The majority of people have estates under the Federal $5.4 million Estate Tax exemption. But the Massachusetts exemption amount is only $1 million. Some people have enough assets to be subject to that tax. So, it makes sense to plan for it if you have to.
My first planning tip is to consider moving out of Massachusetts to New Hampshire or any other State that does not have its own Estate-Tax. Many older folks are thinking about downsizing so if you are selling your house and moving, it isn’t much harder to move a few more miles away to New Hampshire (at least for folks in this area). Of course, you don’t want to up and move just to save your kids some estate taxes, so this option isn’t for everyone.
The next planning tool we explore is the use of life insurance. If you can calculate the amount of tax your estate might owe, it’s easy to replace that amount by purchasing life insurance. This can be done outright (although it would increase the size of your estate and the tax due) or through an Irrevocable Life Insurance Trust (ILIT) which will keep the value of the policy out of your taxable estate.
Another interesting tool is the use of lifetime giving. If you are ready to give away assets you can give each recipient up to $14,000 per year without using up any of your lifetime exemption. With enough family members and enough time you may be able to reduce your estate below the $1 million threshold.
If you don’t have enough family members or time, then there is another interesting twist to use. The Federal Estate-Tax is tied into the Federal Gift-Tax system. If you give more than the yearly exemption to someone, you use up some of your lifetime exemption. If you give away large amounts of money you have less of the exemption to use and might still owe tax when you die even though your estate is then below the total exemption amount.
But, the amount of tax due to Massachusetts is the allowable deduction for amounts paid to a State. This is calculated using the taxable estate but does not take into account lifetime gifts. The threshold for filing the tax return takes this into account, but not the calculation of the tax due.
So, you can make large lifetime gifts and reduce the size of your estate for Massachusetts Estate-Tax purposes. You may still have to file and pay some tax (even if in the end you have less than $1 million), but the tax will only be based on what you have at death while ignoring those large lifetime gifts. This can work well for some people, but as usual it’s not for everyone.
This is a quick summary of a complex issue, so don’t act without good advice. If you have an estate that is larger than the State exemption amount, then you should see your Estate Planning Attorney and figure out which planning tools that are right for you.