Planning for Life

Beware the Mass Estate Tax at the Threshold

Posted by Anthony Bushu on January 25, 2017

By Harry S. Margolis

While the threshold for the federal estate tax is $5.49 million this year, the Massachusetts threshold is $1 million. Fortunately, the Massachusetts rates are much lower than the federal rate, graduated from 0.8% to 16% on estates exceeding $10 million, a flat 40%. (For estates in the $1 million to $2 million range, the marginal rate is 6.4% or 7.2%.) Unfortunately, in Massachusetts if the estate exceeds that threshold, the entire estate gets taxed. The result is a much higher marginal rate.

We recently represented an estate valued at $1,055,000 with $15,000 of deductions for costs of administration and debts owed by the estate. The net estate of $1,040,000 was facing a $16,400 tax, only 1.6% of the entire estate, but 41% of the excess over $1 million.

In this case, it was possible to find deductions to lower or eliminate this tax, but a number of them create taxable income for the recipient of the funds. Possible additional deductions included:

  • Our legal fees
  • Fees to the accountant for preparing the estate and trust income tax returns
  • A fee paid to the personal representative of the estate
  • Payments to the trustees of the revocable trust who had not been paid for their services of several years

A legitimate combination of these fees could easily exceed $40,000, bringing the taxable estate below the $1 million threshold and saving $16,400 in estate taxes. But the family members who would receive the personal representative and trustee fees would have had to report the payments as taxable income, their additional income taxes offsetting some of the estate tax savings. In most cases, the Massachusetts estate tax rate is so low that it would not make sense to save estate taxes by creating taxable income which would be taxed at a higher rate. But in this case, given the high marginal rate just above the $1 million threshold it made sense and the family to consider substituting income taxes for estate taxes.

Ultimately, they decided not to do so for a number of reasons, including: keeping the process simpler, the relatively small savings, concern about the deductions being challenged, and equity among heirs -- they could not all justify the receiving the trustee or personal representative payments.

If there's a moral to this story, it's that it makes sense to reduce your estate below $1 million if it's just above the threshold. But, be careful how you do this since making taxable gifts (over $14,000 a year to an individual) may not solve the problem. To learn more about the Massachusetts estate tax, read our Primer on the Massachusetts Estate Tax.

Topics: Estate Planning, estate taxes

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