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Estate Taxes

When an individual has passed away, all of the assets that the individual owned are transferred into that individual’s Estate. Such assets include all of the individual’s bank, investment and retirement accounts, life insurance policies, and all land, possessions and other assets that the individual owned or had a controlling interest in. An Executor is appointed, either in the individual’s Will or by the probate court, to file any required reports or tax returns on the estate’s behalf, and to administer the distribution of any remaining assets from the estate to the individual’s heirs.

An estate tax is a levy on estates whose value exceeds an exclusion limit set forth by law. Only the amount of the Estate that exceeds that minimum threshold is subject to tax. Such levies are calculated based on the estate's fair market value (FMV), rather than what the deceased had originally paid for its assets. The tax is levied by the state in which the deceased person was living at the time of their death.

The Federal government, the Commonwealth of Massachusetts, and about a dozen other states levy estate taxes. The State of New Hampshire does not levy an estate tax.

A. Federal Estate Tax

One of the provisions of the Tax Cuts and Jobs Act of 2017 (TCJA) was to increase the threshold at which the Federal estate tax is levied to $11,580,000 (2020, $11,400,000 in 2019, or $11,180,000 in 2018). As a result of this change, most Massachusetts residents will not have to worry about filing a Federal Form 706 Estate tax return.

B. Massachusetts Estate Tax

The Commonwealth of Massachusetts elected to not incorporate any of the changes that Congress made to the Internal Revenue Code’s Federal estate tax provisions since 2000. The Massachusetts estate tax exclusion amount is still only $1,000,000. For most residents of Eastern Massachusetts, simply owning your own home means that it is highly likely that your Estate will have pay a Massachusetts estate tax to the Commonwealth before any of the Estate’s assets can be distributed to the individual’s heirs.

Massachusetts levies a progressive estate tax on estates worth more than $1,000.000. The progressive estate tax rate starts at 0% and tops out at 16% for estates valued over $10,040,000. Unlike many other estate taxes, the Massachusetts estate tax applies to the entire estate, not just to the amount above the exclusion amount. This means that if your estate is worth $1.5 million, the tax applies to all $1.5 million, not just to the $500,000 above the exclusion amount. The Massachusetts estate tax is determined by filing a Form M-706. Calculation of the Massachusetts estate tax is rather complicated and is best left to a professional.

To minimize or eliminate Massachusetts estate taxes, Massachusetts residents should, while they’re still living, take proactive steps to periodically transfer some of their wealth to their heirs. Such steps are discussed further in the Shifting Income, Gifts and Gift Taxes, §529 Education Savings Plans and Tax-Advantaged Charitable Contributions pages of this website.

 

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