Mass Estate Tax Avoidance

Mass Estate Tax Avoidance“Due to our firm’s proximity to Massachusetts, many of our firm’s Nashua area estate planning clients have family members who live in Massachusetts.  Our New Hampshire Estate Planning clients are surprised to learn that their family members who reside in Massachusetts when they die with more than $1 million in their “taxable estate,” will owe a Massachusetts estate tax. The tax rate is based on a sliding scale from 0% to 16%. When you add up real estate, retirement accounts, and life insurance death benefits, many Massachusetts residents end up over the $1 million threshold.

There are two common ways to avoid this tax to discuss with your Estate Planning Attorney:

Option One: Proper Planning With Revocable Trusts utilizing the Marital Deduction and Credit Shelter Trust

Every person can pass $1 million free of estate taxes. Therefore, a married couple should be able to pass $2 million free of tax. However, achieving this result requires pre planning with a knowledgeable estate planning attorney.

Here’s what happens without planning: Husband and Wife have $1.5 million. Husband dies, leaving everything to wife. Wife dies with $1.5 million in her taxable estate (because she got everything when Husband died). Wife is now over the threshold by $500,000, and owes a Massachusetts estate tax of around $64,000.

Here’s what happens with planning: Husband and Wife have $1.5 million. They split their assets evenly, and hold them in revocable trusts with estate tax planning provisions. Husband dies, and leaves his half in a credit shelter trust. His half is under the threshold, so no estate tax is due. Husband’s credit shelter trust is now available for Wife’s benefit, but is not part of her taxable estate when she dies. Wife dies, and her taxable estate consists of the $750,000 in her revocable trust, which is under the threshold.  There is no estate tax!

The above technique provides even greater savings with larger estate!

Option Two: Annual Exclusion Gifting

If the estate tax is based on your net worth when you die, then many clients choose to give some of their money away while still alive.  Unfortunately, there are rules in place that cause large gifts to count as part of your taxable estate, even though you no longer have the money/property. However, there is an exclusion from these rules for gifts of up to $14,000 per person per year. Married couples can give $28,000 per year!

Here’s how this works:

Husband and Wife have over $2 million, so they’ll owe an estate tax even with the marital planning discussed above. They also have three children, who are all married. Therefore, Husband and Wife can give each of their children, and each of their children, $28,000 per year. That equals out to $84,000 per year ($28,000 x 3). Husband and Wife decided that they would like to keep their money within the family, and reduce their eventual estate tax, so they make these gifts every year for five years. This reduces their taxable estate by over $420,000, and saves them around $50,000 in estate taxes. There would be additional savings by including gifting to grandchildren, perhaps for private school or the ever increasing cost of college tuition.

Of course there are plenty of more sophisticated methods as well, but for most of us, these two are the ones to discuss with your estate planning attorney.  John S. Polgrean is a Nashua area estate planning attorney with a “cross border” estate planning practice.”