Understanding the Basics of the Massachusetts Estate Tax

Understanding the Basics of the Massachusetts Estate Tax

Barbara Trombley, Financial Advisor, CPA

 

Did you ever wonder why all of your Massachusetts neighbors move to Florida when they retire?  And they make sure that they spend six months and a day at their southern address?  Of course, the winter weather in sunny Florida is a draw.  One reason that many people in Massachusetts change their state residence is to avoid the Massachusetts estate tax, which is levied on estates valued over $1 million dollars.  Given the value of real estate and 401k plans in Massachusetts, it is not that hard to pass this threshold for many middle-class people.

 

Surprisingly, the federal estate tax is $12.06 million per person in 2022.  Also, it is portable between spouses.  With the correct steps, a married couple can protect $24.12 million after the death of both spouses in 2022.  Our state estate tax is shockingly different. Of the 18 states with an estate or inheritance tax, Massachusetts and Oregon have the lowest exemption level of $1 million.  Also, the Massachusetts estate tax has a regressive feature where, if you die with an estate valued at $1,000,001, your heirs will pay a graduated tax starting at the first dollar over $40,000 (which is a small exclusion).  The bill on a $1,000,000 estate is about $40,000.  The tax rate is a graduated one and rises from .8% to 16% depending on the size of the estate.  The heirs of an estate worth $3 million could find themselves with a tax bill approaching $200,000!

 

Massachusetts is shockingly out of step with the nation and with the rest of New England.  Maine, Connecticut and Vermont all have exclusions of over $5 million and New Hampshire does not have an inheritance tax at all. Until our legislators raise the exemption to keep up with inflation and make the exemption a true one, residents will continue to flee the state or jump through hoops to help their heirs avoid the tax.

 

What is included in your estate?  Bank accounts, real estate, retirement accounts, life insurance proceeds, vehicles, etc.  Upon the death of the first spouse, no tax is owed.  It is the death of the last remaining spouse where the dollar amount of assets is counted and an estate tax will need to be filed if the total value exceeds $1 million.  The return must be filed, and any tax must be paid nine months after the death.  The state may grant an extension of time, but interest will accrue on any unpaid amounts past the due date.

 

 

What can be done to mitigate the tax if the laws don’t change?  Perhaps you retitle the ownership of your house to a trust or to an adult child to remove it from your estate.  Each spouse can also set up a trust to shelter $1 million upon their death.  This keeps the funds out of their estate but available to the surviving spouse to use if set up correctly.  Cash and other assets can be gifted to reduce an estate but be careful about capital gains or tax owed on retirement funds.  Charitable contributions can also be made to reduce the size of the estate.  Many retirees move to a tax-friendly state, like Florida, and become residents.  Working with a qualified financial planner and an estate attorney is imperative to mitigate the estate tax.

 

 

 

Securities offered through LPL Financial. Member FINRA/SIPC. Advisory services offered through Trombley Associates, a registered investment advisor and separate entity from LPL Financial.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice.  If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.