The Three Easiest Ways to Avoid The Massachusetts Estate Tax

If you are a resident of Massachusetts, and you die with more than $1 million in your “taxable estate,” then you owe a Massachusetts estate tax. The tax rate is based on a sliding scale from 0% to 16%. When you add up real estate, retirement accounts, and life insurance death benefits, many Massachusetts residents end up over the $1 million threshold.

Fortunately, there are a variety of estate planning mechanisms that can reduce and often eliminate the estate tax. Here are the top three.

Method One: Marital Deduction and Credit Shelter Planning (sounds complicated, but it isn’t really)

Every person can pass $1 million free of estate taxes. Therefore, a married couple should be able to pass $2 million free of tax. However, achieving this result requires a bit of planning.

Here’s what happens without planning: Husband and Wife have $1.5 million. Husband dies, leaving everything to wife. Wife dies with $1.5 million in her taxable estate (because she got everything when Husband died). Wife is now over the threshold by $500,000, and owes a Massachusetts estate tax of around $64,000.

Here’s what happens with planning: Husband and Wife have $1.5 million. They split their assets evenly, and hold them in revocable trusts with estate tax planning provisions. Husband dies, and leaves his half in a credit shelter trust. His half is under the threshold, so no estate tax is due. Husband’s credit shelter trust is now available for Wife’s benefit, but is not part of her taxable estate when she dies. Wife dies, and her taxable estate consists of the $750,000 in her revocable trust, which is under the threshold. Voila, no estate tax!

Here’s how it works with a larger estate.

Without Planning: Husband and Wife have $3 million. Husband dies, leaving everything to wife. Wife dies with $3 million in her taxable estate. Wife is now over the threshold by $2 million, and owes a Massachusetts estate tax of around $182,000.

With Planning: Husband and Wife have $3 million. They split their assets evenly, and hold them in revocable trusts with estate tax planning provisions. Husband dies, and leaves $1 million in a credit shelter trust, and $500,000 in a marital deduction trust. Because the marital trust is deductible, his taxable estate is only $1 million, and not over the threshold. Both trusts are available for Wife’s benefit. Wife dies. Her estate consists of the $1.5 million in her own trust, and the $500,000 in the marital trust, for a total estate of $2 million. She is $1 million over the threshold, and owes a Massachusetts estate tax of around $100,000. That’s an estate tax savings of $82,000!

This type of planning is the most common method of reducing or eliminating estate taxes. The only prerequisite is that you are married.

Method Two: Annual Exclusion Gifting

If the estate tax is based on your net worth when you die, then why not just give your money away while you’re still alive? Well, the smart folks at the federal IRS and Massachusetts Department of Revenue have already thought of that. Therefore, there are rules in place that cause large gifts to count as part of your taxable estate, even though you no longer have the money/property. Fortunately, there is an exclusion from these rules for gifts of up to $14,000 per person per year. That means if you give me $14,000 today, you will lower your future estate taxes. Even better, married couples can give $28,000 per year.

Here’s how this plays out:

Husband and Wife have over $2 million, so they’ll owe an estate tax even with the marital planning discussed above. They also have three children, who are all married. Therefore, Husband and Wife can give each of their children, and each of their children’s spouses, $28,000 per year. That equals out to $168,000 per year ($28,000 x 6). Husband and Wife decided that they would like to keep their money within the family, and reduce their eventual estate tax, so they make these gifts every year for six years. This reduces their taxable estate by over $1 million, and saves them around $100,000 in estate taxes. Imagine how much they could save by gifting to their grandchildren too!

Method Three: Charitable Giving

When you give money (or property) to charity, you reduce your taxable estate. And for charitable gifts, there is no $14,000 limit. You could theoretically eliminate your estate tax by giving everything to charity. It is more common, however, for people to pass their wealth to their families, while making some charitable gifts for tax planning purposes.

Like other types of estate planning, there are many ways to make charitable gifts. You can gift outright, by writing a check. You can leave gifts when you die, by putting them in your will, or in a trust. You can set up a Charitable Remainder Trust, which preserves a stream of income while you are alive, but goes to charity when you die. You can even set up a Private Foundation that serves an ongoing charitable purpose long after your death.

Some clients favor a Zero-Tax Planning approach. This consists of utilizing all three methods with the ultimate goal of paying no estate tax. First, we set up the credit shelter/marital deduction trusts to double the amount that will pass tax free. If they’re still over the threshold, we incorporate annual gifts to family members to gradually reduce their estates. And if they’re still over the threshold at death, we make a charitable gift to reduce their taxable estate to the threshold, ensuring no estate tax is due.

So there you have it, three three easiest and most effective ways to reduce or eliminate estate taxes in Massachusetts. Of course there are plenty of more sophisticated methods as well, but for most of us, these three are the ones to discuss with your Massachusetts estate planning attorney.

Spread the word. Share this post!

Leave a comment

Your email address will not be published. Required fields are marked *

WordPress spam blocked by CleanTalk.