Massachusetts Doubles Estate Tax Exemption

 Last month, Governor Maura Healey signed Massachusetts’ first tax cuts into law in more than 20 years. Among other tax reforms, a major component of the new law doubles the Massachusetts estate tax exemption from $1 million to $2 million.  This increased exemption is effective for Massachusetts residents (and, on a modified basis for non-residents who own real estate in Massachusetts) who die on or after January 1, 2023. 

 Going forward, the first $2 million of a resident’s estate will be exempt from Massachusetts estate tax.  Estate assets exceeding $2 million will be taxed as they have been at marginal rates ranging from 7.2% to 16%.  Prior to this new law, if the value of an estate was less than $1 million, no return was necessary and no tax was owed; however, if the estate exceeded $1 million, the entire value of the estate was subject to estate tax.  In that way, the new law changes what was a filing threshold to a true exemption.  Compared to the prior law, estates will save up to $99,600, and tax will be eliminated for estates under $2 million.

 The exemption continues to be “use it or lose it,” and for unmarried clients there is no particular planning needed to make use of the exemption at death.  Married clients who have signed estate plans with us likely do not need to make any changes to their documents, as our wills and trusts are flexible enough to take advantage of the larger exemption.  However, thoughtful titling of assets becomes even more important for married couples.  A common estate plan states that at the first death, all assets pass to a Marital Trust for the benefit of the surviving spouse.  To make full use of the deceased spouse’s $2 million exemption, $2 million must pass to this Marital Trust rather than outright to the surviving spouse.  Importantly, this does not include retirement assets that typically pass outright to the surviving spouse to optimize income tax deferral, and does not include jointly-held assets that pass automatically to the surviving spouse.  Care should be taken to balance assets to ensure that each spouse can take full advantage of the exemption, regardless of the order of deaths.  For example, we could move a jointly-owned home or investment account to one spouse, or to equal shares where the deceased spouse’s share passes to the Marital Trust and not automatically to the surviving spouse.  We are happy to discuss further, and can review your balance sheet with you and make recommendations regarding retitling assets. 

 Other notable changes included in the new law include a reduction in the Massachusetts short-term capital gains rate from 12% to 8.5%, effective for the 2023 tax year.  Additionally, effective for tax years starting in 2024, the new law requires married couples to align their Massachusetts tax filing status with their federal tax filing status.  This closes a loophole that allowed married couples to file separately for Massachusetts purposes to avoid the Millionaires Tax.  Finally, the tax reform bill provides tax credits and other incentives to support affordable housing and childcare and provide tax relief to renters and taxpayers eligible for earned income tax credits.

 Please reach out to any member of our team to discuss further. 

Bob Goldman, Managing Partner
Liz Drake, Partner
Jill Weiner, Senior Attorney
Frank Hannigan, Associate Attorney