Following Changes in Massachusetts Estate Tax Laws, Should You Adjust Your Estate Plan to Keep Up?

For years, Massachusetts estate tax has affected families in a wide range of circumstances. While federal estate taxes have a high threshold and only apply to estates valued at over $12 million, the threshold in Massachusetts affected estates valued at $1 million.

In a state where the average home value is close to $600,000 and those in the metropolitan areas are often valued at close to a million dollars, many individuals and families needed to engage in strategic estate planning to avoid losing tens of thousands of dollars to estate tax.

Recently, lawmakers raised the estate tax threshold in Massachusetts to $2 million, and implemented this change to apply retroactively, thereby covering the estates of all individuals who passed away January 1st onward. 

In light of these changes, families who built estate plans to avoid the tax liability are now wondering whether they now need to change those plans. Although each decision needs to be made on a case-by-case basis, we have outlined below some factors to consider.

How Estate Tax Works

Estate tax is paid by a decedent’s estate before any of their property can be passed to family members. The owned property value at the time of death is added together to determine whether it meets the threshold for taxation. Property is inclusive of vehicles, business interests, investments, life insurance proceeds, retirement accounts, cash, and real estate. 

Before the change, if an individual’s property was valued at $1 million or more, the entire amount was subjected to estate tax. If the estate lacked the cash to pay the tens of thousands of estate tax owed, it would be necessary to sell real estate, business interests, or other property to meet the tax bill; and instead of passing the family business or home to the next generation, families would see these legacy assets sold to pay taxes.

Furthermore, the new law provides a $99,600 tax credit and sets a higher threshold of $2 million. Taken together, these two factors protect estates that are close to the threshold and prevent them from accumulating tax liability.

Trusts Set Up to Avoid Estate Tax

One of the most secure ways to avoid or reduce estate tax liability is to set up one or more types of trusts. Married couples often established credit shelter trusts which had the effect of allowing each spouse to pass up to $1 million through their estates without estate tax. When one spouse passed away, the trust would prevent $1,000,000 from going to that spouse, and, therefore, that amount would not become part of the surviving spouse’s eventual estate. The funds in the trust would be restricted, but the surviving spouse would have some access.

Depending on familial situations and other goals, an estate planning attorney might have recommended a different type of trust or more than one trust to shield property from estate tax liability. Now, with the tax threshold doubled, there exist a question as to whether those trusts should be revoked. 

Before anyone can answer that question, they need to carefully consider the pros and cons of the trust, and those will be different in each case. Overall, trusts can reduce flexibility and they may require work to administer. Nevertheless, they often provide benefits in addition to providing shelter from estate tax liability. A trust can protect assets from other tax liability or creditors. A trust can allow property to pass without the need for a costly and lengthy probate process. To decide whether it makes sense to revoke a trust, it remains important to review the multiple functions of the trust with your estate planning attorney. Remember, too, that an estate may also continue to increase in value and may cross the $2 million threshold in the not-too-distant future.

Other Tax Avoidance Strategies

In certain instances, a family may have utilized a regular gifting strategy to transfer assets to loved ones while reducing estate tax liability. Given the higher threshold, it might make sense to reduce or discontinue gifting or channel funds differently.

Since life insurance proceeds count toward the estate tax threshold, some people transferred ownership of their life insurance policy to a trust. Depending on the terms of the trust, it might be possible to remove the life insurance policy, but again, before doing so, it is important to weigh the benefits and potential drawbacks.

Casey Lundregan Burns, P.C. Can Help You Determine How to Take Advantage of the New Tax Laws

The changes in estate taxes and other tax liability in Massachusetts can affect your estate planning strategy in several ways. In addition, if it has been three years or more since your estate plans have been reviewed by an attorney, you are due for a review to ensure that your documents are still sufficient to meet your goals.

At Casey Lundregan Burns, P.C., our experienced estate planning team would be happy to discuss how your existing plans will work under the new laws and help you decide whether changes could be more advantageous going forward. We have over 90 years of combined experience protecting families and their legacies, and we would be honored to be given the opportunity to help your family face the future with confidence. Schedule a consultation with our office today!