If you live in Massachusetts, you probably have heard that the state has a $2 million estate tax exemption.
In simple terms, this means that if your estate exceeds $2 million at your death, then your heirs may be exposed to estate tax.
What you may not have heard, however, is that you can reduce the amount of Massachusetts estate tax your family will eventually pay by giving some of your assets away during your lifetime.
The basic premise is simple enough:
The less you own when you die, the smaller your Massachusetts taxable estate may be and correspondingly the lesser the Massachusetts Estate Tax burden on your heirs.
Example: Let’s say you are a Massachusetts resident and your estate is worth $3 million.
If you die with the full $3 million, your estate would owe approximately $82,400 in Massachusetts estate tax.
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Now suppose you give $500,000 to your children during your lifetime and your estate is worth $2.5 million when you die.
The Massachusetts estate tax would fall to approximately $39,200.
That’s a tax savings of about: $43,200
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What If You Give Away Enough to Get Below $2 Million?
This is where the Massachusetts rules become particularly interesting.
If your estate can be reduced from $3 million to $2 million or less, the Massachusetts estate tax can potentially be reduced to zero.
For example: $3 million estate minus $1 million of lifetime gifts equals a $2 million estate
Potential Massachusetts estate tax: $0
So, in this simplified example, gifting $1 million during your lifetime could potentially save your family approximately $82,400 in Massachusetts estate tax.
What About Annual Gifts?
Many people have heard that they can give $19,000 per year to each person without gift tax consequences.
This is generally true but there are a few important particulars to be aware of:
First, it is a federal (not Massachusetts) gift tax rule and in fact is only a limit on what you can give without having to file a federal gift tax return, NOT (for 98% of us, as described in the second point below) whether you would owe tax.
Second, for federal gift and estate tax purposes you can give away during life or leave at death a combined total of 15 million dollars before being subjected to a transfer tax which means 98% of us needn’t be concerned with owing a Federal gift or estate tax even if we give more than the $19,000 per person per year.
Third, Massachusetts does NOT have a gift tax which means you can give away unlimited amounts during life without owing tax on the gift (or even filing a Return reporting the gift to the Commonwealth of Massachusetts).
Simply stated: Most of us can give unlimited amounts to children or other loved ones without owing gift tax. We are NOT limited to the sum of $19,000 per year (unless the goal is to avoid having to file a return with the federal govt. reporting the gift).
The Capital Gains Tax Countervailing Consideration:
But Don’t Give Away Assets Without Thinking It Through. Gifting isn’t always the best answer.
For example, giving away highly appreciated stock can create a capital-gains issue because the person receiving the stock generally receives the donor’s tax basis.
If you keep the stock until death, it may instead receive a step-up in basis, potentially reducing capital-gains tax for your heirs.
So the question isn’t actually: “How much can I give away?” For most of us there is no tax-related limit.
The better questions are: “Which assets should I give away, and which should I keep for me?”
Cash, investment accounts, appreciated stock, real estate and retirement accounts can all have different consequences.
The Bottom Line
For a Massachusetts resident with a $3 million estate, lifetime gifting can be a useful estate-planning tool.
In a simplified example:
- $3 million estate: approximately $82,400 MA estate tax
- $2.5 million estate: approximately $39,200 MA estate tax
- $2 million estate: potentially $0 MA estate tax
Of course, the goal isn’t to give everything away.
The goal is to reduce the estate by gifting assets that have little or no current appreciation (such as cash, bonds and high income/lower growth funds) while still keeping enough money to live comfortably for the rest of your life.
Before making substantial gifts, it’s worth having a Massachusetts estate-planning attorney or tax professional look at your particular situation. A poorly structured gift can create income-tax, capital-gains, or estate-planning problems that outweigh the Massachusetts estate-tax savings.
Founded by a nurse attorney and with offices in Acton, Andover, and Sudbury, Massachusetts, Generations Law Group helps families navigate the complex areas of estate planning and elder law to inform and protect loved ones of every generation.
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