust in place then check with your estate planning attorney to see if this applies to you. For those of you unfamiliar with a bypass trust, it essentially allows you to take advantage of your full exclusion amount, with the remaining property going directly to your spouse to qualify for the marital deduction. Since the assets in your bypass trust “bypasses” your spouse’s estate, it can actually allow you to shield up to $2 million in total assets assuming your spouse dies with less than $1 million in her or his own estate. Plus the appreciation of assets in the Bypass Trust can grow estate tax free!
If you’re well over the $2 million mark then your next option is to create an Irrevocable Trust. The most popular is the Irrevocable Life Insurance Trust (generally known as an “ILIT”), since insurance proceeds are often the biggest trigger of the Massachusetts Estate Tax. If properly drafted and fully complied with, the assets in this trust will be outside of your gross estate and therefore will not be counted when calculating your estate taxes.
Lastly, for those of you who will do anything to avoid paying taxes, you could always move to a state with no estate tax. Florida and New Hampshire seem to be the most popular places to relocate for MA residents.
If you have any questions about the Massachusetts estate tax or estate planning in general, then please feel free to contact Joseph Lento at Perennial Trust by calling (781) 202 – 6368 or emailing jlento@perennialtrust.com. You can also download our Free Estate Planning Guide. Thanks for reading!
