When you contemplate the creation of your estate plan, you likely focus on the ability to decide who will inherit from your estate and what assets each beneficiary will receive. The ability to make those decisions is undeniably an important motivation for creating an estate plan; however, a comprehensive estate plan allows you to do much more than just deciding how your estate assets will be distributed after your passing. One of the most advantageous aspects of a well thought out estate plan is the ability to protect your assets, both while you are alive and after you are gone. Specifically, your estate plan can help your estate avoid, or at least reduce, gift and estate taxes. With that in mind, the attorneys at Legacy Care Law Firm offer a guide to gift and estate taxes for Massachusetts residents.
Understanding Federal Gift and Estate Taxes
The United States federal government imposes a gift and estate tax, essentially a tax on the transfer of wealth, on the estate of a deceased taxpayer. The calculation of federal gift and estate taxes is based on the total value of the deceased person’s estate and the qualifying lifetime gifts (with most gifts being eligible). To illustrate, if your estate is valued at $10 million at the time of death, and you’ve made lifetime gifts worth $5 million, your taxable estate for federal gift and estate tax purposes would be $15 million, subject to a 40 percent tax rate. Without any adjustments, your estate would be liable for a substantial $6 million to the government. Fortunately, the “lifetime exemption” plays a crucial role in mitigating federal gift and estate taxes. In 2024, the lifetime exemption will be set at $13.61 million. Applying this exemption reduces the taxable estate from $25 million to $1.39 million, thereby lowering the estate’s tax liability from $6 million to $556,000.
Does Massachusetts Impose an Estate Tax?
Every taxpayer’s estate is subject to the federal gift and estate tax; however, each individual state also has the right to impose a state level estate tax. Although not all states exercise the right to tax estate, 12 states and the District of Columbia (as of 2023) do collect estate taxes. Massachusetts is among the states that collect an estate tax, meaning your estate has potential exposure to both federal and state estate taxes if you are a Massachusetts resident or you are a non-resident with real estate or tangible personal property located in Massachusetts.
Like the federal government, Massachusetts also allows each taxpayer to effectively make use of a “deduction” or exemption; however, at just $2 million, the Massachusetts exemption is much less than the federal exemption. The federal tax rate is a flat 40 percent for gift and estate taxes while Massachusetts has a graduated tax rate, meaning the tax rate is higher the higher the value of the estate is that is subject to the tax.
Does Massachusetts Collect an Inheritance Tax?
Everything about taxes can be confusing and complex. Even the terminology used to describe various forms of government-imposed taxes can lead to confusion. Consequently, there is often a mix-up between “inheritance” and “estate” taxes, with some people mistakenly using these terms interchangeably. Despite both taxes being associated with the transfer of assets after the owner’s death, they represent distinct types of tax obligations.
An estate tax is levied on the deceased person’s estate, calculated before asset distribution, and the responsibility for payment falls on the estate itself. In contrast, an inheritance tax is imposed on the individual inheriting the assets, and it is the beneficiary or heir who must pay this tax. As of 2023, only five states impose an inheritance tax, and Massachusetts is not among them.
Beneficiaries who are residents of Massachusetts need not worry about owing estate taxes on the inheritance they receive; however, it is essential to consider the potential impact of inheritance taxes if a beneficiary resides in a state that does impose such taxes.
How Can I Avoid Estate Taxes in Massachusetts?
Failing to plan by incorporating tax avoidance tools and strategies in your estate plan can lead to a significant loss of assets from your estate when it comes time to probate your estate. The good news is that a well drafted estate plan can help your estate retain its value. On top of using the federal and state exemptions, you may decide to incorporate common strategies into your estate plan to avoid taxes, such as:
- The annual exclusion. The annual exclusion allows each taxpayer to make annual gifts valued at up to $17,000 for 2023 (increasing to $18,000 for 2024) to an unlimited number of beneficiaries without those gifts counting toward your federal lifetime exemption. If you are married, you can combine your annual exclusion with that of your spouse, allowing you to make gifts valued at up to $34,000 ($36,000 for 2024). You can transfer a significant amount of assets using the annual exclusion if you start early. In just 10 years, you could transfer almost $1.5 million tax-free to four beneficiaries if you combined your exclusion with your spouse.
- Lifetime gifting. Transferring as much wealth as possible during your lifetime is a simple, yet effective, way to limit your estate’s exposure to taxes. Minnesota does not impose taxes on gifts made during your lifetime. Although the federal government does impose a tax on gifts, an experienced estate planning attorney can help you make lifetime gifts that reduce or eliminate taxes.
- Asset protection trust. There is a trust tailored to fulfill nearly any estate planning objective, including safeguarding assets. Asset protection trusts are irrevocable trusts because the assets within such trusts are legally considered to be property owned by the trust once the transfer occurs. As a result, these assets are excluded from your estate when calculating federal gift and estate taxes.
Contact Our Estate Planning Attorneys
For more information, please join us for an upcoming FREE seminar. If you have additional questions about Massachusetts gift and estate taxes, contact our estate plannning attorneys in our North Andover, Woburn, and Beverly offices at (978) 969-0331. Our Salem and Nashua, New Hampshire office can be reached at (603) 894-4141.
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