How Do I Avoid the Massachusetts Estate Tax? (4 Proven Strategies)

May 23

If you live in Massachusetts (or own real estate in Massachusetts), then you should know about the Massachusetts Estate Tax.

What is an estate tax?

An estate tax is a way for the government to take a portion of your hard-earned assets upon your death if you exceed a certain amount of wealth.

As of 2022, virtually no one has to worry about the federal estate tax (assuming they die before the law changes at the end of 2025), but virtually everyone in Massachusetts (or with real estate in Massachusetts) has to worry about the Massachusetts estate tax because its estate tax threshold is surprisingly low at only $1 million.

Normally, a good chunk of people would be below that $1 million threshold, but with the median home price in the greater Boston area skyrocketing to around $700,000, more and more of my clients are realizing that they are in Massachusetts estate tax territory when they factor in their 401k or IRAs.

By the way, life insurance is also estate taxable if not structured properly. Don’t get confused with the income tax rules, which are different from the estate tax rules.

How much is the Massachusetts Estate Tax?

The Massachusetts estate tax has a progressive tax rate structure. This means that the more you have, the higher percentage you will pay in estate taxes (as opposed to a flat tax rate).

Here is the current progressive tax rate structure currently in place for the Massachusetts Estate Tax (Table B Computation of Maximum Credit for State Death Taxes)

Translation:

If you have a taxable estate of $1 million then you would be paying around $38,000 (similar to 3.8% effective tax rate)

If you have a taxable estate of $2 million then you would be paying around $100,000 (similar to 5% effective tax rate)

If you have a taxable estate of $3 million then you would be paying around $190,000 (similar to 6.3% effective tax rate)

If you have a taxable estate of $4 million then you would be paying about $290,000 (similar to 7.25% effective tax rate)

You’ll notice that as you gain more wealth, the effective tax rate rises under a progressive tax rate structure, so by the time you get from $1 million to $4 million, the tax rate has effectively doubled! Meaning you are paying almost twice as much tax per dollar at $4 million compared to $1 million.

If you have an estate above $5 million, then you can’t afford to not incorporate estate tax planning into your estate plan. If you want me to walk you through your options in more detail as may be applicable to your situation, then click the button below to schedule a phone call or zoom meeting with me.

Schedule Your Free Personal Consultation with Attorney Joe Lento

So how do I avoid the Massachusetts Estate Tax?

To avoid (or at least minimize) the Massachusetts Estate Tax, there are 4 estate tax planning strategies that are commonly employed by my clients:

Start gifting. There is no Massachusetts gift tax and there is a $16,000 annual exclusion amount for Federal gift tax purposes. This means you can shift up to $16,000 to each person in your family each year without paying a gift tax and without worrying about estate tax implications. If you are married, then you can do up to $32,000 per year ($16,000 each) or do something called gift splitting.
Credit Shelter Trust aka Family Trust aka Bypass Trust. This strategy generally works best for married couples. You’ll likely hear this type of trust referred to with different names depending on your estate planner, but the general idea is that you can have a separate trust set up to isolate your assets from your spouse for estate tax purposes. Since the trust is sheltering your assets from estate tax by using up your estate tax exemption (aka credit), I call it the credit shelter trust.

Remember: each person in Massachusetts has a $1 million dollar exclusion amount, but it has to be used within 9 months of your death. This use-it-or-lose-it system requires a credit shelter trust to preserve the exemption for after the death of the surviving spouse. Let me give you two scenario to explain what I mean:

Scenario 1 (without credit shelter trust): Jim and Mary are 62 years old and married. They own a house worth $700,000 as joint tenants and each have $500,000 in their own investment accounts (so collectively, $1 million in investments). Therefore, their combined estate is 700 + 500 + 500 = $1.7 million).

Jim dies and leaves all his wealth to his wife, Mary. By leaving all his wealth to Mary without a credit shelter trust, Jim has forfeited his $1 million exemption amount, and Mary now has a net worth of $1.7 million. The good news is that there is no estate tax on the transfer between spouses who are both US citizens. But now Mary has all this money in her estate.

Then Mary then dies. Because Mary received all of Jim’s wealth without a credit shelter trust in place, she now has a taxable estate of about $1.7 million. In Massachusetts, under current estate tax law, the ENTIRE AMOUNT (not just the amount above $1 mil) is taxable. So Mary estate has an estate tax due of about $80,000 (after adjusting for expenses/deduction, etc).That’s $80,000 that could have gone to your kids or grandkids.

Here’s scenario 2 with a credit shelter trust:

Same facts as above, except that Jim and Mary have a credit shelter trust. When Jim dies, all his wealth (350 + 500 = $850,000) is pushed into a credit shelter trust. The trust is designed so Mary can still benefit from the trust and act as trustee, but that money is not considered part of her estate. And since it’s under the $1 million threshold, Jim’s estate has no estate tax due.

Then Mary dies with her half, only owning $850,000 of assets, which is considered part of her estate, but is also below the $1,000,000 Massachusetts Estate Tax threshold. Therefore, Mary doesn’t owe an estate tax either.

Now all of the money (the money in the credit shelter trust and the money in Mary’s estate) passes to their beneficiaries estate tax free. This is the benefit of having a credit shelter trust
Irrevocable Trust. I typically don’t advise clients to do this until they have at least $5 million in the bank, but you can fund irrevocable trusts to shield from estate taxes if set up properly.

In other words, let’s say you want to put money aside for a child or grandchild, but don’t want them to receive it outright just yet. In that scenario, you can gift to an irrevocable trust. Just make sure you give notice of the withdrawal rights (known as Crummey Notice) with the appropriate hanging powers to avoid any gift tax implications. If you have no idea what I just said, give me a call (781 202 6368) and I can walk you through the nuances of it.

If you are gifting to grandchildren and are wealthy, then you will want to make sure the irrevocable trusts are separated (or else GST tax implications could apply).

I suspect that when the Federal estate tax threshold gets cut in half after 2025, you will also see a lot of Irrevocable Life Insurance Trusts set up to shield life insurance policies from estate tax. But there have been proposals in place that could make this strategy less feasible if they change the grantor tax rules. So you should be aware that irrevocable trust estate tax planning exists, but it’s certainly not as common or useful for everyone under the current estate tax laws
You could move to Florida or New Hampshire. What was once a joke, is now a reality. An increasing number of my clients are seriously considering leaving the state as home prices in Massachusetts have skyrocketed and their children have moved out of state. If you already have a secondary home in Florida or New Hampshire (or are thinking about getting one), then this strategy could be the right one for you since those two states do not currently have an estate tax. But Massachusetts could still get you (at least partially) if you still own real estate in Massachusetts (regardless of domicile).

It is also possible for Massachusetts to argue that you are considered domiciled in Massachusetts even if your income tax return shows you are a resident of New Hampshire or Florida for income tax purposes - remember the estate tax laws differ from income tax laws so you have to be careful not to confuse the two.

If you would like to learn more about how to avoid the Massachusetts estate tax (or would like to discuss updating your estate plan), then give me a call at 781 202 6368, email jlento@perennialtrust.com, or click here to schedule your free personal consultation.