Massachusetts Needs Meaningful Estate Tax Reform – Spring 2018

The Massachusetts estate tax is out of step with virtually all other states. Massachusetts should reform its estate tax laws to avoid the flight of wealthy retirees to Florida or other low or no estate tax states and to avoid costly, contorted estate plans for many who must, or choose to, maintain their Massachusetts residency. A modest reform bill is pending in the Massachusetts legislature, but it isn’t clear that even that bill will make it through the legislative process.

Massachusetts is tied with Oregon for having the lowest threshold before imposing an estate tax – $1 million. Rhode Island is next, with a recently increased exemption of $1.5 million. Taking an inventory of our other neighbors – Connecticut has an exemption of $2.6 million, Maine has an exemption of $5.6 million, New Hampshire has no estate tax, New York has a threshold of $5.25 million (rising to around $11.2 million next year), and Vermont has an exemption of $2.75 million. Only twelve states in the United States continue to impose any estate tax at all. The federal government recently increased the estate tax exemption to $11.18 million per person in 2018, and to $22.36 million per couple, meaning that no federal estate tax is owed unless at the death of the surviving spouse, assets of the estate of the surviving spouse were in excess of $22.36 million (indexed for inflation).

Many people who do not consider themselves wealthy have taxable estates that exceed $1 million at death (major assets includable in a taxable estate include houses, bank and investment accounts, life insurance, and retirement funds). The Massachusetts estate tax is imposed on all assets if a decedent’s assets at death exceed $1 million (the exclusion amount) – a taxable estate of $1 million pays no estate tax, but a taxable estate with just over $1 million pays an estate tax of about $33,000!

If all assets in excess of $1 million are left to a spouse, a marital deduction applies eliminating the estate tax at the death of the first spouse, and if the survivor’s taxable estate (including the assets from the first spouse to die) exceeds $1 million, a Massachusetts estate tax is payable when the survivor dies. To get the marital deduction and allow the survivor to utilize the assets included in the $1 million exclusion amount, and keep the $1 million exclusion amount out of the survivor’s estate, one or more trusts must be set up, which are expensive to create and administer and generally contort estate planning for anyone not subject to the federal estate tax.

Multiple bills seeking to reform or eliminate the Massachusetts estate tax have been filed in the state legislature over the last eighteen years. This year, as usual, a number of bills are pending. One, H. 4210, has been reported out of the Joint Committee on Revenue and is now before the House Ways and Means Committee. This bill proposes to change the $1 million threshold to a $1 million exemption – so a $1 million estate would owe no estate tax, and a $1.1 million estate would only owe tax on the amount over $1 million – about $1,700 in estate tax, as opposed to owing $38,800 under the current law. Estates that are under $6.5 million would owe less and estates that are over that amount would owe more than under the current tax rate structure. Unlike the current estate tax, this bill proposes to include in the taxable estate any so-called taxable gifts made in the three years preceding the death of the taxpayer (taxable gifts include any gifts over the annual exclusion amount of $15,000 per donor per year, with limited exceptions, even if no federal gift tax is payable).

While H. 4210 may represent a slight improvement, it will not make Massachusetts competitive with other states and will have no effect on the decision of wealthy retirees to change their residency. A fair number of our retired or semi-retired clients have established residency in states with little or no estate tax. When they do, we lose not only clients, but good citizens and income tax payers.

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