Essential Estate Tax Planning for Massachusetts Families

by Matthew Karr, Esq. on December 2, 2012

Every Massachusetts family with a total asset value of over $1 million should consider creating a trust to reduce their estate tax exposure.  The math is simple; failure to create an appropriate trust structure can cost even a modest estate tens of thousands of dollars in otherwise avoidable estate taxes.   Yet many Massachusetts families are simply not aware of their own estate tax exposure until it is too late to do anything about it.

Estate taxes are in the news now more than ever given the current tug-of-war in Congress over how to address the looming fiscal cliff.  According to CNN.com, the most recent proposal put forth by Treasury Secretary Timothy Geithner includes an increase in the estate tax rate as well as cuts to Medicare, additional stimulus spending, and an expiration of Bush-era tax cuts to those making over $250,000 a year.  The current Massachusetts estate tax is a progressive rate up to 16%.  So how can you avoid being hit by a massive estate tax bill?  Massachusetts couples should take note.

The Estate Tax Dilemma for Massachusetts Couples


In Massachusetts, each person has an estate tax exemption of $1 million.  That means that typically when a person dies owning less than $1 million in assets, they pay no estate tax.  However, one dollar over $1 million and you pay estate taxes on the entire amount, not just what is over.  Also, it is important to keep in mind that the assets counted toward your exemption amount include all of your accounts, investments, real estate equity and life insurance policy proceeds, so this number is achieved faster than one might think.

The dilemma facing Massachusetts married couples is that, typically, the exemption of the first spouse to die is wasted.   This is because most spouses leave everything to the surviving spouse.  While this transfer to the surviving spouse won’t typically be taxed because bequests to a surviving spouse aren’t subject to estate tax due to marital exemption rules, now the surviving spouse owns all the couple’s assets in their single estate.  If those combined assets are over the individual estate tax exemption amount, estate tax would be owed when the second spouse died.

EXAMPLE
Sharon and her husband Mike have combined assets worth $2 million, including $400,000 in bank and investment accounts, real estate worth $600,000 and two $500,000 life insurance policies.  Each leaves everything to the other. When Christine dies in 2009, her $1 million goes to Mike.  No estate tax is due because of the marital exemption.  However, when Mike dies his estate will include the whole $2 million.  The estate would then owe tax (estimated at 10%) on the entire $2 million ($200,000 in estate taxes!).

Reducing Massachusetts Estate Taxes


The outcome in the above example significantly reduces the amount of assets Sharon and Mike are able to pass on to their loved ones.  However, this doesn’t have to be the case.  By planning ahead, using a trust which includes estate tax provisions (often called an AB trust of bypass trust), Sharon and Mike can actually eliminate 100% of their Massachusetts estate tax exposure.

To accomplish this, instead of leaving their property to each other, both spouses leave their property to their family trust which contains appropriate estate tax provisions.  This effectively creates two pots (A and B) funded with assets up to the applicable estate tax exemption.  The surviving spouse receives any income from the trust property and can access the principal as needed.  Typically, the couple’s children inherit the trust property after the second spouse dies.  Because the surviving spouse never technically owns the assets in the trust, those assets wouldn’t become part of the surviving spouse’s estate and aren’t subject to tax at the second spouse’s death.

EXAMPLE
If Sharon and Mike had used an AB trust, when Sharon died, her $1 million would have gone into the family trust, funding pot A.  Because her estate was worth less than the Massachusetts estate tax exemption, no tax would have been due.  For the rest of his life, Mike would have had the right to use the trust property, though he wouldn’t technically own it.  When Mike dies, his estate will now have just his $1 million, and no tax will be due.

As you can see, planning for estate taxes using a family trust can have significant savings for Massachusetts couples (in this case, $200,000).  In today’s economic climate and state tax regime estate tax planning is certainly not just for the uber-wealthy.  Any Massachusetts estate over $1 million can benefit from estate tax planning.  Contact the Heritage Law Center to find out how you can protect your family today.

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