MA has an estate tax for wealth over $1 million.  Will it affect you?  Is this problem yours?

The problem...

You own more than $1 million of assets and live in Massachusetts. You know that Massachusetts has an estate tax on residents who pass away with more than $1 million.  With an extremely broad definition of what you 'own'.   Yes, retirement accounts, life insurance included.

Years ago I learned  from skilled tax accountants the approach to take. It's a 3 part way to lower estate taxes. And so today, 28 years later, we can talk about lowering  MA estate taxes on your family.

• Level 1:   Use Revocable Living Trust (for some people)
• Level 2:  Remove existing life insurance from estate taxes (if larger policy exists)
• Level 3:   Make Gifts (many different ways to do this)

Table shows MA Estate taxes

Estate size      MA Estate tax
$1 Million          Exempt
$1.2 Million       $45,200
$1.4 Million       $58,000
$1.6 Million       $70,800
$1.8 Million       $85,200
$2 Million         $99,600
$2.5 Million      $138,000
$3 Million        $182,000
$3.5 Million     $229,200
$4 Million        $280,400
$4.5 Million     $335,600
$5 Million        $391,600


Level 1 of Estate Tax Planning:  Use Revocable Living Trust

Are you: 

• ​Married? Have life partner?
• Own over $1 million?
• Live in a state with estate taxation, like Massachusetts?

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If you answer 'yes' to all these questions, each spouse or partner should consider signing a revocable trust. 

Each trust should contain an estate tax saving provision. This may be done by instructing the trustee who acts after your death to set aside a Separate Account at your death. It would be a maximum of $1 million of assets.

(This is one way of doing it, there are others. And based on Massachusetts law,)

The Separate Account is the 'exempt' amount. After your death, the trustee in charge of that account uses it for your spouse, partner, or children.

Let's call the Separate Account the Family Trust (FT). It has both tax and non-tax goals. The lesson today deals with the tax lowering goal.

The estate tax goal is to keep the Family Trust assets out of the surviving spouse (partner) estate at their later death.

So the estate of the survivor is smaller than would be if ALL the assets ended up in the surviving spouse's name. This has been part of estate planning for many, many years.

This approach can lower estate tax. Because the first $1 million is not taxed at either the first or second death. And $11.7 million (Federal, 2021) is similarly not estate taxed at either death either.

The subtrust design can frequently be in this form:

SUBTRUST AFTER I DIE

• Income.   All income to spouse. (Or discretion to distribute all or some.)
• Principal.   To spouse and descendants for their health, education, maintenance, and support. (Or variations on this wording,.)
• Death of beneficiary.   Subtrust ends with death of surviving spouse. Assets go to children, equally, or to their descendants. Maybe outright to child, maybe held in trust for a longer period you set.

  
Health, education, maintenance, and support.  This is broad. This language directs the trustee to distribute money to a beneficiary. How much? To let them continue to have the same style of living as the beneficiary enjoyed before the death.
 
Can the trustee be the same person as the beneficiary?  Yes, but you need to include precise language in the trust document.

Can the surviving spouse be both the trustee while also being a beneficiary?  Yes. This is common. It's what most people want and is frequently found in living trusts.
 
Want to improve your own estate planning for your family? Learn more at 7 Questions to Test the Strength of Your Estate Plan


Level 2 of Estate Tax Planning:  Remove existing life insurance from estate taxes

If you're:

• unmarried with assets over $1 million, or
• married with over $2 million (and already have Level 1 planning)

you face MA estate taxes. If so, you should ponder adding Level 2 to your estate planning.

Many people say that 'isn't life insurance free of taxes?'  Yes, free of INCOME tax. But not for estate tax purposes.

Yes, you heard me right. life insurance is not free from estate tax. Let me explain.

Life insurance is part of your estate because you can change the beneficiary right up to your death. It's that right to control its recipient after death that makes it part of your taxable estate.

By the way, if you make your spouse the beneficiary, the proceeds will not be estate taxed because of the marital deduction. A marital deduction eliminates estate tax on the first spouse to die.

But even if you named your spouse as beneficiary of the life insurance, here's the problem

When you leave it to your spouse, the proceeds will be part of their wealth. To be part of their estate when they later die. So the proceeds do get estate taxed. Only later, as part of the surviving spouse's estate.

By the way, some people make this mistake. They think this:  because life insurance does not pass through probate then it's not part of an estate for taxation. Yet those are two different concepts. Probate is probate, taxation is taxation.

How to remove life insurance from estate taxation?

To remove life insurance proceeds from estate tax at your death and your spouse's death, you can do this:

• Transfer the life insurance policy to a separate trust. Now. As Level 2 of estate tax planning. 

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Because you don't own the policy at your death it isn't part of your taxable estate.

Yet that type of trust is not a revocable trust. It's an irrevocable trust.

Using an irrevocable trust in this way is not unusual. It's used so often that it even has its own term, the 'irrevocable life insurance trust.' Or ILIT for short.

There are two main requirements:
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• First, you must change both the owner and beneficiary of the policy to be your ILIT.

• Second, you must live 3 years after the transfer of the policy before you die. Take both these steps and you reduce the family's estate taxes.

Level 3 of Estate Tax Planning:  Gifting

Some people can't use Level 1 or Level 2 planning. They're not married (partner) and have no large life insurance to remove from their estate.

So, if that's you or if you already have Level 1 and Level 2 planning, and still face MA estate taxes, you can consider gifting.

After you make a gift, your estate is lower. It makes sense, doesn't it? There is less that remains in your estate because you gave some of it away during life.

And because the MA estate tax is based only on your estate at death, the estate tax is lower.

• Non MA real estate. You should know that real estate outside of MA is not taxable as part of your MA estate. This is important. So a gift of NH real estate, for example, will not lower your MA estate tax. And because NH estate tax doesn't exist, choosing NH real estate to gift does not lower your MA estate tax.

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Gifting comes in many forms

These include gifts of money, gifts of real estate, gifts of property like cars. Gifts can be outright in form or alternatively in trust form. 

Current gifts in trust form allow you to control the distribution of the asset after your death. While still lowering your estate by making lifetime gifts.

Gift trusts 

​You should not be the trustee. Until the trust ends, the trustee decides when to distribute money to the beneficiary (your loved one).  A gift trust can have more than one beneficiary. And there can be more than one trustee. You can name two people together to be trustees.

$15,000 gifts   Many people know that you can make a $15,000 gift to another person without paying a gift tax. They mistakenly think it's the most money you can make as a gift without paying a gift tax.

Yet, this is not true. You can give much more than that without paying a gift tax. The gift tax is a Federal tax, not a tax that MA has. 

The IRS rules say that you can give $15,000 before preparing and filing a gift tax return.

But you can ALSO give up to $11.7 million (2021) without paying a gift tax. Filing a gift tax return is not too difficult. It is called a 709 form.

Large gifts. You can lower your MA estate tax by making not only $15,000 gifts but also large ones. Much larger ones.

For example: You are single with $2.4 million dollars. You're somewhere between 70 - 90. 

If you make a $400,000 gift by check to an adult child, you will not pay any gift tax. Because it is under $11.7 million. You will have made a gift of $400,000 minus the $15,000 that is exempt from gift calculation. 

When you die with $400,000 less (due to the gift), the size of your MA estate is $2 million. And the MA estate tax is lower. Because the MA estate tax return calculates the estate tax on the size of your death estate. Not the amount you once owned.

Charitable gifting

Another way to lower your estate tax bill is to give or leave, at your death, money to charity. Your estate will be able to deduct any charitable distributions from your taxable estate and so lower the size of your taxable estate.

And the estate tax will be lower.

As I write this, I am listening to a podcast about food banks during the Covid 19 pandemic. Jobs were lost and families needed food for both adults and children.

All are embarrassed by their situation of waiting on line. A private foundation provides the money for the food. Mostly volunteers are on their feet for 9 hours. Trying to get the food in to the site, and out. Each day.

You can leave money, above the amount exempt from MA estate tax, to a charity or two. If you do not have obvious beneficiaries, or even if you do, you might want to search your gut for a charitable impulse.

Plain English in MA Estate Planning

There's a crisis of inattention in the modern world. We're all surrounded by electronic devices that sound off continually, requiring - or seeming to require - our immediate attention. 

Ernest Hemingway once said in an interview, "You can write anytime people will leave you alone and not interrupt you." It's true. If you're a writer, you must arrange time when people will leave you alone and not interrupt you. The biggest key to writing is to apply your seat to the chair, when nobody else is around, and to write.

Having nobody else around includes silencing your smartphone and turning off popup notifications. A real writer needs time to contemplate and compose in silence."

Bryan Garner, https://www.lawprose.org/lawprose-lesson-317-writing-in-solitude/

Lawyers are notorious for poor writing

To be honest, we attorneys were trained in law by reading endless law cases. Nothing but case after case of complicated sentences. Full of needless words and phrases.

Later, when predecessors or we write or speak to clients in the same style, the public has complained. It bores them to tears. It's been going on for centuries.

Yet, for decades, legal scholars and some attorneys have also complained. But to little avail. Lawyers who take plain English seriously are in the minority. Most just don't care. Or even see the problem.

Let me say: You don't need convoluted legal documents. Full of legal jargon. There is another approach. This alternative approach is plain English.

If you'd like to speak with us, contact us and we'll get back to you. I promise.

I've been reading about the plain English subject for 15+ years. Studying it (and the law of wills and trusts) daily.

As I practice law, I work to improve my native skills. (Maybe all writers feel the same.)

Like most people, I don't enjoy reading legal documents that need a good, serious edit to be more readable.


About plain English

Bryan Garner is the leading advocate for a change to a more direct writing style. He's an attorney and author.

Bryan has written over 20 books. His newest is 'Garner's Guidelines for Drafting & Editing Contracts.' I loved it and read it from cover to cover. Because a will or trust is almost a contract.

• He writes that lawyers who constantly use the words 'said' or 'shall' are not writing well.
• Yet, it is the tip of the iceberg. Legal writing is full of using 2 or more words when 1 word would do. And common legal writing has few heading, little attention to typography and little attention to the way the page looks. 

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Another book I enjoyed was Kenneth Adams' 'Adams on Contract Drafting.'

• Adams' book explains that all legal document contain seven different categories of language. Each category serves a different function.

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For example: One category gives a person a power to do something (the language of 'authorization').

Another category places a legal duty on someone (the language of 'obligation'). And so on.

The author advises the attorney/writer to be aware of what they want to say and use the correct type of language category.

Want to improve your own estate planning for your family? Learn more at 7 Questions to Test the Strength of Your Estate Plan

My documents are plainER, not plain

I work hard to make my writing as clear as possible. This takes as much time I can find to edit and edit again. Early in the a.m. for me. It's now 4:35 a.m. 

All the writers say that editing is key. The first draft doesn't make it. Not even close.

And because some legal documents contain intricate tax or trust law clauses, you the reader may need to re-read something. Unfortunately.

But the writing should contain at least a second or third edit.

In sum, these type of legal documents need both tax and non-tax written provisions. Not the easiest things to deal with.

Tax provisions:  Massachusetts and U.S. continue to have an estate tax. While the U.S. estate tax exemption is $11.7 million (2021), the MA exemption is much lower, at $1 million. Your taxable estate includes all you own, in any form. Your estate includes a house, IRAs, 403(b), life insurance, and other assets. There is no income tax on life insurance, I know. But it ends up in your taxable estate.

Nontax provisions:  People live many different situations. All unique. When they die, they leave different situations behind. And so their wishes may differ from one another and this takes detail. With the background of law forcing some things to be said that are not obvious to those not trained in this legal area.

So, we need more complex language for some documents. And 'plainER' may better describe some documents.

To cut many needless words. Words that make reading legal documents difficult - sometimes impossible. People want better documents.

"Only by long practice can you express yourself clearly, attractively, and sincerely. Those are the eternal qualities of good speech and writing: lucidity, euphony, and sincerity.   

Bryan Garner, LawProse Lesson #340, Discipline in Writing.

Limits of a Will

Unfortunately a Will doesn't go into action until after your death. 

So, in case of illness, the fact that you have a will is irrelevant. It doesn't give another person the right to sign your name on any documents or make decisions. It just sits in your file cabinet or safe deposit box. And doesn't help you or your family. 


Living Trust

Contrary, a living trust is useful on incapacity. Your successor trustee can step in and do what's needed.

And, at death, it can avoid the need to go to probate court to have a will approved. That is what attracts many people to it at first. But there's more to it than that.


Maybe you've signed a living trust already

When was the last time you looked at it? Have things in your life changed quite a bit?

If you have a trust - but nothing in the name of the trust - this can be an issue. How are your assets owned? Maybe those assets are still in your sole name. Or in joint name.  

When we do an estate planning/living trust review, we consistently see there's no assets in the trust's name. You haven't changed the legal ownership of a major asset from you to the trust.

This process of naming the trust to be owner of an account is called 'funding' the trust.


If you don't fund a trust, two things are possible...

First, the sole assets will need to pass through probate. So the trust can own the assets after that. A pour-over will directs that post-death transfer from probate estate to a living trust.

• Yet, keep in mind that probate is not the end of the world, despite the ranting of some.
• Yet it's sometimes an expensive detour to getting your assets to your loved ones. A delay and cost. And going through probate does not build character or make you a better person.

Second, remember that you face Massachusetts estate taxes if your assets exceed $1 million. If you're married, without a living trust plan, your family's estate tax bill may be higher than needed.

• If married, those MA estate taxes will be due at the second death. Because you're not using the tax saving provisions of your married living trust.

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By failing to put any assets into your trust, higher taxes can occur. Because you're not using the estate tax provisions typically part of a married person's living trust.

• Yes, the provision is IN the document but not actually USED when you die.

Instead, your first million will go to your spouse along with all other joint assets. Then, on the second death, all will be subject to estate tax. It all gets bunched up together, for the tax man.

Want to improve your own estate planning for your family? Learn more at 7 Questions to Test the Strength of Your Estate Plan

Outdated Living Trust and Documents

What's happened since you signed a Living Trust?

• Has someone you named in it died?
• Or has become seriously ill?

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In our practice, we write clients twice each year.

• In our letter, we remind them of the above possibilities. And many others. And encourage them to ponder if they may need to alter their documents.

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It's essential to do estate planning correctly at the start and ALSO keep it right over time. Like it or not, time keeps moving along. And we see lots of out-of-date estate planning.

So, review your current estate planning documents.

Then you can figure out if you should amend or replace them.

Completely replacing a document can be better. It can be more useful and even more cost-effective than cutting up old documents.

This decision depends on the particular situation. Each case is different. It takes time and focus to figure it out.

Useful is a professional who finds the quiet to review it.

In your estate planning, you discuss and then decide to use one of two approaches.  The one chosen should make sense for you and your situation.

• Living Trust
• Will

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The documents should also deal with incapacity. So, to the trust and will we generally also add these documents:

• Health care proxy
• Durable power of attorney

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Today we'll discuss these two additional documents. So a will or trust becomes a full estate plan.


Dealing with Incapacity

Three documents can help: 

• Health care proxy
• Durable power of attorney
• Living Trust incapacity provisions

Want to improve your own estate planning for your family? Learn more at 7 Questions to Test the Strength of Your Estate Plan


Health care proxy

It's possible that before you die you become too ill to communicate your medical wishes. Or you're involved in a car accident or some other dramatic mishap. A world of possibilities.

You could benefit by now giving someone authority to speak up for you for medical reasons. MA law allows you to name up to two persons. One at a time, to make medical decisions for you. It's called the health care proxy document.
You need to sign the document before two unrelated people. They're called witnesses. Like a will, they sign too.

Some people forget that it only becomes effective when a doctor SIGNS a statement. The statement should say that you cannot communicate your health care wishes, in the doctor's opinion.


Durable Power of Attorney

How many times a week do you sign your name? I bet the number is beyond your imagination. Well, what would happen if you cannot sign it? Not good things.

That's where a durable power of attorney document would come in handy.

Like a health care proxy, there is no official government form to get.  Some are short; some are long. Yet there's some similarity between forms people use. The attorney who prepares the document will determine its contents. And its length.

Like other legal documents, to create one you must be:

• 18 years or older
• know 'who you are'  
• know your 'general family facts'

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Unlike some other states, Massachusetts law doesn't need witnesses or a notary to sign a durable power of attorney. But if a notary does sign it, it can be more useful. For example, you can have it recorded at the registry of deeds. Yet, recording is seldom required.

The word durable means it is valid even if you become incapacitated. Hard to believe, but that was not always the case.

Here's the scoop 

Before about 1980, a power of attorney became invalid if you became incompetent. Power of attorney law is very old and has been around for centuries. That area of law came about before people starting living much longer lives - no longer dying on average before 50.

Problem: Just when you needed to use a power of attorney the most - upon incapacity - the old law said it was no longer valid. 

By 1980, legislatures became aware of this problem. Trying to be helpful, Massachusetts and other states passed a 'durable power of attorney' statute.

This type of statute says that a power of attorney is valid even after you become incapacitated. 

But the statute requires you to include additional wording in a regular power of attorney. Words like 'this document remains in force if I become incapacitated'.

Putting these words in the document makes the document 'durable'.  It's the closest estate planning comes to using magic words to achieve a goal.

How old is your durable power of attorney?

Financial institutions may believe your durable power of attorney is too old for them to accept it's use. Unexpected, but true.

They may call it 'stale.'

The problem is: Each financial company has a different time frame in mind. From our experience it's impossible to prejudge the length of time - until you want (and need) to use the document.

• If they reject your current one, and you have no living trust, a court may need to determine whom can sign your name. Not good. Remember, it's your money.
• It's expensive because it's a court proceeding.
• The court-appointed person may be called a conservator or guardian

Living Revocable Trust

Another document that can help if you become incapacitated is a revocable living trust. This document allows another person to handle trust assets if you can't.

The trust says the person owns the assets as a trustee and may deal with them. Sell, distribute to you.

The pre-death power is an important feature of a living trust.  Like a durable power of attorney, the law insists that it be only used to benefit you and your family. Can benefit the Trustee too, if the Trustee is also listed as a beneficiary. This is the living trust you will sign.

So, the living trust helps you if you become too ill or old to manage your assets.

A living trust is very flexible. If you become too old or permanently ill to manage your assets, a well-written trust allows you to resign. You resign as trustee and another person becomes the trustee. The new trustee takes over.

This 'successor trustee' then become the trustee instead of you. Your family may create some legal document showing the change.