Here’s a very basic overview of the Massachusetts Estate Tax
This may or may not come as a shock to you, but Massachusetts has one of the lowest estate tax thresholds in the United States. We aren’t called Taxachusetts for nothing! Here is an over simplified explanation of whether or not your family will owe a tax when you pass away. In Massachusetts if you pass away and your net worth totals more than one million dollars, then your estate will owe a tax to the Department of Revenue. And the tax isn’t just on what is over $1,000,000, it’s on the whole amount.
How is this calculated? First, we need to add up all the assets that make up your taxable estate. Take a look at this list and apply it to your own accounts.
If the total of these comes to more than one million dollars, then your family may have to pay a tax to Massachusetts. One thing to expand on is the death benefit of life insurance policies. People always get tripped up on this because they don’t think of it as an asset because they don’t have one million dollars in cash. However, this is a tax on your estate, not on your assets while you are alive. Therefore, when you pass away, the death benefit gets paid to your family and that amount paid to your family is included when determining whether your estate has met that $1,000,000 threshold.
Now, before you freak out, there is a little something called the Marital Deduction. Without any planning, if you pass away and leave behind a spouse, you are allowed to leave all of your assets to your surviving spouse, and the estate tax is deferred until the surviving spouse passes away. Phew, right?! First, this only works if the surviving spouse is a United States citizen. Non-US citizens cannot take advantage of the marital deduction, they need to do special trust planning to defer the estate tax. Second, now that the surviving spouse has all the assets, their estate will get hit with a tax bill. It’s really the kids that feel the pain, not you. So, what do we do about it?
A very common approach is to draft trusts that have special language in them to fund a sub-trust or bucket with up to the estate tax threshold amount, currently one million dollars. We don’t fund it to exactly one million dollars, we fund it just under. We file an estate tax return showing that this sub-trust is funding with the decedent’s assets. This sub trust or bucket is for the benefit of the surviving spouse, and then the kids, but it is considered part of the decedent’s estate for tax purposes. No estate tax is owed because the assets in the decedent’s estate are less than the one million dollars threshold (or whatever the threshold is at the time of death).
Everything else that doesn’t go into that sub-trust/bucket passes to the surviving spouse, either in trust or outright, and is now considered part of the surviving spouse’s estate. When the surviving spouse passes away, what was originally put in the sub-trust/bucket is not includable when we calculate the estate tax. We have sheltered that first sub-trust or bucket from the estate tax calculation of the second to die spouse. This planning technique can reduce or possibly eliminate the estate tax owed by the surviving family members (typically the kids).
Is this a good option for you? The answer to this question depends on many different factors such as your types of assets, your comfort level with risk, capital gains taxes, and comfort with understanding complex issues. If you do have questions or you do want to reduce the taxes that your kids will have to pay, I highly recommend that you schedule a consultation to get a full overview of how this would work for your assets and your family. Contact us at email@example.com or 508.532.8689 to schedule an intake today – don’t make your kids pay!
Copyright © 2023 Ladimer Law Office PC
209 West Central Street
Natick, MA 01760
Ladimer Law specializes in estate planning. We protect our clients, their heirs, and their assets by listening closely, knowing the law, and executing estate plans that fit and evolve.