An Estate Tax Story
Phew!
There has been a lot of buzz lately with the new Massachusetts estate tax threshold being changed from $1,000,000 to $2,000,000 – it’s been great news for many of our clients. When you are a Trust and Estate Attorney, dealing with death and taxes are part of everyday life, we hear bad news probably more than average. However, the news of the new Massachusetts estate tax law brought more relief to a client of mine than to others.
How the Massachusetts Estate Tax Works
As a refresher, in Massachusetts, if your estate has more than $1,000,000 million dollars you die, your estate will pay a tax on the whole of your estate. Now that threshold is $2,000,000 million dollars. If you leave your assets to your spouse, then the tax is deferred until your surviving spouse passes away. This is called the marital deduction. Unfortunately, the marital deduction only applies to US citizens. Non-US citizens get a $175,000 exemption amount.
There are certain trusts that you can draft that can protect assets for a non-US citizen spouse, these are called QDOTs (this article is not about those particular trusts!). However, if you choose not to do the QDOT route (they are not a simple fix to the tax problem), the surviving spouse will have to pay a tax on the deceased spouse’s estate.
Client’s Story
I had a client where both spouses were not US citizens, and the husband passed away. They had a traditional marriage where the husband worked, and the wife ran the home and raised the kids. When the kids grew up, she went back to work part-time, but not into a full-fledged career.
Unfortunately, the husband got sick in his late sixties and passed away. They had done a great job of saving money, but he had to retire early because of his illness. The wife also had to stop working to take care of him. They were able to receive disability insurance while he was alive, but those payments stopped when he passed away. The wife came to me, grieving and just trying to do the right thing to administer his estate. When I was able to assess what his estate entailed, I realized that a tax would be owed because the surviving spouse is not a US citizen. The tax would have taken a serious chunk out of her savings that she needs. She must make sure her money can sustain her for another possible 25 years. She was not about to start a career at her age, especially while she was still grieving the loss of her husband. I felt crushed to tell her that she needed to write a check for $100,000 dollars. I had reviewed the option to create a QDOT post-mortem and how that would work, and she chose to pay the tax and move on. To her, it was the simpler approach. She just wanted closure and to keep things as simple as possible. And as I’ve written before, with the law, simple doesn’t mean cheaper or better; simple is not easy.
Our office did everything we could to squeak out every last deduction to reduce her estate taxes. We even calculated how much money she contributed to their accounts and how much her husband contributed, to reduce what was considered in his taxable estate. We had her sign an affidavit regarding her employment, pay, and how they used the money. We were able to get her estimated payment down to $80,000, which helped a lot!
Relief in the End
But then the Governor of Massachusetts signed into the law the estate tax law raising the threshold. The new law also applied to deaths occurring after January 1, 2023. My client’s husband passed away in the winter of 2023, and the law was signed a week before the estate tax was due. I’m sure the timing wasn’t lost on the lawmakers (nine months after January 1st). However, sending an email with the good news to my client was something I was not used to experiencing in my line of work. It felt amazing to give good news to someone who really needed it. The tax seems unfair, especially in this situation. My clients were unaware of the law, and when they had their Wills drafted nothing was explained to them. I hope others in their situation talk with a Trust and Estate attorney who knows how to ask questions about citizenship and explain what the options are so they can prepare themselves.