Fed & Massachusetts Estate Tax Planning

Estate tax planning is one of the most common motivations for estate planning. Without careful planning, much of your life’s legacy could be lost to estate taxes.

While a simple Will can provide for the transfer of your estate to your loved ones, it does not contain special provisions for state and federal estate tax planning.

At the Socius Law Firm, we employ a variety of tools and strategies to minimize or even eliminate your tax burden. These include gifting, business valuation discounts, low interest loans, charitable and marital deductions, deferred compensation agreements and more. The comprehensive plan we design for you can also provide the flexibility needed to deal with changes to the tax codes.

Our goal with respect to tax planning is to help you leave the largest possible amount of your assets to your children, a charity of your choosing, or any other people or institutions you see fit—as opposed to letting the government obtain a substantial portion of all that you have worked so hard to achieve.

The Socius Law Firm helps individuals and families with foundational trust-based estate planning that can minimize – if not 100% eliminate – estate taxes.

Your taxable estate comprises the total value of your assets including your home, other real estate, business interests, your share of joint accounts, retirement accounts, and life insurance policies minus liabilities and deductions such as funeral expenses paid out of the estate, debts owed by you at the time of death, bequests to charities and value of the assets passed on to your U.S. citizen spouse.

Any taxes imposed on the taxable portion of your estate are then paid out of the estate itself before distribution to your beneficiaries.

In 2018, if you are a Massachusetts resident that passes with an estate of $1.0 million or more, your estate will owe an estate tax to the Commonwealth of Massachusetts.

Given the high value of real estate in Massachusetts, as well as common life insurance policies and retirement assets, your estate can quickly add up to $1.0 million or more.

For example, a married couple with total assets of $1.5 million may have simple, or “I love you” Wills that leave all assets to the survivor with ultimate distribution to their children. This type of estate plan has the advantage of simplicity; however, it does not take advantage of planning opportunities to minimize or otherwise eliminate Massachusetts Estate Taxes.

With Socius’ foundational trust-based estate planning and other more advanced planning strategies, this same married couple (with a combined estate of $1.5 million), can effectively eliminate all liability for the Massachusetts Estate Tax in 2018.

You can learn more about Massachusetts Estate Taxes by visiting the Massachusetts Department of Revenue website.

In consideration of federal estate taxes, for 2018, an individual is allowed an exemption from Federal Estate Tax in the amount of $11.2 million. This means that each individual can transfer up to $11.2M in assets free of Federal Estate Taxes.

The taxable value of the estate is calculated by adding up all the assets owned by the individual and subtracting from that total any of his or her liabilities. Additional deductions can be taken for qualified charitable deductions as well as administrative and legal costs involved in settling the deceased’s estate.

The tax rate for estates exceeding the exemption amount is 40%. The rate is applied to the taxable estate value that is in excess of the exemption amount ($11.2M).

In addition to the individual exemption, married couples enjoy an unlimited deduction for transfers to one another. While this is great news for many couples who choose to leave their estate to each other, without proper planning, it can result in a forfeiture of some of the individual estate tax exemptions after the passing of the second spouse.

For example, this can occur when a husband leaves $8M of his individually-owned assets to his surviving wife who already has $8M herself, bringing her total net worth to $16M. The bequest to his wife is not subject to estate taxes because it qualifies for the unlimited marital deduction. After some time, the wife also passes away, leaving everything to the children. While her estate can take advantage of her individual exemption of $11.2M, the rest her estate could be subject to Federal Estate Taxes because her husband’s individual exemption was not utilized.

To address this issue, the current Federal Estate Tax law allows for “portability” of individual exemptions between spouses. Stated another way, estate tax portability enables the surviving spouse to utilize the unused portion of the first-to-die spouse’s estate tax exemption. Portability is not automatic and in order to take advantage of it, a Federal Estate Tax return must be filed with the IRS within 9 months of the passing of the first spouse, even if there are no taxes due at the time.

An alternative to relying on portability is to utilize a special planning tool referred to as a credit shelter trust (also referred to as a Bypass Trust or A-B trust). If properly established, such trusts work much in the same way as portability, but do not require filing of a Federal Estate Tax return after the passing of the first spouse.

Individuals and families with significant net worth may still have taxable estates even if they take full advantage of their respective exemptions. For these individuals, there are a variety of advanced planning techniques that can be utilized to help reduce the estate tax burden, such as strategic gifting plans, irrevocable life insurance trusts, personal residence trusts and grantor retained annuity trusts.

Learn more about Advanced Estate Planning.