After twenty years of planning around an absurdly low $1 million state estate tax threshold, Massachusetts residents have gained some breathing room with the newly enacted $2 million estate tax exemption. On October 4, 2023, Governor Maura Healy signed into law the “Competitiveness, Affordability, and Equity” Act, which makes the long-awaited exemption increase official after several years of stalled legislative efforts. The new law accomplishes two important things: first, it doubles the prior $1 million exemption, so that Massachusetts decedents worth less than $2 million will not be subject to estate tax. Second, it eliminates the so-called “cliff effect” under the old law, which subjected estates over $1 million to estate tax on all of the assets, not just the overage above the $1 million threshold. Under the new law, Massachusetts residents worth more than $2 million will pay estate taxes on the assets in excess of that number, but not on the exempt portion. The tax rates for the assets in excess of the $2 million remain unchanged.
What does this mean for estate planning?
- Single individuals or couples with more modest estates that are not close to the $2 million value can breathe easy and not have to focus their planning efforts on the state estate tax.
- Individuals and couples who are worth more than $2 million should remain aware of fluctuating values to ensure they do not inadvertently cross the $2 million mark. If they do, they should be able to reduce or eliminate the tax with some very practical and accessible planning solutions.
- Couples who together are or expect to be worth more than $2 million still need to plan for the estate tax with proper trust planning so that they do not waste the first-to-die spouse’s $2 million exemption. If married couples do not use tax sheltered trusts, they will lose out on the ability to collectively shelter $4 million, and stand to pay significant unnecessary taxes on the second spouse’s death.
- Couples of any net worth where one or both spouses are not US citizens need to be extra proactive to ensure they avail themselves of the relevant tax sheltering opportunities.
What if I already have tax-sheltered trust planning in place?
- If you created your estate plan with EPLO, your trusts should not require any amendments to avail yourself of the newly increased exemption.
- The new law is a great opportunity to review your plan and see if with the new higher exemption you can take advantage of directing more assets to the trusts at the first spouse’s death to double the protection. You might already be adequately funded, but a quick review discussion can help us figure that out together.
Do I still need to do estate tax planning in MA if my spouse and I are worth less than $4M?
Absolutely! First, tax laws are very unpredictable. For instance, our current Federal exemption of $12.92 million (as of 2023) is going to dramatically drop in the next couple of years. Even with a higher state estate tax exemption (or no state estate tax at all, in other states), we can’t fall asleep on the Federal tax. Additionally, if you don’t use tax-sheltered trusts to strategically control/direct assets at each of your deaths, you will completely waste/forfeit the first-to-die spouse’s $2 million shelter.
Unlike the Federal law, Massachusetts still does not allow surviving spouses to “port” (roll over) the first-to-die spouse’s unused exemption. Bear in mind that the entire estate is subject to the estate tax, including life insurance benefits (even ones provided by your employer), so a person’s “gross taxable estate” can get sneaky high. Finally, the vast majority of people who do true estate planning are using a trust for many other reasons – probate avoidance, blended family planning, inheritance protection for children/beneficiaries, and nursing home protection, to name a few. It is virtually effortless to include standard estate tax sheltering provisions within those structures, and there’s no downside to having them in there.