We Massachusetts residents face a MA estate tax. Our state is one of 15 that continues to have this type of taxation.
This tax is different and more complicated than the income tax. It is a tax on the value of property we own or control at death.
Federal estate tax has been in place since 1916. Before that, it came into use from time to time to raise funds for war.
The tax is calculated on the assets we control at death.
To illustrate: You're on your deathbed. You legally can direct where assets or accounts will go. It's deemed a pleasure. One worthy of taxation. Some people call it the 'death tax.'
Only some people pay this tax. Many die with assets below the MA exemption from this tax of $1 million. The Federal exemption is $11.58 million.
Important non-taxable distributions
Your estate does not pay estate tax on distributions that go to a spouse or charity.
What goes to your spouse will end up in their estate. Unless they spend it first. When added to your spouse's assets, the amount will face estate tax later.
This delay for a married person does not apply if you die married to a non-US citizen.
Instead, you should put a special provision into your estate planning documents. To cut estate tax on your death. It's called a QDOT provision.
To find out more about whether a Living Trust is right for you, read more here.
An alternative estate planning approach is to have a LT in place.
A Living Trust is a revocable, amendable document that can act like a will. But differently. The other type of trust used in estate planning is the irrevocable trust.
By the way, business uses trusts in different ways. Say, for example, mutual funds are often in trust form.
A Living Trust may be useful to achieve some estate planning goals.
A Living Trust can avoid probate. This is because at death the Living Trust owns the trust assets and not the individual.
A Living Trust can lower estate taxes for some people. It depends on how you use it. And your family and asset situation.
A typical situation: A Massachusetts married couple owns more than $1 million. Lawyers suggest using Living Trusts. Similar suggestion for unmarried living together with joint children.
For single people, you can use it in a different way. Apart from estate taxes, the goals of married unmarried and single are similar.
No one's perfect. (Our mothers told us this).
Unfortunately, sometimes a loved one develops an issue. A problem. With drugs, alcohol, or other behavior. Way more common that most of us think.
The National Council on Alcoholism and Drug Dependence estimates that:
While some of it is harmless, serious substance abuse is not. From the Journal of the American Medical Association:
Up to 60% of patients who receive substance abuse treatment will relapse within one year.
YOUR estate planning
Will leaving them part of your money not help things?
Make the problem worse?
A trust provision requires the trustee to give or use the money in the trust for the benefit of someone else. In the beneficiary's best interest.
This provision is a 'trust' arrangement.
Discussing this when you create or update a will or trust is part of estate planning. If you have this situation, you can deal with it.
You have an adult child with a serious drug addiction problem. The child has a son or daughter the MA court has given you custody over. You're not sure where your own child is living.
A hard place to be.
But if you die, do you want the money to go directly to your addicted son or daughter?
This is the estate planning issue.
Some people come to us with only one goal. 'To avoid probate."
But that should be only one goal.
Almost a minor goal. There are many bigger ones. But first, about probate.
Will or no will can lead to probate court
You go to the probate court if you die with a will. Or without one.
In either case, if you don't own any assets in your sole name, then you don't need to go there. Because a major goal of probate is to allow your survivors to get their hands on them.
It goes like this. You identify which assets were in the sole name. Someone prepares several legal documents, then delivered to the probate court. The 'someone' is the person you've named in your will to handle that job.
After a process, the probate court appoints a MA personal representative (PR.
The PR then requests the court for a document. Called a 'letter of authority'. The PR gives a Letter of Authority to each bank or other financial house that hold assets.
The institution hands over the assets. The PR pays bills. What is not needed for debts or taxes you hand over to the persons the will names. Or your heirs at law if there is no will.
Only SOLE assets need probate
Remember: Only assets in your sole name need this process.
Assets not in your sole name go others through non-probate ways. You likely signed a form for each non-probate asset. That form lists a person or two to get the asset. It sits in the file of the financial institution where the money is.
Such as an IRA or retirement account. Life insurance is similar. Differently, joint assets will belong to the surviving joint owner.
The wording on the account is important. Joint assets have words like ''with rights of survivorship.'
Another type of ownership is 'Tenants in Common'.
This is different from joint ownership with survivorship. Each tenant (each person) owns 1/2 of this asset type.
The interest of each tenant in common goes pursuant to your will. It does not pass automatically to the other tenant in common.
It will need to go through probate.
Lots of U.S citizens are married to non-U.S. citizens. Can you leave them with your assets? Yup. Write a will or trust--whether a U.S. citizen, or not.
Now, what happens if you’re married to a non-US citizen and you die? Then the normal rules for marital deduction do not apply. For this, include a qualified domestic trust (QDOT) provision in your estate plan. This allows your non-U.S. citizen spouse to avoid paying estate taxes.
A foreign trust is when the trustee lives outside U.S.
Generally, QDOT provisions are part of a revocable living trust you create while living. Say your spouse becomes a US citizen after creating this living trust. Cool. The QDOT provisions can be made to not apply. So then you don’t have to revise your estate planning.
You can name a non-US citizen to act in your behalf after you pass. This is known as a Foreign Trust. Your survivor will have to fill out more tax forms for the IRS. But that’s hardly a reason to not appoint someone you trust.
Are you going through a divorce? Or is one in your future? Yikes. If so, wondering what to do about your estate plan? Not to worry.In MA, you can always create a new or change an existing will or trust.
Now, there are some limitations during the divorce. It depends on the state laws. For instance, life insurance and retirement accounts are often off the table.
Know, your spouse is still your spouse—until divorce is final. So they may try to claim their portion if you die before you’re divorced.
State laws dictate what your spouse should get if: a) you leave them with nothing and b) the divorce is not final. This is known in Massachusetts as elective share. Different states calculate elective share differently.
Some states include more assets than others. The more modern state laws have what is known as augmented estate. This is to prevent spouses from trying to make sole assets joint before the other spouse passes—thereby, fooling the elective share system. Unfortunately, Massachusetts does not have augmented estate laws.
Massachusetts has a $1 million exemption from estate tax.
Meaning… if you are single and die in MA and own more than $1 million, then you must file a tax return and pay estate tax.
With real estate values high in eastern Massachusetts, many estates exceed that amount, resulting in high taxes.How can a Living Trust for married persons lower estate taxes?
By making large gifts before you die.
This lowers the value of your estate. Then we file your estate tax return, based on the size of your estate—excluding the large gift. So long as the gift is less than Federal gift tax limit of $11.5 million.
Make all your money out West? Here's what to do about it for your estate plan in MA.
People move here from all over. Including from Western states, where one may have earned all their current wealth. Sound familiar? Why does this matter?
Because they’re differences in how assets are owned—if you’re married. It’s called Community Property. But this doesn’t apply to Massachusetts, because we have separate property.
For instance, in California, when you earn a dollar, your spouse owns one-half of it. But here, you own that whole dollar until you part with it.
Say you moved here from California. Community property remains community property. Even if it’s put into the name of one spouse.
There’s two benefits of a community property scenario.
1) Each spouse can control who gets their half when they die.
2) You can save on income taxes. Say you guys bought Apple stock for $20K. Later, it grows to be worth $1M. The surviving spouse will pay less income taxes when they later sell the stock. Why? Because the tax law has a lower tax rate when a surviving spouse sells it.
Yesterday I made a gift of a painting to my son. After, I reflected on making a gift. Something like this:
My best friend is an artist. A talented one. I've known him for about 50 years. We met in high school.
He paints wonderful landscapes. I own several of them. And I gave away one of my favorites yesterday to my son.
There was another one that is not so good, in my eyes. I would have liked if he would have said that one was the one he had his eye on.
Instead, he mentioned the one that I've liked for some time. It's a vertical piece, about 30 inches fall and 18 inches wide.
I mention it because it hurt a little to give it away. But I love my son (one of three children). And if he liked it, I wanted him to have it.
I reflected that a good gift should be something that you value. Money and non-money gifts differ in this way. Money is money, and it doesn't have a real relationship with you. Not a history.
In my line of work, as an estate planning attorney, I urge people of large wealth to give assets away. And to do it while they are living. Some act on my advice.
But the ones whom don't likely don't want to experience the pain of giving. To lower estate taxe, the gift should be large enough so that it 'hurts.' It lowers your principal. And maintaining principal is a long-lived adage in our society.
I gave the painting away not to lower estate taxes. I gave it away because it will outlast me. And why not see the pleasure my son and his mate will get from having it in their home.
Both transfer an estate to heirs, but only a trust can skip probate court
Will vs. Trust: An Overview
“You can’t take it with you when you go.”
While this familiar statement is true, you can and should do your best to control your assets from beyond the grave. If you are unable to do so, there may be obstacles to managing your estate. Those obstacles may significantly reduce the benefits your heirs would otherwise enjoy.
Possessions and money passing from one spouse to the other are generally not an issue. The unlimited marital deduction provision within the United States Estate and Gift Tax Law allows the passing of wealth to a surviving spouse without incurring gift or estate tax liabilities. 1
The transfer process becomes much more involved when wealth is passed to a subsequent generation. If assets that are held individually are properly titled, this process should be seamless. However, financial planners have seen some significant mistakes on the titling of assets held individually, as well as beneficiary designations that would be sure to upset even the happiest of homes.
For the purposes of this article, we will examine the transfer of assets to a subsequent generation—children, grandchildren, etc. Of the various situations dealt with in estate-transfer conversations, some outstanding ones include the following cases:
What is certain is that a vast fortune could easily be imperiled if the holder of such wealth does not consider the dynamics of an estate transfer.
What Is a Will?A will, also called a testamentary will, is a legally enforceable document stating how you want your affairs handled and assets distributed after you die. It is an important component of estate planning.
If you have minor-aged children at home, it's important to have a will that appoints guardianship of your children. If a guardian is not appointed at the time of death, your surviving family will have to seek help in a probate court to have a guardian appointed for your children. The person appointed may not be one whom you would have wanted to be entrusted with your kids.
You should also consider how you will pass a portion of your estate to a minor child through a will. A will places your decisions in the hands of the judge presiding over your estate transfer. Your testamentary will carries out your wishes from beyond the grave. A will also allows you to give insight and direction over the handling of assets your beneficiaries will receive.
Within reason, you can address how you would like them to use what you have left them. While children, natural or adopted, have a statutory right to inherit, a will allows you to disinherit a child if you choose to do so (check your state laws for the specific details about this). A person can disinherit a spouse as well, under certain circumstances. However, you will need to be aware of the laws governing your state—whether it is a common law state, a community property state, or an equitable distribution state; a person may only disinherit a spouse in a community property state. Each has a different set of stipulations on what and how much can be disinherited. Note, too, that a person can only disinherit a spouse or child through a will.
Seek legal counsel in the creation of a will. A will can be effective in an estate transfer and other legal proceedings after death, but there are drawbacks of which you should be aware. Your estate will become part of the public record, for example, and anything left by a will must go through probate court. Also, probate attorneys can be expensive and cannot be avoided, except in California and Wisconsin.
What Is a Trust?
A trust is another method of estate transfer—a fiduciary relationship in which you give another party authority to handle your assets for the benefit of a third party, your beneficiaries.
A trust can be created for a variety of functions, and there are many types of trusts. Overall, however, there are two categories: living and testamentary. A will can be used to create a testamentary trust. You can also create a trust for the primary purpose of avoiding probate court, called a revocable living trust.
Let's focus on a revocable living trust for the purpose of estate transfer. Like a will, a trust will require you to transfer property after death to loved ones. It is called a living trust because it is created while the property owner, or trustor, is alive. It is revocable, as it may be changed during the life of the trustor. The trustor maintains ownership of the property held by the trust while the trustor is alive.
The trust becomes operational at the trustor’s death. Unlike a will, a living trust passes property outside of probate court. There are no court or attorney fees after the trust is established. Your property can be passed immediately and directly to your named beneficiaries.
Trusts tend to be more expensive than wills to create and maintain. A person called a trustee will be named in the document to control the distribution of assets following the wishes of the trustor, in accordance with the trust document and its mandates. This is also an effective way to control the passing of your estate beyond the grave.
To be valid, a trust must identify the following: the trustor, the trustee, the successor trustee, and the trust beneficiaries.
A declaration of trust will also provide the basic terms of the trust. Your estate stays private and passes directly to your heirs, you do not pay a probate attorney or court costs, and your loved ones may be able to avoid being tied up in probate court for what could be a year or more. From this planner’s perspective, a trust can be a fantastic choice for estate transfer.
Trusts Could Keep You Out of Probate Court
One stop you should try to avoid on the estate-transfer train is probate court. This is where your heirs could spend months sorting out your estate if your plans for transfer are not efficiently laid out. You could easily lose an additional 2-4% of your estate due to attorney fees and court costs. 2
Probate court is the section of the judicial system responsible for settling wills, trusts, conservatorships, and guardianships. After death, this court might examine your testamentary will, which is a legal document used to transfer your estate, appoint guardians for minor children, select will executors, and sometimes set up trusts for your survivors.
I'm Joel Bernstein, an estate planning attorney with over 30 years of experience. I use plain English to help you understand wills, trusts, and the other documents you need to protect your loved ones and your estate.
Most middle-aged people aren’t ready for their inevitable death. We make estate planning simple, affordable, and quick. So people can live in peace, knowing their affairs are in order.