For the first time in more than two decades, Massachusetts residents and their families may be able to enjoy new tax-saving benefits. On October 4, 2023, Governor Maura Healy signed the $1 billion Massachusetts Tax Relief Plan, providing tax relief to residents and corporations doing business in the Commonwealth.
One notable update included adjustments to the state’s estate tax exemption limit, as well as a few other related changes. For high earners especially, these updates can be significant in helping you transfer less of your estate to the government and more to your intended beneficiaries.
To help you and your family navigate these recent changes and update your estate plan accordingly, we’ve answered a few common questions below and interviewed Senior Associate Nikolaus Schuttauf of Day Pitney to discuss who this impacts most.
What Is Estate Tax?
Before diving into MA’s recent changes, let’s briefly review what estate tax is and who it applies to. An estate tax is a levy against your estate (minus a set exemption) based on its value at the time of your passing. The estate tax is calculated before any distributions are made to your beneficiaries (or heirs).
There is, however, a federal exemption limit for estate taxes, meaning those with estates valued less than the exemption limit will not be subject to the tax. In 2024, the federal estate tax exemption limit is $13,610,000 per person (or $27,220,000) for married couples.¹ Because this is considered an “exemption” limit, individuals’ estates are only taxed on the portion that exceeds the federal threshold at rates between 18% and 40%.
In addition to a federal estate tax, 12 states (including MA) impose a state-level estate tax with varying exemptions.
What Is the Updated Massachusetts Estate Tax Limit?
Recent legislation provided three primary provisions to previous estate tax law:²
- The former $1 million exemption limit was raised to $2 million.
- This increase means estates of deceased individuals will receive a tax credit of up to $99,600, which effectively zeros out tax due on the first $2 million of the estate.
- The $2 million exemption triggers a tax on the remaining estate vs it being a threshold to impose a tax on the whole estate. More on this later.
While the law wasn’t passed until October 4, 2023, it retroactively applies to estates of those who passed on or after January 1, 2023.
Keep in mind estates passing to a surviving spouse have no estate tax imposed on them. The survivor would simply inherit and potentially pass away with that much larger estate. If that surviving spouse remained unmarried, the tax would be assessed at their passing.
Is the Entire Estate Taxed if it Exceeds the Exemption Limit?
Prior to this new law, large estates were subject to what’s called the “cliff effect.” Essentially, if an estate exceeded the previous $1 million exemption limit, the entire estate was subject to estate taxes (not just the portion exceeding the limit). In this way, it acted less as an “exemption” and more as a “threshold.”
Nik Schuttauf pointed out that in this scenario, for couples over $2M, advanced estate planning techniques were really only able to protect $1 million of the estate from MA estate tax by utilizing a credit-shelter trust. When the first spouse passed, they would segway $1 million of that person’s estate into a credit-shelter trust thereby utilizing their $1 million exclusion. If this step is missed, the spouse simply inherits everything under their own name thereby increasing their own estate that much more. At the survivor’s passing, their whole estate is assessed for MA estate tax. However, even with the $1 million segwayed to trust, if the remaining estate was $1 million+ it would trigger a tax on everything remaining.
The cliff effect has now been eliminated, and only the portion of the estate exceeding $2 million will be subject to MA’s estate tax. Again, this can be a significant tax saver for estates of high-earners. Nik says that in this scenario, $2 million can be segwayed into a credit-shelter trust at the first passing, the second to die can now utilize their own $2 million exemption, and now only what’s beyond that would be taxed. A full $4 million is sheltered from tax vs just $1 million in year’s past with the boost of the exemption plus use of credit-shelter trusts.
What if Massachusetts Residents Owned Property Elsewhere?
Another notable change within this new legislation is how out-of-state property is considered when calculating total estate tax liability.
Prior to 2023, if a resident of Massachusetts owned what’s considered “real property” outside of the state, it was not included when determining estate tax liability. Now, however, the value of that property is considered when determining estate tax liability.
Here’s an example of how it works:
Say you live in Massachusetts and own a second home in Florida. Your estate, including the property you own in Massachusetts, is valued at $10 million at the time of death, and your Florida home is valued at $2 million. Your taxable estate is reduced by 20%, because your Florida home accounts for 20% of it. Therefore, 80% of your estate would be taxable.
Other common assets that make up your estate include:
- Checking and saving accounts
- Brokerage accounts
- Retirement accounts (401(k), IRA, Roth accounts, etc.)
- Your interests in small business corporations or LLCs
- Life insurance payouts
- Cars, boats, collectibles, and other physical assets
- Gifts previously reported on your tax return
What about for MA Snowbirds claiming out-of-state residency?
Nik Schuttauf explains that this updated legislation has a bit of a windfall provision for out-of-state residents with property in Massachusetts. Say you retired to Florida but retained a Cape Cod property worth $1,000,000 for occasional summer use. The tax credit provided from the $2,000,000 exclusion is available to all estates (in or out-of-state), and is not adjusted proportionately as we see above for residents of Massachusetts. Meaning the full $99,600 credit is available to wipe out the tax due on the in-state property. This is a significant change from years past.
Nik gave the example that a FL resident with an $8 million total estate and $1 million being a Cape Cod home subject to MA estate tax, that no tax would be due under this new tax law. Whereas in years past, $96,650 would have been assessed.
Is the Exemption Limit Adjusted for Inflation Annually?
While the federal estate tax exemption limit is adjusted annually to account for changes in inflation, Massachusetts does not follow suit. Today’s current $2 million limit will remain as-is for the foreseeable future—at least, until it is amended by state legislation once again.
Should High-Earners Revisit Their Estate Plans?
Estate plans are meant to adapt and evolve over time to reflect both your life circumstances and changing legislation (like 2023’s tax relief plan). It’s a good idea to meet with both your estate attorney and financial advisor to see what may need to be adjusted to accommodate these new estate law changes.
For example, Massachusetts does not allow portability of the estate tax exemption limit between spouses—meaning if one spouse dies first and their estate is less than $2 million, they cannot transfer the remainder of their exemption limit to their spouse. As discussed above, some high-earning couples opt for an AB trust (also known as a credit-shelter or bypass trust), to maximize MA’s estate tax exemptions. When done effectively, this strategy enables the couple to take advantage of each individual’s full tax exemption limit and, ultimately, pass along more of the couple’s estate to their children or grandchildren.
Nik says “This change most impacts a couple who have over $4 million of non-qualified assets. If you own a home plus various investments, property, or business interests, you want to speak to an attorney to make sure the assets are appropriately distributed between each spouse.” Retirement accounts typically stand separately from trust funding, if possible. However, if all that’s on the table are a home and retirement assets, there are creative ways to structure a trust to maximize tax savings and provide for beneficiaries.”
Need Help Reviewing Your Estate Plan?
This recent legislation created significant tax-saving opportunities for high-earning families in Massachusetts, but it still requires some consideration and thoughtful planning. In our discussion with Nik, we realized how much value can be created when financial advisors and attorneys collaborate on trust funding. For example, trusts created to utilize the MA estate exclusion at the first spouse’s passing could be funded strategically. “What’s often overlooked is that the growth on what lands in the $2 million credit-shelter trust is also excluded. This means funding the trust with assets that have the most growth potential is ideal,” says Nik Schuttauf.
If you need help reviewing and updating your estate plan accordingly, we can help. Don’t hesitate to reach out to our team or Day Pitney today to schedule an appointment.
Sources
2What to Know About the Recent Change to the Massachusetts Estate Tax
