The new Massachusetts "Millionaires Tax" will have a significant impact on estate planning for high-income residents of the state. The tax (officially an amendment to Article 44 of the state’s Constitution) was approved by voters in November 2022, and imposes an additional 4% income tax on the portion of annual taxable income in excess of $1 million. This is on top of the 5% state income tax already in place. For example, a couple with a combined taxable income of $2 million could eventually pay an additional $80,000 in state income tax.
The tax will be phased in over time, starting with a 1% surcharge in 2023, increasing to 2% in 2024, and reaching 4% in 2025. The tax is also indexed for inflation, so it will increase over time as well.

The Millionaires Tax will likely lead to changes in estate planning strategies for high-income Massachusetts residents. The impact of the Millionaires Tax on estate planning will vary depending on individual circumstances. However, the tax will have a significant impact on how high-income Massachusetts residents plan for their estates.

Some common estate planning strategies that may be affected by the tax include:
• Charitable giving: Starting in January, 2023, high-income Massachusetts residents may choose to increase their charitable giving to reduce their taxable income. This could be done through outright gifts, charitable trusts, or other means.

• Estate planning trusts: High-income residents may choose to establish estate planning trusts to minimize the impact of the Millionaires Tax on their heirs. There are a variety of trusts that can be used for this purpose, possibly including trusts drafted to be non-resident trusts in Massachusetts, provided such trusts also qualify as “non-grantor” trusts for income tax purposes.
• Asset protection: High-income residents may choose to implement asset protection strategies to protect their assets using irrevocable trusts, limited liability companies, or other legal entities.
• Family Limited Partnership (FLP) or Family Limited Liability Company: These entities allow the business owner to maintain control while gradually transferring ownership to family members. By gifting limited partnership or membership interests, the owner can reduce the taxable value of their estate and shift income to lower bracket taxpayers.
• Change of Domicile: Many individuals will be motivated to consider changing their residence to a more tax-friendly jurisdiction.

Higher income taxes could potentially affect income generated from trust assets or investment portfolios, which may influence decisions on asset distribution and investment strategies within an estate plan.

Any change in tax laws should prompt individuals to revisit their estate plans and make adjustments to ensure their assets are managed and distributed in a tax-efficient manner. Estate planning techniques such as lifetime giving, charitable giving, or the creation of trusts may be considered to mitigate potential tax burdens resulting from income tax increases.

If you are a high-income Massachusetts resident, it is important to speak with an estate planning attorney to discuss the impact of the Millionaires Tax on your estate planning, and to develop strategies to minimize the impact of the tax and protect your assets for your heirs.

Richard P. Breed, III is a partner at Tarlow Breed Hart & Rodgers, P.C. in Boston, Mass. Please connect with Rick at www.linkedin.com/in/rick-breed/