Massachusetts recently made a substantial change to its estate tax laws by increasing the estate tax exclusion amount from $1.0 million to $2.0 million, effective as of January 1, 2023. It is essential to understand how this change could impact you. Residents of Massachusetts, non-residents with Massachusetts property, and those administering estates in Massachusetts should pay close attention to the details and its potential ramifications for estate planning purposes.
Reduction in Taxable Estates
With the increased exemption amount, fewer estates will now be subject to the Massachusetts estate tax. Previously, if the value of a decedent’s estate exceeded $1.0 million, the entire value of the estate was subject to the Massachusetts estate tax. With the new $2.0 million exclusion amount, estates valued between $1.0 million and $2.0 million, which would have previously been taxable, will not pay any tax. This shift is significant and is expected to provide relief to many families.
Review of Current Estate Plans
Those individuals who have an estate plan established prior to October 4, 2023, when the legislation was signed by Governor Maura Healey, should review and reassess those plans to determine whether any changes are necessary. It is also an opportune time to ensure that the assets are aligned with the current estate plan.
With the new exclusion amount, it is important to review any estate tax mitigation strategies to determine which ones are appropriate for you and your family. For a married couple, trust planning is still required to maximize the use of the exclusion for each spouse. Unfortunately, Massachusetts still does not allow the surviving spouse to inherit the deceased spouse’s unused estate tax exemption amount, which is permissible under federal estate tax rules (i.e., portability).
Gifting Strategies
Massachusetts, unlike the federal government, does not have a gift tax. When appropriate, individuals will continue to make gifts during life to reduce their total taxable estates. Gifting assets during life to remove them from the Massachusetts total taxable estate remains a valuable strategy for state and federal estate tax purposes.
Impact on Irrevocable Trusts
Those individuals with taxable estates may consider establishing irrevocable trusts during life to remove the transferred assets (and future appreciation) from the individual’s taxable estate. This type of planning has the benefit of reducing the estate tax associated with the transferred assets and can provide a significant reduction in estate taxes depending on the appreciation associated with the transferred assets.
With the increased exclusion amount, individuals with estates less than $2.0 million may find that the costs and complexities of maintaining certain trusts might outweigh the benefits. In contrast, individuals with estates greater than $2.0 million may wish to create irrevocable trusts given the scheduled 50% reduction in the federal exemption amount to occur on January 1, 2026. After this date, the estate tax exemption amount will be reduced from the current $12.92 million amount to approximately $6.5 million.
Broader Economic Impact
From a broader perspective, this increased exclusion amount might also influence decisions regarding domicile (where you intend to live and remain). Higher estate tax thresholds can make a state more attractive to retirees or those in the process of estate planning. It may also encourage investment within the state as individuals feel more secure that a larger portion of their estate will be preserved for their heirs.
Massachusetts' decision to raise the estate tax exclusion amount from $1.0 million to $2.0 million marks a substantial shift in the estate planning landscape. Though the exclusion amount has doubled in Massachusetts, estate taxes and their associated laws are an ever-evolving landscape. Those considering future estate planning must remain vigilant and informed about any changes.
While many will find relief in this change, other taxpayers will find that it only modestly impacts their overall estate tax liability. Regardless of the situation, this law underscores the importance of staying informed and periodically revisiting your estate plan to ensure it aligns with current laws and your desired legacy. As always, it is important to consult with a qualified and experienced estate planning attorney before making any changes or decisions.
If you would like to establish an estate plan or review your current estate plan, it is important to consult with an expert to help you navigate the complexities of the tax laws. Please call Tarlow Breed Hart & Rodgers, P.C. at (617) 218-2000 for additional information and guidance.
Dara Lynn Freytag is an estate planning attorney at Tarlow Breed Hart & Rodgers, P.C. in Boston, Massachusetts. Please connect at https://www.linkedin.com/in/daralynnfreytag/.
Reduction in Taxable Estates
With the increased exemption amount, fewer estates will now be subject to the Massachusetts estate tax. Previously, if the value of a decedent’s estate exceeded $1.0 million, the entire value of the estate was subject to the Massachusetts estate tax. With the new $2.0 million exclusion amount, estates valued between $1.0 million and $2.0 million, which would have previously been taxable, will not pay any tax. This shift is significant and is expected to provide relief to many families.
Review of Current Estate Plans
Those individuals who have an estate plan established prior to October 4, 2023, when the legislation was signed by Governor Maura Healey, should review and reassess those plans to determine whether any changes are necessary. It is also an opportune time to ensure that the assets are aligned with the current estate plan.
With the new exclusion amount, it is important to review any estate tax mitigation strategies to determine which ones are appropriate for you and your family. For a married couple, trust planning is still required to maximize the use of the exclusion for each spouse. Unfortunately, Massachusetts still does not allow the surviving spouse to inherit the deceased spouse’s unused estate tax exemption amount, which is permissible under federal estate tax rules (i.e., portability).
Gifting Strategies
Massachusetts, unlike the federal government, does not have a gift tax. When appropriate, individuals will continue to make gifts during life to reduce their total taxable estates. Gifting assets during life to remove them from the Massachusetts total taxable estate remains a valuable strategy for state and federal estate tax purposes.
Impact on Irrevocable Trusts
Those individuals with taxable estates may consider establishing irrevocable trusts during life to remove the transferred assets (and future appreciation) from the individual’s taxable estate. This type of planning has the benefit of reducing the estate tax associated with the transferred assets and can provide a significant reduction in estate taxes depending on the appreciation associated with the transferred assets.
With the increased exclusion amount, individuals with estates less than $2.0 million may find that the costs and complexities of maintaining certain trusts might outweigh the benefits. In contrast, individuals with estates greater than $2.0 million may wish to create irrevocable trusts given the scheduled 50% reduction in the federal exemption amount to occur on January 1, 2026. After this date, the estate tax exemption amount will be reduced from the current $12.92 million amount to approximately $6.5 million.
Broader Economic Impact
From a broader perspective, this increased exclusion amount might also influence decisions regarding domicile (where you intend to live and remain). Higher estate tax thresholds can make a state more attractive to retirees or those in the process of estate planning. It may also encourage investment within the state as individuals feel more secure that a larger portion of their estate will be preserved for their heirs.
Massachusetts' decision to raise the estate tax exclusion amount from $1.0 million to $2.0 million marks a substantial shift in the estate planning landscape. Though the exclusion amount has doubled in Massachusetts, estate taxes and their associated laws are an ever-evolving landscape. Those considering future estate planning must remain vigilant and informed about any changes.
While many will find relief in this change, other taxpayers will find that it only modestly impacts their overall estate tax liability. Regardless of the situation, this law underscores the importance of staying informed and periodically revisiting your estate plan to ensure it aligns with current laws and your desired legacy. As always, it is important to consult with a qualified and experienced estate planning attorney before making any changes or decisions.
If you would like to establish an estate plan or review your current estate plan, it is important to consult with an expert to help you navigate the complexities of the tax laws. Please call Tarlow Breed Hart & Rodgers, P.C. at (617) 218-2000 for additional information and guidance.
Dara Lynn Freytag is an estate planning attorney at Tarlow Breed Hart & Rodgers, P.C. in Boston, Massachusetts. Please connect at https://www.linkedin.com/in/daralynnfreytag/.
