Avoiding Massachusetts Estate Tax


The Massachusetts Estate Tax is based on a Federal estate tax formula that was in effect in the year 2000. The personal representative must file a Massachusetts Estate Tax Return ((Form M-706) if the decedent's estate, plus taxable gifts made during the decedent's lifetime, total more than $1 million.

So, even if a decedent's estate is below the $1 million threshold, a Massachusetts estate tax filing may still be required if the decedent made taxable gifts during his or her lifetime. Here are thre things to consider as decide whether you need Massachusetts Estate Tax planning:

Lifetime Gifts Are Added to the Estate Value at Death
Adding lifetime gifts to the decedent’s estate has the effect of reducing the filing threshold. Making taxable lifetime gifts during your lifetime can cause your estate to become subject to the Massachusetts estate tax, and lifestime gifts can result in some Massachusetts estate tax savings upon the taxpayer’s death. But taxable gifting will not eliminate Massachusetts estate tax liability if the gifts + the taxable estate will total over $1 million.

Non Taxable Gifts
Gifts are not considered "taxable gifts" if they are eligible for the annual exclusion. Only gift amounts that exceed the current annual gift tax exclusion are included in the Massachusetts estate tax calculation.

Martial Deduction
Massachusetts has an unlimited marital deduction. so any amount that passes to spouse is not subject to estate tax. But married couples must keep their estate plans updated, to make sure that the surviving spouse will not be subject to the Massachusetts estate tax.

Estate tax planning formulas that optimize the use of each spouse's federal estate tax exclusion may prevent federal estate tax liability at the death of the first spouse, but still set up a situation where a Massachusetts estate tax IS owed. Plans can be updated to:

  • use the larger federal applicable exclusion amount (or basis adjustment) at the death of the first spouse, and incur a Massachusetts estate tax that will result in lower total estate tax due on both estates
  • use the smaller Massachusetts estate tax exclusion amount at the first death, and risk incurring federal estate tax at the death of the surviving spouse
  • use lifetime gifting and the annual exclusion amount to eliminate Massachusetts estate tax liability

To keep flexibility during these time of uncertainty over federal estate tax rules, a married couple can consider:

  • a disclaimer trust. When the first spouse dies, everything goes to the surviving spouse, who then has nine months to decide whether to keep the assets or "disclaim" them into a bypass trust.
  • a bypass trust equal to the Massachusetts exemption amount, and a special "QTIP gap trust" funded with the difference between the Massachusetts and federal exemptions. When the second spouse dies, any funds left in the gap trust are exempt from federal, but not Massachusetts, estate tax.

If the combined assets of a married couple are greater than the Massachusetts exemption amount, and one spouse dies before estate tax planning steps are taken, the couple may end up wasting a valuable exemption from Massachusetts estate taxes.

Summary: Planning Techniques Reduce or Eliminate Massachusetts Estate Tax: