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Minimizing Estate Taxes Liability in Massachusetts

Estate planning is a crucial process to guarantee the distribution of your assets in accordance with your wishes, while also considering the potential tax implications. In Massachusetts, estate taxes are required for estates exceeding a certain threshold. With an estimated estate value of $1 million, including assets like real estate, 401K, and investment accounts, it’s important to explore options to minimize the estate tax liability. Here’s an overview of strategies that might be applied in such situations.

What is Included in Estate Tax Calculation In Massachusetts?

Almost all your assets, held in your name at the time of death are included in the calculation of your estate tax liability. But it can be reduced with proper planning. This can include your home, investment properties, savings accounts, and any other asset.

Estate tax liability in MA includes your home

The Best Strategies to Reduce Estate Tax Liability in Massachusetts

Estates valued over $2 million are subject to Estate Tax in Massachusetts. There have been recent legal changes to the estate tax for decedents dying on or after January 1, 2023. See St. 2023, c. 50. The new law amended the estate tax by providing a credit of up to $99,600, thereby eliminating the tax for estates valued at $2 million or less and reducing the tax for estates valued at more than $2 million. If your estate approaches or exceeds this amount, these strategies could be beneficial for reducing your estate tax liability.

Make annual gifts.

Annual gifting is one of the most straightforward ways to reduce your taxable estate. Each year, you can gift up to $18,000 (as of 2024) per recipient without incurring federal gift taxes. Over time, this can systematically reduce the size of your estate.

Invest in irrevocable trusts.

Irrevocable trusts, in contrast to revocable or “living” trusts, are not considered part of your estate for tax purposes because you relinquish control over the assets they contain. This can significantly lower your estate value, thus mitigating potential estate tax.

However, once established, irrevocable trusts cannot be altered or revoked, and you give up access to the assets placed in the trust. Examples include:

  • Irrevocable Life Insurance Trust (ILIT): To exclude life insurance proceeds from the taxable estate.
  • Credit Shelter Trust: Allows spouses to take full advantage of their federal estate tax exemptions.
  • Charitable Remainder Trust: This enables you to receive an income stream for a period, with the remaining assets going to a charity, potentially qualifying you for a tax break.

Utilization of 401(k)s and IRAs

Given that funds in retirement accounts like 401(k)s and IRAs are subject to estate taxes upon death, consider conversion strategies such as a Roth IRA conversion, which can result in a lower estate tax burden. Additionally, designating heirs to these accounts allows for the possibility of “stretching” the distributions over the beneficiary’s life expectancy.

Consider Massachusetts-Specific Trusts

Unique trust structures exist in some states that are beneficial for estate planning.

Consult with estate planning professionals.

Effectively implementing tax-reduction strategies requires careful planning and consultation with legal and financial advisors who specialize in estate planning and are familiar with Massachusetts-specific rules and standards.

Working with an expert is essential to tailor your estate plan to your specific needs, ensuring the protection and preservation of your wealth for your beneficiaries in accordance with your wishes, given the complexity of these strategies.

Disclaimer: This content is for informational purposes only and does not constitute legal, tax, or financial advice. We always recommend seeking tailored professional advice to your personal circumstances.