Massachusetts Estate Tax Doesn’t Have to be So Confusing

After years of helping clients navigate Massachusetts estate planning, I know how much stress and confusion the Massachusetts estate tax can cause Commonwealth residents. People tend to come to me armed with a lot of questions about exactly how this tax will affect them. Will my estate owe this tax? If I’m someone’s executor, what does paying the Massachusetts estate tax entail? And is there a way to minimize my tax liability and preserve more of my money for my heirs?

I promise that this tax isn’t as confusing as it might seem at first. To break things down, here are the main things you need to know about the Massachusetts estate tax. 

1.       It’s separate from the federal estate tax. Distinguishing between the federal estate tax and the Massachusetts estate tax trips up a lot of people who are working on estate planning. Here’s what you need to know: The federal estate tax doesn’t affect the majority of Americans because it’s only imposed on wealthy estates. For 2020, your estate would only owe taxes if it’s valued at more than $11.58 million at the time of your death. But states can also decide to levy their own estate taxes, which Massachusetts does. The Massachusetts estate tax threshold is just $1 million. If you’re a Massachusetts resident and your estate is worth at least $1 million at the time of your death, it will owe the Commonwealth this tax.

2.       If you owe the Massachusetts estate tax, almost all of your estate will be taxed. This is another way the Massachusetts estate tax differs from the federal estate tax. At the federal level, the estate tax obligation is only applied to the portion that exceeds the estate tax threshold. Say someone who dies in 2020 leaves an estate worth $12 million, or $420,000 more than the $11.58 million threshold. Taxes would be owed on just that $420,000 portion. But in Massachusetts, an estate that owes estate taxes is taxed on the entire value of the estate exceeding $40,000. An estate valued at exactly $1 million will be taxed on $960,000. This is why residents whose estates hover around the $1 million mark have to be especially careful; poor planning can tip the estate over that threshold and result in a huge tax bill.

3.       The Massachusetts estate tax uses a graduated rate ranging from 0.8 to 16 percent. For context, an estate with an adjusted taxable value of $1 million would be taxed at 5.6 percent. The federal estate tax, by comparison, maxes out at 40 percent.

4.       Prior gifts you’ve given may count toward your estate for estate tax purposes. This is one of the elements of the Massachusetts estate tax law that can seem especially confusing. Massachusetts doesn’t impose its own gift tax. However, federal gift tax law says that gifts exceeding a set annual exclusion amount are federally taxed. (The annual exclusion amount is occasionally increased and is set at $15,000 for 2020 and 2021.) If you make a gift above that annual exclusion amount, it can be added back to your estate when determining whether your estate meets the $1 million Massachusetts estate tax threshold. The gifts themselves won’t be taxed, but their value may tip your estate over the edge into taxable territory. Say you give a relative a gift of $75,0000 and then die with an estate worth $950,000. For tax purposes, your estate is worth $1,025,000. The estate tax is triggered, though it’s only owed on the $950,000.

5.       Spouses can’t combine exemptions. This is another way the federal and Massachusetts estate tax laws differ. Federal estate tax law gives spouses portability. That means a surviving spouse can use their deceased spouse’s estate tax exemption, functionally shielding twice the assets from taxes. Massachusetts doesn’t give spouses portability. Each spouse can only shield $1 million in assets from estate taxes, unless they use estate planning to protect more.

6.       When an estate owes an estate tax, the personal representative is responsible for filing the tax return. Massachusetts must receive the tax return and payment within nine months of the decedent’s death. A six-month extension may be approved in some cases. Submitting a tax return or payment late may incur penalties of 1 percent per month.

7.       The estate tax isn’t inevitable for homeowners—or anyone. Because the threshold is so low and home prices are so high in much of Massachusetts, many residents will die leaving estates valued at more than $1 million. I know many people assume that because they own a home, a big chunk of their estate will be swallowed by taxes before their kids and grandkids can inherit. Everyone’s situation is unique, but there’s a lot that can be done during estate planning to minimize the impact.

The Massachusetts estate tax might still seem confusing. I’m here to help in whatever way I can, and so is the rest of the team at Ladimer Law. I encourage you to reach out with questions. Contact me today!

Jessica Pesce specializes in estate law and elder law. She has helped many people with their estate planning and tax planning since joining Ladimer Law in 2017. Jessica has been named a Rising Star by Super Lawyers three years running.