At Fletcher Tilton, we assist clients in Massachusetts with estate tax planning. Our deep knowledge of applicable trusts, estates, and tax laws and our ability to provide sophisticated legal advice and dependable service make us the trusted choice.
When you consult with us, we will explore ways to minimize your potential estate tax liabilities and preserve your legacy for future generations. Contact our Massachusetts office today to speak with an experienced estate tax planning attorney.
Understanding Estate Taxes
Federal estate taxes are owed when someone passes away with an estate valued above the applicable tax exemption. This is simply the value of assets (in dollars) a person can pass away owning in their name before the estate tax applies.
Notably, changes to the tax code in 2017 temporarily doubled the federal estate tax exemption. For 2024, the federal estate tax threshold is $13.61 million for individuals, which means married couples don’t have to pay estate tax if their estate is worth $27.22 million or less. In other words, under the current tax laws, only a tiny percentage of estates are subject to estate taxes.
However, the exemption amounts will sunset at the end of 2025 and revert to pre-2018 levels ($5.45 million for individuals indexed for inflation) unless Congress makes the changes permanent. Given that the tax scheme will likely expire, high-net-worth estates may face tax liabilities. So, the time to start planning is now.
How Portability Impacts Estate Taxes
The federal exemption amount for married couples may be “portable,” a legal concept under federal estate tax law. This allows a surviving spouse to take advantage of the deceased spouse’s unused federal estate tax exemption, effectively doubling the exemption amount for the surviving spouse.
In short, a surviving spouse can shield assets from potential future estate tax liabilities upon the surviving spouse’s death. Their estate can only use the individual exemption amount; however, the remainder will be subject to estate taxes, posing potential tax implications when the current exemption amounts sunset. Talk to an estate tax planning attorney to learn how to take advantage of portability in the evolving tax law landscape.
Massachusetts Estate Taxes
In addition to federal estate taxes, Massachusetts imposes an estate tax on estates valued above $2 million. This threshold was recently doubled from the previous $1 million exemption following tax reform legislation enacted in October 2023. The new law, effective for decedents who passed away on or after January 1, 2023, eliminates estate tax liability for estates valued at $2 million or less and reduces the tax burden for larger estates by taxing only the amount exceeding $2 million.
Unlike the federal estate tax, the Massachusetts exemption is not indexed for inflation and has no portability, meaning the unused exemption of a deceased spouse cannot be transferred to the surviving spouse. Given these distinctions, proper estate planning is crucial to minimize tax liabilities and ensure the efficient transfer of assets to your heirs.
Estate Planning Tools To Limit Your Estate Tax Liability
High-net-worth individuals should consider advanced estate planning techniques to minimize their estate tax liabilities, such as:
A-B Trusts: An Alternative to Portability
Rather than relying on portability, an alternative planning tool is a credit shelter trust (also referred to as a family, bypass, or A-B trust). This device works similarly to portability by “sheltering” the estate tax exemption of the first spouse to pass without the need to file an estate tax return. At the same time, portability and credit shelter trusts often work together, so consult an attorney to determine whether the estate tax applies to your situation.
Annual Gift Tax Exclusion: A Tax-Savvy Strategy
As of the 2024 fiscal year, the gift tax exclusion is $18,000 per person and $36,000 for married couples. This allows you to bestow monetary gifts up to these specified limits to a limited number of individuals each year without incurring any gift or estate tax liabilities.
Annual tax-free gifting can significantly reduce the burden of potential estate taxes and allow you to distribute parts of your estate to your beneficiaries during your lifetime, providing the joy of witnessing them benefit from your generosity.
Creating a Legacy Through Charitable Trusts
Leaving a charitable legacy can be achieved through various means, such as establishing a charitable remainder trust. In a charitable remainder trust, you can transfer specific assets into the trust that generate income for your chosen beneficiaries over a predetermined duration.
Once this period concludes, the remaining balance of the trust, aptly termed the “remainder,” is directed to a charitable entity of your choice, such as a university, non-profit organization, or medical center. Establishing a charitable trust can fulfill a philanthropic goal and create a meaningful legacy.
Maximizing Benefits with an Irrevocable Life Insurance Trust (ILIT)
Life insurance is a critical element of estate planning, but it’s crucial to understand how it integrates with estate taxes. While life insurance proceeds are not considered part of your estate, the policy’s cash value can be included in the deceased’s taxable estate, potentially reducing the amount passed on to beneficiaries. A strategic solution to this issue is using an Irrevocable Life Insurance Trust (ILIT).
Utilizing a Qualified Personal Residence Trust for Estate Tax Benefits
One significant strategy to reduce estate taxes when your home represents a substantial portion of your estate’s value is a Qualified Personal Residence Trust (QPRT). This approach involves transferring the title of your home into the trust, designated for the benefit of your family members. You retain the right to live in the home during your lifetime. After the trust’s term concludes, you can continue residing there but must pay rent to the trust beneficiaries.
This arrangement is crucial to prevent the home’s value from being counted in your estate. In the event of your passing, the residence, along with the increase in its value since the transfer, seamlessly passes to your beneficiaries, free from estate taxes. However, if you pass away before the end of the predetermined period, the home’s value is considered part of your taxable estate.
Transferring Wealth With Generation-Skipping Trusts
A Generation-Skipping Trust (GST) or dynasty trust is an estate planning tool designed to pass assets directly to distant generations, such as grandchildren or great-grandchildren, bypassing your immediate offspring.
This method leverages current exemption limits for substantial tax benefits. However, it’s crucial to know the potential estate tax implications when exemption thresholds revert to pre-2018 figures. A GST is a strategic way to preserve wealth across multiple generations.
Talk To An Experienced Estate Tax Planning Attorney Today
When you partner with Fletcher Tilton, we will work strategically to help you minimize your estate tax liability. You’ve worked hard to build your legacy; let us help you preserve it. Contact our estate tax planning attorneys today.
