Introduction
In the realm of estate planning, the only constant is change. Massachusetts, known for its rich history and vibrant cultural landscape, has recently witnessed significant shifts in its estate tax laws.
These changes, effective from October 4, 2023, have profound implications for residents and non-residents with property interests in the state. This blog post delves into the nuances of the Massachusetts Estate Tax Reform and underscores the critical need for revising estate plans in light of these developments.
Understanding the New Massachusetts Estate Tax Law
The Massachusetts Estate Tax Reform has introduced pivotal changes that impact estate planning strategies. The primary change is the exemption threshold, which now stands at $2 million. This means estates valued under this amount are exempt from the state estate tax, a substantial increase from the previous threshold.
Why Revise Your Estate Plan Now?
Estate plans crafted under the old tax regime may no longer be optimal. Here are key reasons why revising your estate plan is imperative:
- Shift from Estate Tax to Income Tax Planning: With the increased exemption limit, many estate plans need to pivot from primarily addressing estate taxes to optimizing for income taxes. This shift is crucial since income taxes, including capital gains taxes, can significantly impact the net value of the estate passed on to beneficiaries.
- Capital Gains Tax Considerations: The new law underscores the importance of capital gains tax planning. Most estates face a 20% capital gains tax rate, and this can be compounded by the 3.8% surtax on net investment income. Effective estate planning should now include strategies to minimize these taxes. Married couples have the unique opportunity to obtain a 100% step-up in cost basis, not just once but twice. A step-up in cost basis occurs when the owner of an asset dies. Currently, the law allows the basis of an investment assets (like stocks or real estate) to be changed from the amount that was paid for the asset to the value of the decedent’s interest on the date of death. The step-up gives a way to reduce or eliminate capital gains taxes. Since most married couples own assets jointly, there is usually only a 50% step-up. That means that should the surviving spouse want to sell an asset, there may still be a capital gains tax. But some trusts are specially designed so that when one spouse dies all of the assets of the trust are eligible for a 100% step-up in cost basis when the first spouse dies, and it is possible to get a second 100% step-up when the surviving spouse dies. By revising your estate plan, you may be able to take advantage of a 100% step-up so that your spouse of heirs will pay little or no capital gains taxes on the inherited assets.
- Trust Structures and Income Taxes: Many people use trusts as part of their estate plan. However, under the new law, wills and most trusts may lead to significantly higher income taxes. In Massachusetts, there is an additional 5% state income tax on wills and most trusts, leading to combined income tax rates of almost 46% in 2024, potentially nearing 50% by 2026. It’s essential to review and possibly restructure these trusts to avoid unintended tax consequences. Many trusts can be re-written to take advantage of provisions in the tax code so that the income is not taxed at the higher estate and trust rates. Instead, it is possible to have the trust’s income subject to tax at the beneficiary’s lower tax rate.
- State vs. Federal Tax Disparities: The divergence between state and federal estate tax laws can create complexities. For instance, while the federal estate tax exemption is significantly higher, the state’s lower threshold requires careful planning to avoid state-level taxation. If the estate value exceeds the filing threshold, an estate tax return may be required at the state level. Even if the estate is below the federal threshold, filing a US estate tax return is often the best practice – it can start a Statute of Limitations and may allow for “portability” of the unused federal exemption. Many strategies to avoid estate taxation involve gifting. Gifts that exceed the annual exclusion ($17,000 in 2023 and 2024), require the filing of a gift tax return. Working with an attorney experienced in preparing and filing estate and gift tax returns can provide your family with the opportunity to take advantage of the differences and the loopholes that are in the state and federal laws.
Strategies for Estate Plan Revision
Given these changes, here are some strategies you might consider:
- Revise Wills and Trusts: Review and update your wills and trusts to align with the new tax landscape. This might involve changing how assets are distributed to minimize the overall tax burden.
- Incorporate Lifetime Gifting Strategies: With the high federal exemption, consider lifetime gifting to reduce the state estate tax liability. This strategy can be particularly effective in transferring wealth and minimizing future tax burdens.
- Reevaluate Ownership Structures: For non-residents owning property in Massachusetts, it’s crucial to reassess how their real estate is held. Different ownership structures can have varying tax implications under the new law.
- Explore Trust Decanting: If you have existing irrevocable trusts, trust decanting can be a valuable tool. It allows for the modification of trust terms to better align with current tax laws and personal circumstances. Not all trusts qualify for decanting.
- Utilize Trusts for Asset Protection: Despite the focus shift to income tax planning, trusts remain vital for asset protection. Most trusts act like wills and make outright distribution (ie. “After the death of the survivor of the Donor and the Donor’s spouse the Trustee shall distribute to …”). But they can be set up to safeguard assets from creditors, divorces, and lawsuits, while providing structured wealth transfer.
Conclusion
The Massachusetts Estate Tax Reform has set in motion a need for comprehensive estate plan revisions. Given the increased focus on income tax planning, residents and property owners in Massachusetts must proactively adapt their estate plans to navigate the new tax landscape effectively. Consulting with an experienced estate planning attorney is advisable to ensure that your estate plan is not only compliant but also optimized for your goals and the current legal environment.
Practical Tips for Navigating the New Estate Tax Landscape
In navigating these changes, here are some practical tips:
- Regular Reviews and Updates: Estate plans should not be static. Regularly review and update your plans in light of legal changes and personal life developments, such as marriages, births, and asset fluctuations. Many estate planning attorneys offer an Estate Planning Maintenance Program. Be sure to take part in such a program.
- Collaborate with Professionals: Estate planning is a complex field that intersects with tax laws, financial planning, and legal regulations. Collaborate with a team of professionals, including estate planning attorneys, tax advisors, and financial planners, to ensure a holistic approach.
- Maximize Charitable Contributions: Consider incorporating charitable giving into your estate plan. Not only does this facilitate philanthropic goals, but it can also provide tax benefits, especially in terms of reducing the taxable estate.
- Consider Life Insurance Strategies: Life insurance can play a strategic role in estate planning. It provides liquidity to pay estate taxes and other expenses, ensuring that assets do not need to be liquidated under unfavorable conditions.
- Explore Advanced Trust Options: Advanced trust structures, such as Domestic Asset Protection Trusts (DAPTs), Spousal Access Trusts (SLATs), Irrevocable Life Insurance Trusts (ILITs), and other planning techniques, can offer additional avenues for estate & income tax savings and asset protection.
Impact on Real Estate Ownership
The changes have particular significance for real estate owners. For those owning multiple properties or properties in different states, consider the implications of domicile and residency on your estate plan. Establishing trusts can be a strategic move to consolidate ownership and manage real estate assets efficiently, especially to avoid probate in multiple states.
Educating and Involving Beneficiaries
An often-overlooked aspect of estate planning is beneficiary involvement and education. It’s essential to discuss your estate plan with your beneficiaries to ensure they understand their roles, the plan’s rationale, and how to manage their inheritance effectively. This approach fosters transparency and helps prevent conflicts and misunderstandings.
Leveraging Technology for Estate Planning
In today’s digital age, leveraging technology in estate planning is becoming increasingly important. Digital asset management and online trust administration are emerging trends that offer convenience and efficiency. Ensure that your digital assets and online accounts are accounted for in your estate plan.
Staying Informed
Lastly, staying informed about legislative changes and emerging trends in estate planning is crucial. Subscribe to legal updates, attend seminars, and engage with professional communities to stay ahead in your estate planning journey.
Conclusion
The recent Massachusetts Estate Tax Reform is a call to action for individuals to revisit and potentially overhaul their estate plans. In an ever-evolving legal landscape, staying proactive, informed, and engaged with professional advice is the key to ensuring that your estate plan remains robust, effective, and aligned with your goals.
As we navigate these changes together, remember that estate planning is more than just tax savings; it’s about securing your legacy, protecting your loved ones, and ensuring that your final wishes are honored. Let’s embrace this opportunity to refine our strategies and fortify our plans for the future.
For more information about how recent changes to the law might impact your estate plans or how you can save on estate taxes of all types, reach out to the Law Offices of Boyd & Boyd, P.C.
by calling 508-444-9688.
