In 2017, the Tax Cuts and Jobs Act doubled the exemption limit for the federal estate or gift tax to $11.4 million per person. That exemption limit is slated to increase with inflation every year until 2026, when it will revert back to the previous levels.
However, that law did not affect state-level estate taxes. In Massachusetts, estate taxes are usually applied to estates valued at more than $1 million and use a progressive rate scale. Rates can be anywhere from .08 percent to 16 percent.
For gift tax, there is none in Massachusetts—residents of the state are able to give away as many assets as they like without being affected by a state gift tax. However, using gifts to bring an estate below $1 million in value may or may not actually help you to completely avoid the estate tax.
Determining your Estate Tax in Massachusetts
As stated above, the filing threshold for estate tax in Massachusetts is $1 million. Any estates valued at $1 million or more will be required to file Form M-706 with the state’s Department of Revenue. To value your estate, your executor would add the gross value of your estate at the time of your death to any adjusted taxable gifts you made after December 31, 1976.
Determining the gross value of the estate is simple. Gross value includes all assets over which the decedent had material control. It is the idea of “taxable gifts” that can be complicated. While Massachusetts does not have a gift tax, there are federal gift tax rules that will play a role here.
Federal Gift Taxes
According to federal tax rules as of 2019, any individual can make gifts of up to $15,000 per year per recipient without incurring any gift tax or having to file a federal gift tax return. Any gifts over this annual exclusion are considered “taxable gifts.”
However, there is also the $11.4 million estate/gift tax exemption in place. So, let’s say you decide to make a gift of $100,000 to a child. The first $15,000 is considered an annual exclusion gift and will not result in any gift tax, nor will it be considered toward the estate/gift exemption money. The other $85,000 is considered a taxable gift and must be reported on a federal gift tax return. However, there will not be any gift tax due, because that $85,000 will be covered by your estate/gift exemption of $11.4 million.
It is possible, then, for an estate with a gross value of less than $1 million to still have estate tax owed if you made enough taxable gifts in your lifetime to surpass the filing threshold with your taxable gifts. This is why it is extremely important to spread out gifts over time if possible, in an attempt to avoid eating into your estate/gift tax exemption.
This can be a complicated concept for wealthy Massachusetts residents planning their estate. It is highly advisable you seek the advice of an experienced financial planner or estate planning attorney in Massachusetts before you make any decisions about large gifts.
For more information, contact our legal team at Baker Law Group. We provide custom advanced estate planning for high net-worth estates.
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