Massachusetts levies an estate tax on estates worth more than $1 million. Who must pay the Massachusetts estate tax? Can that tax be reduced or avoided with proper estate planning and sound advice from a Cape Cod estate planning attorney? Keep reading for the answers.
Here’s how the Massachusetts estate tax works. The estate tax exemption is $1 million. If your estate is under $1 million at the time of your death, no state estate tax is owed. If your estate is over $1 million, an estate tax must be paid before your assets can be distributed to your heirs.
However, the Massachusetts estate tax applies to the entire estate and not just to the amount exceeding the exemption figure. Thus, if your estate is valued at $1.5 million, the tax applies to the entire $1.5 million and not just to the $500,000 over the exemption figure.
Will Your Estate Have to Pay the Massachusetts Estate Tax?
The federal estate tax exemption (for 2022) is $12,060,000, but with a state estate tax exemption of only $1 million, many people who own homes in Massachusetts should consult an estate planning attorney about reducing their estate tax burden or avoiding the state estate tax entirely.
The median price of a single-family home in the Boston area rose to $811,000 in 2021, making the exemption “a middle-class tax burden if you own real estate in the Commonwealth,” Eileen McAnneny of the Massachusetts Taxpayers Foundation told the Boston Globe.
If your estate’s value is close to or over the $1 million exemption figure, an inadequate estate plan could leave your estate with a devastating tax burden. A Cape Cod estate planning lawyer may be able to help you keep your estate’s value below the $1 million exemption figure.
How Is the Massachusetts Estate Tax Paid?
If the estate of a Massachusetts resident is worth over $1 million at the time of that person’s death, or if an out-of-state resident owns real estate or personal property located in the Commonwealth of Massachusetts with a total estate size, regardless of where it is located, of more than $1 million, the executor of the estate must file a Massachusetts estate tax return.
Your taxable estate in Massachusetts includes your real estate holdings, the vehicles you own, business interests, proceeds from any life insurance policies you own, your bank, investment, and retirement accounts, and any property you hold in a revocable living trust.
Typically, if you and your spouse co-own property or assets in Massachusetts, only your share is included in your taxable estate. If you co-own your residence in Massachusetts with your spouse, for instance, only half of the value of the residence is counted as part of your taxable estate. But if you there is a non-spouse co-owner then the entire value of the co-owned asset will be included in the estate of the estate of each co-owner at death.
If you’ve been named as the executor of an estate, you may need professional help to prepare the Massachusetts estate tax return. Don’t hesitate to contact a Massachusetts estate planning lawyer for help with the estate tax return or any other matter regarding the administration of an estate.
Are You an Out-of-State Resident With a Home in Massachusetts?
Unless you take the right steps, if you own any real estate or tangible property in Massachusetts, you may have to pay the state’s estate tax, even if you are an out-of-state resident. However, with the right estate planning, out-of-state residents may be able to avoid the Massachusetts estate tax.
You can avoid the estate tax in Massachusetts if you do not own any tangible property in the state in your own name. However, as mentioned above, transferring a property in Massachusetts into a revocable living trust does not remove that property from your taxable estate.
A living trust offers considerable benefits and allows you to avoid probate, but property that you move into a living trust remains subject to the Massachusetts estate tax. Nevertheless, out-of-state residents may have options for reducing or eliminating their Massachusetts estate taxes.
Consider a Joint Trust for Reducing or Eliminating the State Estate Tax
A joint trust is one option. A couple may choose to establish a joint trust to shield real estate in Massachusetts from the state’s estate tax. By setting up a joint or “A/B/C” trust, a couple can avoid or reduce the Massachusetts estate taxes that would be due upon the second spouse’s death.
Merging your trusts has the added benefit of giving the trustee of your new joint trust additional investment options because your trustee will be managing and investing a larger sum of capital.
Some trusts give a trustee the authority to consolidate or merge the trust, or a trust may spell out a somewhat restrictive provision regarding mergers. In either case, let a Massachusetts estate planning lawyer advise you and handle the merger of your separate trusts into a single joint trust.
What Are the Other Options for Reducing or Eliminating the State Estate Tax?
Establishing an irrevocable trust is a second option. While a revocable trust does not shield your properties in this state from the Massachusetts estate tax, an irrevocable trust does. Prepared properly, an irrevocable trust can provide you and your family with substantial estate tax savings.
A third option for out-of-state residents who seek to avoid the Massachusetts estate tax is starting up a limited liability company (LLC) and transferring ownership of your Massachusetts property to the LLC. Legally, LLC shares are intangible property not subject to the state’s estate tax.
A number of types of trusts – and several other estate planning strategies – may allow out-of-state residents with Massachusetts properties to reduce or avoid entirely the state estate tax. A Cape Cod estate planning attorney can review your options and help you make the best choices.
When Should You Start Planning Your Estate?
The future can’t be predicted, but when it comes to protecting your estate and your loved ones, you need to be prepared for whatever the future may bring. Now is the time to start planning your estate, but good estate planning can’t be done in haste or under pressure.
A Cape Cod estate planning lawyer can prepare a last will and testament, set up a limited liability company, or create the revocable or irrevocable trust that works best for you. Helping you prepare effectively and adequately for the future is your estate planning lawyer’s job and goal.
Your attorney will ensure that your estate planning documents are easy to understand, that nothing has been overlooked, and that your plan is updated as your needs and circumstances – and as the laws governing estates and taxes – change in the future.