While the federal estate tax is currently now a problem only for the very wealthy, many states, including Massachusetts, impose their own, separate estate taxes. Unfortunately, these often kick in at much lower thresholds. What this means is that a taxpayer could have an estate well below the federal exemption, yet still have to pay state death taxes because his or her estate exceeded these lower exemption amounts.
Generally, there is no need to file a Massachusetts estate tax return if the value of the gross estate is under $1,000,000, provided that no gifts have been made that exceeded the annual gift tax exclusion when they were made. Keep in mind that the gross estate for estate tax purposes is different from a decedent’s Probate Estate. One may be able to keep a majority or all of their assets out of the probate court (a great planning goal), but those assets, with exceptions, are still part of your estate for purposes of determining value for estate taxes.
Once the value of the estate equals or exceeds $1,000,000, this triggers the filing obligation. The deadline for filing of the return and payment of any tax owed is nine months from the date of death. Unlike the federal estate tax, which taxes only the amount over the exemption (11.7 million for 2021), once a Massachusetts estate is valued over the million-dollar mark, the entire estate becomes subject to estate tax, starting at dollar one. There are some deductions that can be made like funeral expenses, administrative expenses, claims against the estate and losses during the estate settlement, but usually estate planning strategies are needed to avoid or reduce the estate tax.
Revocable trusts are a common tool used when spouses do their estate planning to help address estate taxes. Without a trust, when the first spouse dies his or her estate passes tax free to the surviving spouse. It is at the second spouse’s death that the estate will be taxed on the full value of all the assets. However, if the married couple were to utilize a trust that incorporates a well-designed estate tax plan, it’s possible to shelter up to $1,000,000 in value from estate tax at the first spouse’s death. The $1,000,000as well as the growth in value of that $1,000,000 will be sheltered from estate taxes at the second spouse’s death. As you can imagine, this can create significant wealth preservation.
Lifetime gifting is another option that can help reduce the taxable estate. However, as with other strategies, there are restrictions. The gifts will not be considered part of the taxable estate as long as they are under the annual federal gift tax exemption, currently set at $15,000 per donee per year. Any annual gift in excess of this amount will still be accounted for retroactively for purposes of determining the taxable estate. There are many other non-tax elements to gifting that must be considered as well, which are outside the scope of this blog.
Finally, charitable trusts, which can be structured in various ways, allow people to use deductions made available by charitable giving to offset taxes. These are complex planning vehicles, but in the right circumstances these types of trusts can be very advantageous.
All strategies have pros and cons that must be weighed, and many times proper estate tax planning could be a combination of different techniques. As families are unique, so is their planning. Contact the attorneys at Simmons & Schiavo to help you decide which strategies are right for you. .