While it may be true that the only two certainties in life are death and taxes, it is also perfectly legal to reduce the amount of taxes your estate will have to pay to the Commonwealth of Massachusetts or to the Department of Revenue.
That’s right! Paying taxes in full without using the available, lawful means to reduce tax payments and redirect your assets to the people and charitable causes most important to you is completely voluntary. It’s also the default and what will happen if you do nothing.
As we have seen over the years, the tax law is highly politically-charged and subject to frequent, significant changes. Depending on the particular political administration and congressional makeup of any given time, there may be major differences in the way taxes are assessed on and collected from which groups of individual people or which size businesses.
The Massachusetts estate tax took effect in 2001, when the Commonwealth decoupled from the federal estate tax system to provide more stability and predictability residents of the beautiful Bay State. Our state estate tax law did not change until October 2023, when the exemption amount doubled to $2,000,000, leaving the top tax bracket in place at 16%. The Massachusetts estate tax still bites sooner than the federal estate tax, but its bite is much smaller by comparison.
The federal estate tax has changed more times than it’s easy to quickly count off-hand, and it is already poised to do so again when the Tax Cuts and Jobs Act (TCJA) sunsets and the federal gift and estate tax exemption amount, which is tied together and also called the unified credit, reverts back to its pre-2018 level of $5,000,000 per person. That amount, however, is indexed to inflation (and is predicted to approximate $6,500,000 to $7,000,000 based on recent inflation).
The federal estate tax exemption is also automatically combined for married couples through what’s called “portability” of the estate tax exemption amount. Instead of a use it or lose it approach, portability enables a surviving spouse use the Deceased Spouse’s Unused Exemption (DSUE), if any, of the last spouse to whom that surviving spouse was married, before having to dip into the surviving spouse’s own exemption amount. Massachusetts does not have portability of our state estate tax exemption for married couples, so without proper estate tax planning within your estate plan, it remains a use it or lose it opportunity to shield up to $2,000,000 on the death of the first Massachusetts resident spouse and then an additional $2,000,000 on the surviving spouse’s death.
Some of the potential tax law changes may affect the estate planning legal techniques used in your estate plan or that we are able to use effectively in the future to address your tax-related goals. That is one reason why it is so important review and update your plan regularly over the years, but especially after any major tax law changes.
If it has been three or more years since you last reviewed your estate plan, it’s time now. Your total gross estate includes the your:
- life insurance policies that you own in your individual name or have as a benefit through your employer
- retirement savings accounts (401Ks, 403bs, IRAs, Roth IRAs, pensions, etc.)
- real estate equity (Fair Market Value less any mortgages or lines of credit with a balance due)
- taxable investment or brokerage accounts
- bank accounts, including all checking, savings, Money Market Savings, and CDs
- tangible personal property (automobiles, jewelry, artwork, antiques, collectibles, memorabilia, etc.)
(Note: Children’s 529 college savings accounts and custodial bank accounts are not included in your taxable estate, but if you only think of it as a college savings account and it’s not really in a tax-advantaged college savings account but rather in a regular, jointly-owned account, then half of the account is deemed yours on your death.)
Your estate planning attorney can work together with your financial advisor or wealth manager and your tax accountant to identify, propose, and discuss the best possible options for you to take advantage of the existing rules to reduce your income and estate taxes, accomplish your overall estate planning goals.
By investing a little time, energy, and money wisely now, you and your loved ones can save so much more of all of those later.
Contact us now to plan, while you can, to:
- provide as fully as possible for your loved ones
- create living legacies to teach the lessons you want them to learn during your lifetime, and
- leave a legacy that reflects your deeply held values and and beliefs,
- not a an expensive, time-consuming, stressful mess.
