Using a Trust to Limit Massachusetts Estate Taxes for Couples

The Massachusetts estate tax exemption is $1M. When you die, if your estate is valued at $1M or under, you pay no estate tax. If it is valued at one dollar over $1M your estate is taxed on the ENTIRE amount, not just the amount that is over.

Your “estate” includes all the property you own, including tangible property (e.g., furniture, tools, artwork, cars, etc.), intangible property (e.g., bank accounts, investments, 401(k)s, business interests, etc.), and real property (e.g., your home, land, commercial property). One big ticket item often forgotten is life insurance – policies you own are included in your estate for tax purposes even though you will never see that money.  The MA tax rate is progressive, with a rate between 8% and 16%.

The problem starts when a spouse leaves everything to the surviving spouse. This wastes the exemption of the first spouse. For example, Sam and his wife, Laura, each have $1 million in assets, resulting in $2 million of combined assets. When Sam dies, he leaves his assets directly to his wife Laura. That transfer won’t typically be taxed since bequests to a surviving spouse aren’t subject to estate tax due to marital exemption rules. But now Laura owns all the couple’s assets and only has her own $1 million exemption to work with. When she dies her $2 million estate would owe estate taxes (estimated at 10%) of $200,000.

The result is a significant reduction in the couple’s estate – leaving less to their loved ones. By planning ahead and using a trust (often called an AB trust or bypass trust), which includes estate tax provisions, Sam and Laura could have eliminated 100% of those Massachusetts estate taxes.

So, what if Sam and Laura leave their property to their family trust, which contains appropriate estate tax provisions, instead of to each other? The trust effectively creates two pots of money (A and B) funded with assets up to the applicable estate tax exemption. When Sam dies, his $1 million goes into the family trust, funding pot A. Because his estate was worth less than the Massachusetts estate tax exemption, no tax would be due. As the surviving spouse, for the rest of her life Laura would receive any income from the trust property and have the ability to access the principal as needed, though she wouldn’t technically own it. When Laura dies, her estate would have only her $1 million, and no tax would be due.

A family trust can have significant savings for Massachusetts couples (in this example, $200,000). Any family estate in Massachusetts worth $1 million can benefit from estate tax planning. Other strategies to avoid an estate tax include creating a gifting plan, life insurance trusts, and qualified personal residence trusts (QPRTs). Make an appointment with us to discuss your options for reducing your estate tax.