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.

The implications of this change are twofold. First, it potentially reduces the estate tax burden for many Massachusetts residents and non-residents owning property in the state. Second, and more importantly, it signals a shift in estate planning focus from avoiding estate tax to income tax planning.

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:

1.  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.
2.  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.
3. 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.
4.  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:

1.  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.
2.  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.
3.  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.
4.  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.
5.  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.

Remember, estate planning is not a one-time event but a dynamic process that evolves with changing laws and personal circumstances. Embracing this change and taking timely action can significantly enhance the effectiveness of your estate planning efforts, ensuring that your legacy is preserved and passed on according to your wishes, with minimal tax implications. Stay informed, stay prepared, and let your estate plan be a reflection of both your financial acumen and your foresight.

Practical Tips for Navigating the New Estate Tax Landscape

In navigating these changes, here are some practical tips:

1.  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.
2.  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.
3.  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.
4.  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.
5.  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.

Consider joining our mailing list to get notices about changes in the law or seminars that we offer.

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.

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Estate Planning vs. Legacy Planning: Understanding the Difference

Estate planning includes a wide variety of potential activities. Not all of those activities are right for everyone who engages in estate planning. For example, someone with relatively few assets may want to find out more about trusts in order to avoid a court process called probate (which is required for a Will), and those with estates with large values may want to know about avoiding estate taxes. However, almost anyone can benefit from basic estate planning that uses powers of attorney, wills, healthcare directives and revocable trusts.

One decision you might want to make as you approach estate planning is whether you simply want to protect your assets and your interests or prepare to leave a legacy for others. You don’t need millions in the bank to consider your legacy; for example, real estate, like raw land or even a cottage on Cape Cod that is used by the family, can be a part of your legacy.

Understanding the difference between estate planning and legacy planning — and speaking to an attorney experienced in these matters — can help you make those choices.

What Is Estate Planning?

Estate planning in general refers to the process of protecting your assets and personal interests legally during your life and after you pass away.

Some common activities in estate planning include:

• Understanding what you have. Many people start with an inventory of assets. This provides a comprehensive list of what you have now — and potentially an understanding of how you might grow that wealth in the future.
• Deciding what you want to do with your assets now and in the future. Once you know what assets you have, you can work with an experienced estate planning attorney to determine how best to protect those assets and how to ensure your wishes for them are carried out even if you’re incapacitated or pass away.
• Setting legal structures in place to safeguard your assets and wishes. Estate planning often includes the use of trusts, wills, and other legal documents to ensure your wishes are carried out and that your assets are protected – from creditors, lawsuits, divorcing spouses or taxes.
• Making and implementing plans for the future. If asked, most people want to remain at home should some form of long term care be required. Some estate planning attorneys help with issues such as elder law, which can involve considerations such as long-term care like in-home care.

What Is Legacy Planning?

Legacy planning is a specific part of estate planning that considers what happens with your assets when you pass away. When you engage in legacy planning, you may take a more comprehensive approach to this than you would with general estate planning.

For example, with general estate planning, you may create a revocable trust that makes it easy for people to identify what assets you have and what you want done with them when you pass away and to help keep those assets out of probate.

However, with legacy planning, you consider in a holistic manner the legacy you want to leave behind along with your assets. With legacy planning you goal is to structure your affairs so that your values are transferred together with your assets.  The aim is for your estate to achieve goals and objectives that are important to you long after you have passed away.

Some common goals of legacy planning can include, but certainly aren’t limited to:

• Emphasizing the importance of certain family values, like education, home ownership, marriage, entrepreneurial endevors and business ownership.  These goals may be encouraged through the use of a Family Bank. A Family Bank (often in the form of a trust or a business entity) may be created to provide grants or loans to family members at favorable terms to encourage the continuation of valued activities (ie. education, home ownership, etc.). 
• Creating charitable foundations or trusts. You can set up a variety of legal structures that allow philanthropic efforts you care about now to continue even after you’re gone — and in your own name or the name of your family. You may even structure these entities in a way that encourages family involvement. 
• Safeguarding assets against taxes. 
  • Individuals with larger estates may have the opportunity to leave larger legacies. However, they also may have to consider the impact of estate taxes on what they leave to heirs. Proper legacy planning can help to reduce the impact of estate taxes – often over multiple generations.
  • Almost every family is impacted by income taxes. Proper legacy planning will structure the legacy you leave so that income taxes are minimized. This is done by through basis step-up techniques, like powers of appointment, and qualifying an inheritance for lower ordinary income tax rates through proper design of the legal structures best suited for your situation.
• Protecting assets against confiscation. Approximately, fifty perscent of all marriages in the United States end in divorce.  A proper legacy plan will protect your loved so that any inheritance you leave will not be subject to claims in a divorce.  In other cases, an heir may have a hig risk of being sued, so structuring the legacy to protect against lawsuits may be critical.  Finally, you may want to leave assets for loved ones, but you don’t trust their ability to manage the assets correctly. Creating trusts can help you protect assets against  mismanagement.
• Setting guidelines for how assets can be used. You may have a specific purpose in mind for how heirs should use assets. Legacy planning helps you put legal provisions in place to ensure those guidelines are followed.
• Supporting the growth of wealth now and in the future. By safeguarding your assets legally, you can protect them now and help increase the chance that wealth grows in the future.

What Are Some Possible Tools Used in Legacy Planning?

Many legal tools exist to help you protect your assets now, better build wealth for the future, and ensure your wishes are carried out regarding the use of your assets. The best way to understand what legal options might be right for your legacy planning is to talk to an experienced estate attorney.

However, here are a few options that might come up, depending on your situation:

• Trusts. You can use trusts to protect your assets now and once you pass away. They can help streamline the process of passing assets on to others, keep assets out of probate, and ensure your guidelines for asset use are followed.
• Family Limited Partnerships (FLPs). In some cases, it may make more sense for family members to own and manage assets, like an investment portfolio, together. In this case, an FLP might be a good decision for legacy planning. FLPs are also a great tool for sharing ownership of a startup company with children at an early stage, before growth or a buyout occurs. FLPs can provide strong protection from the divorce of or creditor claims against an owner.
• Limited Liabiltiy Companies (LLCs) and Corporations. Many times clients want their children, and eventually their grandchildren, to own real estate together. For example, many clients want their children to continue to use their Cape Cod home for family use and enjoyment. But what you are really doing is placing your children into a business relationship with each other.  Effectively, they are managing your home for the needs of multiple families. This requires capital contributions from each heir to pay property taxes, insurances and maintenance and repairs. This can best be structured through a business entity, like an LLC or Corporation, that sets out what the rules are for each co-owner.  
• Annual gift tax exclusions. You may be able to start creating a legacy by gifting assets to your loved ones before you pass away. Understanding the tax implications of doing so is important.  In order to build a legacy out of annual exclusion gifts, it is often best to use an Gifting Trust that allows for pooling of the annual gift and can be managed in a more controlled manor.

To find out more about legacy planning and what options you have, reach out to the Law Offices of Boyd & Boyd, P.C., today by calling 508-444-9688.

If you reside in a state other than Massachusetts but own real estate or tangible personal property in the Commonwealth, your property here will probably be subject to the Massachusetts estate tax – unless you have sound planning advice and guidance from a Cape Cod estate planning lawyer.

A change of residency can often help you reduce the income tax liability you face as a Massachusetts resident. However, just because you are no longer a resident subject to the state income tax, non-residency does not necessarily mean you are no longer subject to the Massachusetts estate tax.

How does the estate tax in Massachusetts work if you are not a resident but you own real estate or tangible personal property in this state? Is there a way to avoid the estate tax? If you own property in Massachusetts but are not a resident, keep reading to learn the answers to these questions.

How Does the Massachusetts State Estate Tax Work?

The current Massachusetts estate tax exemption is $1 million. For an estate valued at less than $1 million upon the owner’s death, there is no estate tax. For an estate that is valued at or above $1 million, the tax must be paid before any assets may be transferred to the beneficiaries. As with any inheritance, debts and taxes must be paid before an heir may inherit.

However, the state’s estate tax applies to the full value of the estate, not merely to the part of the estate that exceeds the exemption amount. If an estate is worth $3 million, the entire estate – not just the $2 million above the exemption amount – is subject to the estate tax in Massachusetts.

If the value of your estate hovers around the $1 million figure, the wrong estate planning strategy could impose a crushing tax burden on your beneficiaries, but an astute Massachusetts estate planning lawyer can suggest several ways to keep the value of your estate below $1 million.

If your estate is subject to the estate tax in Massachusetts, how much will have to be paid to the state? It’s a complicated question, and the answer to that question is, “It depends.” However, as of 2022, the Massachusetts estate tax rate is a graduated rate that begins at 8% and works up to the highest rate of 16 percent.

How Does the Estate Tax in Massachusetts Apply to Non-Residents?

By statute (MGL ch 65C sec. 4), Massachusetts has the right to tax a resident of another state if they own real estate or tangible personal property located within the Commonwealth of Massachusetts.

Section 4. (a) A tax is hereby imposed on the transfer of a nonresident decedent’s real and tangible personal property having an actual situs in Massachusetts, if such property would have been included in the Massachusetts gross estate had the decedent been a resident.
(b) The tax imposed under subsection (a) shall be an amount which bears the same ratio to the tax that would be due if the decedent had been a resident as (i) the value of all real and tangible personal property, diminished by any mortgage or lien thereon, having an actual situs in Massachusetts, the transfer of which is subject to tax under said subsection (a) bears to (ii) the value of the decedent’s Massachusetts gross estate, diminished by any mortgage or lien or property included therein, determined as if he had been a resident.

Here’s how the Massachusetts estate tax applies to non-residents. Let’s say that you’re a resident of Florida, single, and you own a home in Dennis. Then, let’s say that your estate is valued at $3 million, and your Osterville home represents one-third of your estate because it’s worth $1 million.

If you were a resident of Massachusetts and if your entire estate were located here, your estate tax would amount to $182,000, but as a resident of Florida, your home in Massachusetts constitutes only one-third of your total estate.

You would thus pay one-third of the estate tax that a resident of Massachusetts would pay, or $60,667. If you would prefer not to pay over $60,000 to a state where you’re not a resident, a Cape Cod estate planning attorney can help you plan to avoid the estate tax in Massachusetts.

A Revocable Trust Will Not Protect Your Estate from the Massachusetts Estate Tax

Many of the people who own real estate or tangible personal property in Massachusetts have set up revocable living trusts. Transferring your Massachusetts assets into a revocable trust will avoid probate in Massachusetts, but it may not give those properties protection from the Massachusetts estate tax. Incidentally, the same is true for irrevocable Medicaid Planning Trusts (MPTs).

It’s true that a revocable living trust provides a number of advantages and lets your estate avoid the probate process, but any Massachusetts property that is owned by your revocable trust (and most MPTs) is still considered part of your taxable estate and remains subject to the estate tax in Massachusetts.

How Can Non-Residents Avoid the Massachusetts Estate Tax?

It is often best to keep things simple. For married couples, there is a very easy option. No sophisticated estate planning is needed. A properly drafted joint revocable trust may be used to eliminate the Massachusetts estate tax.

If you are using revocable trusts to avoid probate, your trust may be amended. Most married couples use separate trusts – one trust for one spouse and a second trust for the other. By amending and merging those separate trusts into one joint trust, it is possible to eliminate any Massachusetts estate tax liability. A Cape Cod estate planning lawyer can help you and your spouse establish a joint trust or help you merge your individual trusts into a joint trust.

With a joint trust, at the death of the first spouse, the Massachusetts real estate may be allocated to an irrevocable portion of the trust (sometimes referred to as a credit shelter trust), as long as the net value of the real estate is less than $1 million. Because the irrevocable trust is built in a way that the surviving spouse can use the real estate but not “own” it under the tax code, the Massachusetts real estate will not be a part of the survivor’s estate at death. This effectively allows a widowed spouse to avoid the Massachusetts estate tax on Massachusetts real estate when the second spouse dies.

What if you are not married? Or what if my Massachusetts real estate is worth more than $1 million?

However, an out-of-state resident who owns property in this state may have several other practical alternatives for avoiding or reducing the Massachusetts estate tax. A Cape Cod estate planning attorney can help you determine which technique makes the most sense for you and your family.

Out-of-state residents who own investment real estate in this state may consider setting up a limited liability company, which is one strategy for avoiding the Massachusetts estate tax. When you transfer your real estate in Massachusetts into your LLC, the LLC becomes its legal owner. By statute, Massachusetts levies a tax on real or tangible personal property “owned” by a decedent and located in the Commonwealth.

Massachusetts does not subject the intangible personal property of a non-resident, including limited liability company membership shares, to its estate tax, so any of your properties that legally belong to your limited liability company would no longer be considered a part of your taxable estate.

But be warned: just creating an LLC and transferring your real estate to an LLC is not enough. Your LLC must have a legitimate business purpose, that includes generating some form of revenue. So your LLC will need to charge fair market rent on the real estate it owns to be legitimate. The trick is how to structure the rent so that it does not create taxable income in Massachusetts. There are many other considerations that your Massachusetts estate planning attorney can help with.

What Are Your Other Alternatives?

If you are an out-of-state resident who owns a home or other real estate in Massachusetts, another strategy for avoiding the Massachusetts estate tax is the creation of one of several types of irrevocable trusts.

Some examples of irrevocable trusts include:

(1) the sale of the Massachusetts real estate to a deceased spouse’s credit shelter trust (this preserves ones federal estate tax exemption but that this may have a capital gains tax consequence),

(2) the sale of the real estate to a Massachusetts Estate Tax Avoidance Trusts (this technique preserves your federal estate tax exemption and has no capital gains tax exposure), and

(3) transfers to a Qualified Personal Residence Trust (QPRT). A QPRT is a special type of irrevocable trust into which you give your primary or secondary home and reserve the right to use the home for a term or period of years. QPRTs use a portion of your federal estate tax exemption and do not expose you to capital gains taxes (but your heirs will receive your cost basis). QPRTs also have a risk of failure. If you die before the term ends, the real estate will be pulled back into your estate, thereby subjecting your estate to the estate tax you were trying to avoid.

These are just a few examples of the types of irrevocable trusts that may be used to eliminate the Massachusetts estate tax. Which technique will work best for you depends on your particular needs and circumstances.

What Is a Spousal Access Trust?

If you are married, a trust like a Spousal Access Trust allows you to give your Massachusetts real estate and tangible personal property to a trust for your spouse. And you can be sure that your spouse will greatly appreciate the gift!

A spousal access trust is an irrevocable trust prepared by one spouse for the other’s benefit. A spousal access trust is funded by gifts from the donor spouse while both spouses are still alive. It may be written in such a way that if your spouse dies before you, the assets owned by the trust may be transferred to an irrevocable trust for your benefit.

What Option Is Right For You?

Several other types of trusts – and several other estate planning approaches – may allow an out-of-state resident who owns tangible property or real estate in Massachusetts to reduce or avoid this state’s estate tax.

The option that’s best for you can only be determined by consulting a Massachusetts estate planning lawyer. Your estate planning lawyer will evaluate your assets and properties and recommend the best way for you to reduce or avoid having to pay the Massachusetts estate tax.