Understanding the Massachusetts Estate Tax Marital Deduction
You didn’t get married for the tax perks – but, hey, it’s not like you’re going to turn them down. In this state, like many others, married couples can benefit from special tax provisions in a variety of areas, including the Massachusetts estate tax marital deduction. The deduction available to married American couples can help the surviving spouse hold onto assets after the first spouse dies.
Will estate taxes affect your spouse and heirs when you die? The federal estate tax exemption for 2020 is so high that in most states, few Americans have to worry about how their estates will pay these taxes; that requirement is reserved for the wealthy. But it’s a different story for residents of states that have their own, significantly lower estate tax thresholds, such as Massachusetts. Here, couples have to do advance planning if they want to preserve their assets for future generations.
Massachusetts Estate Tax Overview
The 2020 federal estate tax exemption threshold is $11.58 million, which means that the estate of an individual who dies in 2020 will only owe estate taxes if its value is greater than that threshold. Even then, only the portion of the estate that exceeds $11.58 million will be taxed, at a maximum rate of 40 percent.
However, the estate tax exemption threshold in Massachusetts is just $1 million. When a resident dies with an estate valued at more than $1 million, the state requires that the estate pay taxes on a graduated rate of up to 16 percent. Unlike the federal exemption amount, the Massachusetts estate tax threshold has remained the same since the early 2000s.
The state’s low threshold, combined with high home prices in many parts of Massachusetts, mean that estate taxes aren’t only a problem for the ultra wealthy. Anyone who dies while owning a home and/or other assets valued at more than $1 million could lose a chunk of their earnings to taxes before the heirs get anything.
How the Massachusetts Estate Tax Marital Deduction Works
The marital deduction is a component of estate tax law that allows one spouse to leave assets to their surviving spouse, without the survivor having to pay taxes on the deceased’s estate. (Note that the marital deduction is only available to surviving spouses who are U.S. citizens.) This provision won’t necessarily eliminate the need to pay estate taxes. It may simply delay the tax bill until the second spouse dies.
Federal estate tax law allows portability for the marital deduction, which means that if one spouse doesn’t use their $11.58 million exemption, the other spouse can use it – effectively allowing one couple to combine their personal exemptions to shield up to $23.16 million in 2020.
In Massachusetts, however, there is no portability. Each spouse may only shield up to $1 million from estate taxes. When the first spouse dies, the marital deduction means that the surviving spouse doesn’t have to pay estate taxes. If the deceased’s assets all flow to their surviving spouse, the person’s estate wouldn’t owe taxes in the first place because it would be empty – but all those assets are now part of the surviving spouse’s estate. This is where things can get expensive. The surviving spouse’s estate is now made up of both spouse’s assets, but the estate can still only shield a total of $1 million from taxes.
What This Could Mean for You
Tax law is extremely complicated and there’s no one-size-fits-all approach to planning for estate taxes. Two couples that have assets of similar value could end up paying very different amounts of estate taxes, depending on dozens of factors. So it’s important to remember, when you’re thinking about estate tax planning, that your own options and tax responsibilities will be unique to you and your spouse.
Still, we can illustrate the ways that the Massachusetts estate tax marital deduction might play out. Let’s say Tom and Carol own a home worth $1.5 million. Tom also has some other assets and his estate is valued at $2 million. When he dies, his assets flow to Carol. Because of the marital deduction, no taxes are owed on Tom’s estate. He didn’t use his $1 million exemption. Carol’s estate is now valued at $3 million. When she dies, her $1 million exemption kicks in, but Tom and Carol’s heirs owe estate taxes on the remaining $2 million in her estate. If they had found a way to take advantage of Tom’s personal exemption too, the heirs would pay far less in estate taxes and keep more for themselves.
In the interest of minimizing or altogether avoiding estate taxes, some married Massachusetts residents create trusts that shelter more of their assets from estate taxes. If you’re a married Massachusetts resident with an estate that may be valued at more than $1 million, your estate planning attorneys may be able to help you put plans in place that protect what you’ve earned.
Do you have questions about how the Massachusetts estate tax marital deduction might affect you, your spouse and your heirs? The attorneys at Ladimer Law are here to help you make sense of this and other complex estate planning topics. Reach out today to learn more.