Understanding The Current Estate Tax/Death Tax Landscape
As wealth passes from generation to generation the Estate Tax operates to tax that passage of wealth. For over 20 years Massachusetts has imposed an Estate Tax on individuals having an interest in over $1 Million of assets when they pass away. Our Governor has signed into law a major change in this law that essentially exempts individuals with less than $2M. Some of the details:
No More Cliff
If your assets exceed $2M you calculate the tax due as before but then reduce the tax due by $99,600. So essentially you only pay tax on the assets in excess of $2M.
No Portability
At the federal level, the first spouse to pass away can give their unused credit amount to the surviving spouse so the surviving spouse can avoid a large amount of tax ($25.84 Million in 2023). Whereas Massachusetts does not allow this, and therefore if the first spouse who passes away does not utilize their credit they lose it (and thus credit shelter planning is still necessary for clients in excess of $2M of assets).
Retroactivity
The effective date is for individuals who passed away January 1, 2023 and thereafter. If the estate tax return has already been filed for such an individual apparently the Department of Revenue will be processing refunds automatically, without the need to file an abatement or amended return.
No Inflation Indexing
This $2M is a fixed amount and so with inflation this number will become practically lower and lower over time.
No Change In Rates
Previously the estate tax (also referred to as the death tax) began at a rate of 5.6% and topped off at 16%. The rate table has not changed so once you do go over the $2M threshold you will be in the 7.2% bracket on your first dollar instead of 5.6%.
Gift Treatment Is Same
While Massachusetts does not have a gift tax, taxable gifts made during lifetime will still be factored in to determine whether you have an obligation to file, but with this being a true credit it may make more sense than ever to gift assets with high tax basis before death.
Out of State Property Treatment
For Massachusetts residents, it appears that the statute can produce a worse result than before. The new statute provides a proportionate reduction in the estate tax equal to the proportionate amount of real or tangible property outside of Massachusetts. However, this means a previous non-taxable Massachusetts’s estate could become taxable if the out of state property brings you over the taxation threshold.
Character of Out of State Property Matters
Only real property and tangible property results in a reduction of the tax imposed. If you have an intangible property interest such as a LLC Membership Interest and that entity owns Florida real estate for example, that Florida real property is going to increase the Massachusetts Estate Tax (whereas if you owned it outside of an LLC it would result in a decrease in Estate Tax).
Interaction With Income Tax Planning
With this increase in the Massachusetts Estate Tax, there may be cases where eliminating a credit shelter plan may make sense in favor of a joint trust that gets a full step up in basis on the death of the surviving spouse (and if the credit shelter trust is already in place from the death of the first spouse it may make sense to distribute assets out to the surviving spouse). This type of planning must be done very carefully however as income tax planning is not the only goal and a credit shelter trust with its ability to protect assets, direct where assets pass on the death of the surviving spouse, and possible MassHealth protections may be overwhelming goals.
Get Answers To Your Estate Tax/Inheritance Tax Questions
Watch our Webinar from October 25, 2023
On October 25th we held a one hour webinar reviewing the changes in the tax law and the potential planning impacts. The recorded webinar is available for viewing on our webinar page at https://herbstlawgroup.com/videos/massachusetts-estate-tax-update-2023/ .