Skilled Lawyers Providing Help in Avoiding Estate Taxes for Residents of Cape Cod and The Surrounding Islands

When it comes to avoiding the Massachusetts estate tax, there are a few widely used strategies for you to consider. Proper planning is key to ensuring your beneficiaries will be able to receive your assets in the way you intended to transfer them. Being hit with an expensive estate tax bill can jeopardize the integrity of your estate and the beneficiaries’ ability to receive financial support from it.

The state of Massachusetts requires estate taxes to be paid on any estate that totals two million dollars or more. For assets that fall below that number, no estate taxes are required. For those who fall into the category of $2 million or more, an estate tax of 8 to 16% will be assessed on the amount that exceeds the threshold. But there are a few strategies that are commonly used to reduce or avoid paying estate taxes in Massachusetts. Let’s look at three of the most common ones.

Reducing Your Estate Size by Giving Annual Gifts

This is a strategy that allows you to reduce the size of your estate over a period of time. It does come with a caveat: the IRS knows that many may give gift funds to avoid paying estate taxes, so it has set a limit (the “annual exclusion”) to the amount of non-taxable gifts one can give in a year’s time. In 2024, the annual exclusion is $18,000. A married couple can make gifts separately to the same person, which would double the annual exclusion.

By making gifts to your family members over time, the size of your estate will be gradually reduced. If what remains of your assets at your death totals less than two million dollars, your estate is now free from paying taxes. This strategy might not be right for everyone and must be done carefully in order to avoid gifting any money above the allowed tax-free amount. The combined fair market value of all gifts made during the year cannot exceed the annual exclusion. If you give more than the annual exclusion, you are required to file a Gift Tax Return (US Form 709) to report the gift and, in some cases, pay a gift tax.

Remember, the gift is valued at its true fair market value. Some people wrongly believe they can make a gift of valuable property for $1, and $1 is the value of the gift for gift tax purposes.  Unfortunately, this is not true.  The value of the gift is its fair market value. For example, a gift of real estate that has a fair market value of $400,000 but is gifted for only $1 is a gift that exceeds the annual exclusion and requires the filing of a Gift Tax Return.

Using Charitable Donations To Avoid MA Estate Tax

There is no annual limit to the amount of your estate that you can give to charity, and such donations can reduce the size of your estate and also count as a taxable deduction. Some people will include charities as an heir in their Will or Trust.  Making gifts at death to a charity is eligible for a charitable estate tax deduction and, as a result, will reduce or even eliminate estate taxes. While this is definitely an option to avoid estate taxes in Massachusetts, many individuals with families would rather preserve their estate and keep it in the family. For those individuals, charitable donations may not be the best option.

Using Trusts to Preserve Your Estate Size and Avoid MA Taxes

Some of the most commonly used trusts are Revocable Living Trusts and Irrevocable Trusts. Here, the term “revocable” means it can be amended or revoked at any time, and the term “living” means that it has been funded; in other words, assets have been transferred to the trust, and the title is now in the trust and no longer owned by you personally. Revocable trusts can be changed or amended at any time.  Revocable trusts can even be cancelled altogether. While irrevocable trusts are permanent and usually cannot be changed by the person who created them.

Married couples have a very simple technique available to avoid the Massachusetts estate tax.  It is possible for married couples to use a tax shelter that is known as a “credit shelter” trust or a “by-pass” trust.  These tax shelters are typically built into a revocable trust.  Generally speaking, a revocable or living trust is a document that allows you to place all your assets in a trust and name yourself as a trustee to stay in full control of your assets for your lifetime. It also allows you to determine who will receive those assets upon your death. With a living trust, your wealth is transferred directly to a successor trustee that you previously named in the document, avoiding the probate process altogether. Traditionally, estate planning attorneys create a revocable trust for each spouse and fund each trust with assets owned by the couple. But for a variety of reasons, the separate trust approach is less desirable than a joint revocable trust.  A joint trust can still provide a tax shelter from the Massachusetts estate tax.  At the same time, a joint trust can provide more flexibility than separate trusts.  A joint trust can also provide income-tax benefits that separate trusts cannot.

For non-married individuals whose net worth exceeds $2 million or married couples with a combined net worth of over $4 million, there are other types of trusts that can help to avoid or even eliminate the Massachusetts estate tax.  Setting up an irrevocable trust becomes the most favorable option to achieve both the goals of estate preservation and tax protection. There are many different types of trusts available, like Domestic Asset Protection Trusts (DAPTs), Spousal Limited Access Trusts (SLATs), and Grantor Retained Annuity Trusts (GRATs), to name only a few.

In many cases, assets you transfer into an irrevocable trust are not “owned” by you. Therefore, those assets are not part of your taxable estate. You can set up one or multiple irrevocable trusts that will bring your taxable estate below the $2 million estate tax threshold, allowing you or your surviving spouse to avoid paying MA estate tax.

Whatever you choose to do, make sure to always consult a professional estate planning attorney to decide which strategy is right for your specific situation. We can help guide you. Call us at (508) 775-7800.