One of the many smart people I work with is Holly Simeone, a certified estate and trust specialist. A benefit of working with experienced professionals like Holly is that I get to collaborate with them. And sometimes, like today, that “collaboration” manifests itself with some straight-up borrowing.
Holly works out of the Great Barrington office of Berkshire Money Management and meets with a lot of folks who move from New York to towns like Egremont, Alford, Monterey, Lenox, and Great Barrington. Holly found that many of them were able to avoid some tax liability with a bit of financial maneuvering, so she wrote an educational piece for clients. I thought it would be helpful to share some of those concepts with readers of “Capital Ideas.” Even if you are a long-term Massachusetts resident, this information should be beneficial if you have not yet taken action to avoid unnecessary taxes.
Benjamin Franklin’s famous words, “Nothing is certain except death and taxes,” ring particularly true when you consider the Massachusetts estate tax. If your total assets exceed $2 million, including property, investments, and savings, you will find yourself dealing with estate taxes in Massachusetts. While you won’t personally face this financial burden, the so-called “death tax” could significantly diminish the wealth you have intended to leave behind for your loved ones. (If your parents have assets, you will be affected and may want to share this article with them. Feel free to contact me if you don’t know how to start that conversation. There are tools and ideas to have those family conversations that I can share with you.)
Understanding how Massachusetts estate tax works, and planning accordingly, is critical if you want to preserve your financial legacy for future generations. By addressing these concerns head-on, you can ensure that your assets are passed down as intended and you are prepared for any financial implications that might arise.
What Is the Massachusetts estate tax exemption in 2024?
In 2024, the Massachusetts estate tax exemption is set at $2 million per individual. This means that if your estate’s total value exceeds $2 million, your estate will be subject to state taxes. Crossing this threshold may be unavoidable for people whose homes are valued at $500,000 or more.
The new tax law in Massachusetts offers some relief compared to past rules. Before, estates just a dollar over the exemption amount were subject to taxes on the entire estate. Now, under the updated tax package, estates only owe taxes on the portion exceeding the $2 million threshold—a welcome change for many residents.
However, a significant update in 2024 is that property owned outside Massachusetts now factors into calculating your estate’s value. For instance, owning a vacation home in another state may now contribute to your total estate value for Massachusetts tax purposes. Imagine you have a $1.5 million estate in Massachusetts and a second home in Florida worth $1 million. Previously, your Massachusetts estate value would have been $1.5 million, but now it is considered $2.5 million, with the out-of-state assets being taxed proportionately.
Why estate taxes matter
Think of your estate like a sandcastle you have carefully built over a lifetime. Without proper tax planning, much of your hard-earned wealth could be washed away before reaching your heirs. Massachusetts estate taxes, which can range from 0.8 percent to 16 percent, must be settled before your beneficiaries can inherit anything.
This potential tax burden can lead to difficult decisions, such as selling family homes or valuable properties you intend to pass down to the next generation. Proper estate planning, however, can help reduce or even eliminate this tax burden, preserving more of your assets for your family.
Examples of estate tax implications
Let’s explore two hypothetical examples that can be used in real life to show how Massachusetts estate taxes can impact families.
Joan and Terry’s journey from Brooklyn to the Berkshires
Joan and Terry, a retired couple, moved from Brooklyn, N.Y., to Sheffield after the COVID pandemic made them rethink city living. Their estate, valued at $4.25 million, would have been entirely exempt from taxes in New York thanks to its generous $6.94 million estate tax exemption. After relocating to Massachusetts, however, they discovered that their estate could now face a tax bill of more than $123,000.
Joan and Terry began using trusts and other financial tools to protect their assets and reduce their tax exposure. By doing so, they ensured their hard-earned savings would benefit their children and grandchildren rather than being lost to taxes.
Gloria’s fresh start in Great Barrington
Gloria, a lively grandmother from Scarsdale, N.Y., faced a similar issue when she moved to Great Barrington. After her husband’s passing, Gloria moved closer to her grandchildren. However, this move came with an unexpected consequence: a potential estate tax liability of over $290,000. Her $7 million estate would have been entirely exempt from state taxes in Connecticut. But in Massachusetts, her wealth, including her out-of-state property, was now subject to a hefty estate tax bill.
Like Joan and Terry, she set up trusts and gifting to reduce her estate’s tax burden. By doing so, she ensured that more of her wealth would be passed on to her family rather than to Massachusetts.
How can you avoid estate taxes in Massachusetts?
If your estate exceeds $2 million, there are steps you can take to limit your tax exposure. Proactive planning is critical. Here are several options to consider:
1. Estate planning with a trust
One of the most effective ways to reduce estate taxes is through an irrevocable trust. Assets placed into an irrevocable trust are not included in your gross estate for estate tax purposes; the trust must utilize an independent trustee, and you, the grantor, cannot maintain control over the trust during your life. Upon your passing, the assets transferred into the trust are no longer considered part of your taxable estate, thus reducing your estate’s overall tax liability.
2. Strategic gifting
Gifting assets while you are still alive is another strategy to reduce the value of your taxable estate. The federal gifting exemption allows you to give up to $18,000 per person per year tax free. By gifting money or assets to your heirs now, you can reduce your estate size and avoid estate taxes later.
For example, if you have a large IRA, making qualified charitable distributions (QCDs) directly from your IRA to a charity can reduce the tax burden on both you and your heirs.
3. Life insurance
Life insurance can be a crucial component of your estate plan. While the proceeds from a life insurance policy are generally tax free, they can be included in the value of your estate for tax purposes. However, by setting up an irrevocable life insurance trust (ILIT), you can keep the life insurance policy out of your taxable estate, ensuring that the benefits go directly to your heirs without being diminished by taxes.
4. Roth conversions
Converting traditional IRA funds into a Roth IRA can also help reduce future estate taxes. While you will pay taxes on the income at the time of the conversion, it creates a source of tax-free income for your heirs later. By paying taxes now, when rates are known, you reduce the value of your estate, which can lower your future estate tax liability.
Of all the tools you may use to reduce estate taxes in Massachusetts, the trust is one of my favorites because it offers benefits beyond tax protection. Your estate plan may include several different tools and documents. When you pass away, the assets in the trust are distributed according to the terms outlined in the document. Unlike a will, a trust can dictate how heirs can spend the money left to them, make stipulations about inheritances, or include incentives for accomplishments like graduation, marriage, or launching a business. A trust also allows your assets to bypass probate court and transfer to your heirs without a lengthy and expensive legal process.
Allen Harris is an owner of Berkshire Money Management in Great Barrington and Dalton, managing more than $700 million of investments. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representations that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at AHarris@BerkshireMM.com.
