Estate and Gift Tax Explained

The difference between Massachusetts and federal estate taxes can be confusing. The federal estate tax threshold is currently $5.6 million, or $11.2 for a married couple. On the other hand, the Massachusetts estate tax threshold is much lower: $1 million for an unmarried person. This sum includes the value of all real property owned in Massachusetts; the value of death benefits from a life insurance policy; and, real estate owned anywhere in the world that is not used solely for personal use. For estates over a million, a Massachusetts estate tax return must be filed and the taxes paid by the beneficiaries. If there is a surviving spouse, no taxes are owed. The estate taxes imposed upon an estate of $1.5 million is $96,000; and, for an estate of $2 million is $144,000, and so on.

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There are legal tools to save the beneficiaries this cost. The most common tool is a revocable trust for a married couple. The couple can sign a joint trust or each spouse can sign his or her own trust. Signing a properly drafted revocable trust containing “the magic IRS/DOR” language and funding the trust permits the beneficiaries to receive the trust benefits estate tax free for the trust assets up to $2 million.

 I emphasize “funding” the trust because often this critical step is missed. After the trust is signed, the ownership of the non-retirement assets must be changed to the trust; and, the trust is named the beneficiary of the retirement assets.

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Because Massachusetts does not have a gift tax, individuals owning more than $2 million can do serious gifting more than three years before death directly to the beneficiaries or give the excess assets to an irrevocable trust. For 2018, if a gift of more than $15,000 is made, a gift tax return must be filed, but no federal gift taxes will be owed unless the lifetime gifts exceed $5.4 million.