If you are responsible for overseeing the probate of an estate for someone who recently passed away, one of your many duties and responsibilities is to ensure that all taxes owed by the estate are correctly calculated and paid before assets are transferred out of the estate. To successfully fulfill this duty, you must understand the various applicable taxes. Toward that end, the probate attorneys at DeBruyckere Law Offices discuss what estate taxes and estate might owe when a Massachusetts resident dies.
Does the Estate Owe Federal Gift and Estate Taxes?
One of the first steps you will need to take if you are serving as the Executor or Personal Representative (PR) of an estate is to identify all the estate assets. You will then need to determine the cumulative value of all the estate assets because any taxes owed by the estate will be determined based on the value of the estate. When calculating the value of the estate you must also include the value of qualifying lifetime gifts.
The federal government imposes gift and estate taxes on all estates at the rate of 40 percent; however, every taxpayer is also entitled to use the lifetime exemption which will reduce, if not eliminate, the amount of taxes owed by the estate. As of 2023 the lifetime exemption amount for an individual taxpayer is $11.92 million and will be adjusted for inflation each year until it drops back down to $5 million (adjusted for inflation) in 2026. If the value of the estate is less than the current lifetime exemption, the estate will not owe federal gift and estate taxes. If the estate value is more than the lifetime exemption, the estate may owe federal gift and estate taxes on the amount to which the value exceeds the lifetime exemption.
By way of illustration, imagine that the estate you are administering has assets valued at $12 million and qualifying gifts valued at $5 million for a cumulative value of $20 million. After deducting the lifetime exemption of $11.92 million, the taxable estate for federal gift and estate tax purposes is $7.08 million. Without any further deductions, credits, or adjustments, the estate would owe $2,832,000 in federal gift and estate taxes.
Does the Estate Owe Massachusetts Estate Taxes?
Some states, including the Commonwealth of Massachusetts, also levy a state-level estate tax on estates probated in the state. Massachusetts does have an “exclusion” that is similar to its federal counterpart; however, there are important differences. Estates with a value of less than $1 million are not subject to estate taxes in Massachusetts. If the estate value exceeds $1 million, the entire value of the estate is subject to estate taxation. As such, in the example above, the estate would owe taxes on the entire $20 million. If the estate’s value exceeds $1 million, you are required to file a Massachusetts Estate Tax Form, Form M-706 within nine months after the decedent’s date of death. Calculating the amount of taxes owed on an estate in Massachusetts is complicated because you have to factor in the maximum federal credit for state death taxes and the tax rate is a graduated rate, meaning the percentage of taxes owed increases with the value of the estate up to a maximum rate of around 16 percent. Although Massachusetts effectively gives the estate a credit for having to pay federal gift and estate taxes, the Massachusetts estate tax is a separate and distinct tax obligation that must be paid before assets are distributed to beneficiaries and/or heirs of the estate.
Will Beneficiaries or Heirs Pay an Inheritance Tax?
The other important tax you should consider when probating an estate is an inheritance tax. Unlike federal and state gift and estate taxes that are paid out of the estate before assets are distributed, an inheritance tax is paid by the beneficiary or heir after ownership of the assets has been transferred. While it is not your duty as the Executor or PR to pay any inheritances taxes owed, it would be wise to notify beneficiaries or heirs that the tax may be owed. Only a handful of states impose an inheritance tax and Massachusetts is not one of them. As of 2023, only Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania collect inheritance taxes. If a beneficiary or heir is a resident of one of those states, the value of the inheritance they receive may be taxed.
Can a Massachusetts Probate Attorney Help Me Determine What Taxes an Estate Owes?
You are not required to work with an attorney when you oversee the probate of an estate in Massachusetts; however, you can be held personally liable for failure to pay taxes owed by the estate. For that reason alone, it is in your best interest to consult with an experienced probate attorney if you find yourself responsible for probating an estate in Massachusetts.
Contact Probate Attorneys
For more information, please join us for an upcoming FREE seminar. If you have additional questions about what taxes an estate may owe in Massachusetts, contact our probate 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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