With no COLA since 2006, the state estate tax has been a pain point for middle-class families in Massachusetts.

On October 3, 2023, Maura Healy signed into law a Massachusetts Tax Relief Plan that finally addresses the outdated Massachusetts state estate tax threshold.

For context on this major development, Massachusetts imposes a state estate tax on a deceased’s estate when it surpasses $1,000,000 in value. While this sounds high, factor in skyrocketing home values and you’ll realize it’s fairly to surpass. Here are some items that factor into the deceased estate value:

● Bank accounts

● Investment and Retirement accounts

● Real estate

● Small business interests – small corporation, sole proprietorship, limited liability

● Life insurance proceeds

● Vehicles and any other tangible assets

● And yes, even reportable gifts made in advance to minimize the estate get factored back in to help push the valuation past the $1,000,000 breakpoint (but the gifts themselves aren’t taxed).

Now you may say, but for a couple, they would have a $2,000,000 trigger point and that seems pretty fair – right? In theory, yes. In practice, no. Without advanced estate planning, individuals and couples effectively end up with the same $1,000,000 threshold.

At the federal level, they provide “portability” of the deceased spouse’s exclusion so that the eventual non-spouse heirs can claim the couple’s total exemption at the second passing. It’s a simple form to be filled out with the final tax return. At the state level, MA does not provide portability. The first spouse to pass away essentially dies with their $1,000,000 exclusionary amount if the surviving spouse is set to inherit (which is usually the case, and at that time doesn’t owe tax). When the surviving spouse later passes, they pass with that much larger of an estate (their own assets plus what they inherited from the spouse). The heirs now inherit the parent’s full estate but are tested by the same $1,000,000 trigger point. A way to circumvent without disinheriting your spouse is to create and properly fund “his and her trusts” in advance so the first to die fully utilize their $1,000,000 exclusion via trust and the survivor dies with a lesser estate.

Confusing? Sure is! But if you have any questions just ask me and we can hash it out against your own situation to see if this strategy is worth pursuing.

And if the threshold wasn’t problematic enough, keep in mind the $1,000,000+ valuation is a trigger point. While saying it’s an exclusion is common, it’s not accurate. You’re not taxed on what lands above this threshold, your whole estate is taxed. Someone at $999,999 pays no state estate tax. Someone at $1,100,000 pays close to $40,000.

While this was intended to be a tax on the wealthy, it’s very much become a tax on the middle class because since 2006 there has been no inflation adjustment on the $1,000,000 threshold, which is something we see with the Federal estate tax. 

So what’s the big change? We finally see an adjustment!!

This relief bill adjusts the discussed $1,000,000 to $2,000,000. It also adjusts the tax to be assessed on what lands ABOVE the threshold vs. it acting as a cliff. So now when we say $2,000,000 exclusion, it’s a more accurate statement. Lastly, many MA residents own property out-of-state which was included in the calculation. It was argued that out-of-state assets shouldn’t have to pay a state-level tax. Now, out-of-state assets will not be included in the calculation (think of NH lake houses and FL snowbirds). 

Tax rates remain the same, which are 0-16%, and this new $2,000,000 amount will not automatically inflate, so we may anticipate a similar issue in the future.

Changes for this are retroactive for January 1, 2023. Couples exceeding a $2,000,000 net worth will still want to consider a his & her trust with bypass provisions as discussed above. Again, I’m happy to discuss to see if the strategy is worth pursuing, or so you can atleast understand how this all applies to your financial circumstances.