Common Massachusetts Estate Tax Planning Methods
As you may know, if you are a resident of Massachusetts and die with more than $1 million in your “taxable estate,” then you owe a Massachusetts estate tax. Unlike the federal estate tax, which has a current threshold of $5.49 million and taxes at a 40% rate over the threshold, Massachusetts taxes the entire amount above $40,000 if over the $1 million exemption. The Massachusetts tax rate is based on a sliding scale from .8% to 16%.
Considering real estate, life insurance death benefits, and retirement accounts, many people are over the $1 million exemption. Fortunately, there are planning tools that can reduce and often eliminate the Massachusetts estate tax.
For a couple who have, say, $3 million, here is a common planning mechanism:
Living Trust with Marital Trust and Credit Shelter Trust:
The couple splits their assets evenly - each spouse with $1.5 million - and holds them in living revocable trusts with estate tax planning provisions. Spouse 1 dies and leaves $1 million in a credit shelter trust and $500,000 in a marital deduction trust. The marital share of $500,000 passes to the surviving spouse in trust and qualifies for the estate tax marital deduction. The $1 million credit shelter trust is not over the $1 million exemption, meaning no estate tax is due. Both trusts are available for Spouse 2’s benefit. If Spouse 2 then dies, Spouse 2 has $1.5 million in Spouse 2's own trust and the $500,000 in the marital trust. Because Spouse 2's taxable estate is $2 million, Spouse 2 is $1 million over the exemption and owes estate tax of around $100,000.
Without planning, their Massachusetts estate tax would have been about 80% greater.
Another benefit of this approach is that the credit shelter trust protects assets from unsecured creditors. These benefits should be considered alongside the desirable degree of the surviving spouse's control over assets, and whether it would make sense for the couple to hold their assets evenly.
This approach might not be best for younger families who’d want more control for the surviving spouse, however. In that case, a disclaimer plan might be better, where a back-up trust - with credit shelter trust provisions - is drafted in order to provide flexibility and the appearance of simplicity (this plan puts the burden on the survivor to effect a tax plan and requires careful counseling while settling the first spouse’s estate). A client might also be best advised to plan for the next several years and understand future revisions to the plan will be necessary.
Charitable giving, and/or annual exclusion gifting are also great ways to reduce one's taxable estate.
As you can see, plans vary greatly depending on circumstances and goals. There are also more sophisticated planning mechanisms, but for most of us, the methods above are the ones to discuss with your Massachusetts estate planning attorney.