Day3

Day 3. Massachusetts Estate Tax Traps

Subject: The $2 million tax surprise. How middle-class families get blindsided (and how to avoid it).

Good morning,

Welcome to the final lesson. Today we're talking about the tax surprise that blindsides middle-class Massachusetts families.

This is where living trusts become tax-saving machines.

The Garden That Grew Too Much

Every spring I plant tomatoes in my garden. Just a few plants. Nothing fancy.

But tomatoes grow like crazy. They spread. They take over. By August I'm drowning in tomatoes. Way more than we can eat.

Last year my wife said "Maybe plant fewer tomatoes?"

I said "But I like tomatoes."

She said "Having too much of something you like creates problems you don't expect."

That's exactly what happens with Massachusetts estates.

You work hard. You save money. Your house goes up in value. Your 401k grows. These are good things.

But success creates a tax problem most people don't see coming.

The $2 Million Surprise

Here's what most Massachusetts families don't know.

The federal estate tax exemption is $15 million per person. Most people hear that and think "I'm nowhere close to $15 million. I don't have an estate tax problem."

They're wrong.

Massachusetts has its own estate tax. And it starts at just $2 million.

Not $15 million. Not $10 million. $2 million.

Important Truth: If your estate is worth over $2 million when you die, Massachusetts will tax it. The rates range from 8% to 16% on the amount over $2 million.

Let me show you how fast $2 million happens.

How Middle-Class Families Hit $2 Million

House in Newton, Lexington, or Wellesley or other towns: $850,000
401k and IRA accounts: $750,000
Life insurance death benefit: $500,000
Investment accounts: $200,000
Bank accounts and other stuff: $100,000

Total Estate Value: $2,400,000

That's not a rich family. That's a teacher married to an engineer. A nurse married to a small business owner. Two state workers who saved carefully.

They're over the Massachusetts limit by $400,000.

The tax on $400,000? About $32,000 that their kids don't get.

Understanding Massachusetts Estate Tax

Let me explain how this tax actually works. It's not simple.

Massachusetts taxes estates over $2 million. But it doesn't just tax the amount over $2 million. The way the math works is tricky.

For estates over $2 million, you pay a graduated tax rate. It starts at 8% and goes up to 16% on amounts over $10 million.

Here's an example. Your estate is worth exactly $2.4 million.

The taxable amount is $400,000 over the $2 million threshold. At roughly 8-10% average rate, that's about $32,000-$40,000 in Massachusetts estate tax.

Your kids inherit $2.36 million instead of $2.4 million. The state keeps the difference.

Why the Federal Exemption Doesn't Help

People hear about the $15 million federal exemption and relax.

"My estate is only $2.4 million. The federal exemption protects me."

True. You won't owe federal estate tax.

But Massachusetts doesn't care about federal law.

Massachusetts has its own estate tax. Its own limit. Its own rates.

Completely separate from federal tax.

You can owe zero federal tax and still get hit with a big Massachusetts tax bill.

Let me tell you about clients in Brookline.

Combined estate worth $2.8 million. They kept saying "But we're nowhere near $15 million."

I showed them the math. Massachusetts would take about $64,000.

"But that's not fair," they said. "We already paid taxes on this money when we earned it."

I agreed. But fair doesn't matter. Massachusetts law doesn't care about fair.

How to Calculate Your Estate Value

Most people have no idea what their estate is worth. Let me show you how to figure it out.

Step 1: Add up your assets

House (current market value, not what you paid)
All retirement accounts (401k, IRA, Roth IRA, pension values)
Life insurance death benefits (the full amount your family gets)
Investment accounts (stocks, bonds, mutual funds)
Bank accounts (checking, savings, CDs)
Business interests (if you own part of a company)
Other real estate (rental properties, vacation homes)
Valuable personal property (jewelry, art, collectibles)

Step 2: Subtract your debts

Mortgage balance
Car loans
Credit card balances
Other loans

Step 3: That's your estate value

If it's over $2 million, Massachusetts will tax it. Time to start planning.

Strategy 1: The Bypass Trust for Married Couples

Here's where living trusts become powerful tax tools.

Married couples can shelter up to $4 million using the right trust planning. Let me explain how.

Without planning:

Husband dies. Everything goes to wife. Wife now owns everything. When wife dies, her estate is worth $2.4 million. Massachusetts takes about $32,000.

With bypass trust planning:

Husband dies. His $1.2 million goes into a bypass trust. Wife can use the money but doesn't own it. She still has her own $1.2 million.
When wife dies, the bypass trust passes to kids tax-free. The wife's $1.2 million passes to kids using her exemption. Both $2 million exemptions get used.

Result: $4 million passes to kids tax-free instead of $2 million.

Let me show you the math more clearly.

Bypass Trust Example

John and Mary have $2.4 million total estate. John dies first.

Without bypass trust:

John's $1.2M goes directly to Mary
Mary now owns $2.4M total
Mary dies
Estate over $2M threshold by $400,000
Massachusetts tax: approximately $32,000
Kids inherit: $2,368,000

With bypass trust:

John's $1.2M goes into bypass trust
Mary still has her $1.2M
Mary can use income from John's trust
Mary dies
John's trust: $1.2M passes to kids (under $2M, no tax)
Mary's assets: $1.2M passes to kids (under $2M, no tax)
Total Massachusetts tax: $0
Kids inherit: $2,400,000
Tax savings: $32,000

That's $32,000 your kids inherit instead of sending to Massachusetts.

How Bypass Trusts Actually Work

The bypass trust is sometimes called a "credit shelter trust" or "family trust."

When the first spouse dies, their assets go into this trust. The surviving spouse gets benefits from the trust but doesn't own it.

The surviving spouse can:

Receive all income from the trust
Use the principal for health, education, support, and maintenance
Live in a house owned by the trust
Control investments in the trust

But the surviving spouse doesn't own the trust assets. So when the surviving spouse dies, those assets aren't part of their estate.

This "locks in" the first spouse's $2 million exemption. Otherwise it would be wasted.

The $19,000 Annual Gift Exclusion

Here's another strategy most people miss.

You can give away $19,000 per person per year without any gift tax or estate tax problems.

Both spouses can give. So a married couple can give $38,000 per year to each child.

Three children? That's $114,000 per year out of your estate.

Do this for 5 years and you've moved $570,000 out of your taxable estate. Your estate drops from $2.4 million to $1.83 million.

No Massachusetts estate tax.

Real Example: The Johnson Family

Estate value: $2.6 million
Three adult children
Started gifting $38,000 per child per year

Year 1: Estate drops to $2,486,000
Year 2: Estate drops to $2,372,000
Year 3: Estate drops to $2,258,000
Year 4: Estate drops to $2,144,000
Year 5: Estate drops to $2,030,000

After 5 years:

Total gifted: $570,000
Remaining estate: $2,030,000
Massachusetts tax saved: Approximately $48,000

Plus their kids got the money when they needed it. Down payments on houses. Kids' education. Starting businesses.

How Annual Gifting Really Works

The $19,000 annual exclusion is per person, per recipient, per year.

That means:

You can give $19,000 to each of your three children = $57,000 total
Your spouse can also give $19,000 to each child = $57,000 more
Total per year to three children = $114,000

And this resets every January 1st. You can give $19,000 on December 31st and another $19,000 on January 1st.

The money belongs to your children once you give it. You can't take it back. You can't control what they do with it.

You don't have to file any gift tax returns for gifts under $19,000 per person. It's simple and clean.

When Gifting Backfires

Gifting sounds easy. But it creates problems if done wrong.

Problem 1: You give away too much and run out of money

Don't gift assets you might need. Keep enough for your lifetime needs plus emergencies. What if you need nursing home care? What if you live to 95?

A good rule: Keep at least 10 years of living expenses plus medical emergency funds. Gift only the excess.

Problem 2: You gift to a child going through divorce

You give your daughter $38,000. She puts it in a joint account with her husband. Six months later, divorce. Now your ex-son-in-law might get half.

Better approach: Gift money into a trust for your daughter. The trust protects it from divorce.

Problem 3: You gift to a child with creditor problems

Your son has business debts. You gift him $38,000 to help. Creditors can seize it immediately. The money you gave to help him actually goes to his creditors.

Better approach: Use a trust for gifting instead of direct transfers.

Problem 4: Capital gains issues

Here's something most people don't know. Gifted assets keep your cost basis. Inherited assets get stepped-up basis.

Example: You bought stock for $10,000. It's now worth $50,000.
If you gift it: Your child gets your $10,000 cost basis. When they sell for $50,000, they pay capital gains tax on $40,000 profit.

If they inherit it: They get stepped-up basis of $50,000. When they sell for $50,000, they pay zero capital gains tax.

Sometimes it's better to keep assets and let them pass at death. Talk to your tax advisor.

The Life Insurance Trap

Here's a mistake I saw all the time.

People buy $500,000 life insurance to "protect their family." Good idea.

But they own the policy personally. When they die, that $500,000 gets added to their taxable estate.

Their estate goes from $1.9 million to $2.4 million. Now they owe Massachusetts estate tax. The insurance they bought to help their family actually created a tax bill.

The Life Insurance Solution

Use an Irrevocable Life Insurance Trust. We call it an ILIT.

The trust owns the policy. Not you. When you die, the death benefit goes to the trust. The trust distributes money to your family.

Because you don't own the policy, the death benefit isn't in your taxable estate. No estate tax increase.

Same protection for your family. No tax problem.

How ILITs Actually Work

You create the irrevocable trust. The trust applies for life insurance on your life. The trust is the owner and beneficiary.

You gift money to the trust each year to pay premiums. These gifts use your $19,000 annual exclusion.

When you die, the insurance pays the trust. The trust distributes money to your spouse and kids according to your instructions.

The death benefit isn't in your estate. Doesn't count toward the $2 million threshold. Your family gets the full benefit without creating a tax problem.

There's one catch. The trust is irrevocable. You can't change your mind. You can't get the policy back. You can't cancel the trust.

That's the trade-off for keeping it out of your estate.

Combining Strategies for Maximum Savings

Here's where it gets really powerful. You can use multiple strategies together.

Example: The Martinez Family

Estate: $3.2 million
Two adult children
Ages: 62 and 60

Strategy combination:

Set up bypass trust (saves first $2M exemption)
Start annual gifting of $38,000 per year to each child ($76,000 total)
Move $500,000 life insurance into ILIT (removes from estate)
Gift vacation home to children (removes appreciated asset)

Results after 5 years:

Estate reduced by $380,000 from gifting
Estate reduced by $500,000 from ILIT
Estate reduced by $400,000 from vacation home gift
Total estate reduced from $3.2M to $1.92M
Massachusetts estate tax reduced from approximately $96,000 to $0
Total tax savings: $96,000

Plus the bypass trust preserves both $2 million exemptions. Even if the estate grows back above $2 million, they have room.

When to Use Irrevocable Trusts

We've talked mostly about revocable trusts. You keep control. You can change them.

But irrevocable trusts offer more protection. Once you create them, you can't change them. You give up control.

Why would anyone do that? Three reasons.

Reason 1: Asset protection

Assets in irrevocable trusts are protected from lawsuits and creditors.

Even your own creditors can't reach them if they are set up in a certain way.

If you're in a high-risk profession like medicine or business ownership, irrevocable trusts protect wealth.

Reason 2: Estate tax savings

Assets you give to irrevocable trusts leave your estate. They don't count toward the $2 million threshold.

For estates well over $2 million, this creates huge tax savings.

Reason 3: Medicaid planning

If you need nursing home care, Medicaid has a 5-year look-back. Assets transferred to irrevocable trusts more than 5 years ago don't count.

This protects your house and savings from nursing home costs.

Understanding Medicaid and Estate Planning

This is important for Massachusetts families. Nursing home care costs $12,000-$15,000 per month. Most people can't afford this for years.

Medicaid will pay for nursing home care. But only after you spend down almost everything you own.

Your house, your savings, your investments - Medicaid requires you to use them first.

Unless you planned ahead. Assets in irrevocable trusts don't count if the transfer happened more than 5 years before applying for Medicaid.

Some people in their 60s transfer their house to an irrevocable trust.

They can still live there. But if they need nursing home care in their 70s or 80s, the house is protected.

This is complex planning. Mistakes disqualify you from Medicaid. Work with an attorney who knows Massachusetts Medicaid rules.

What You've Learned in Three Days

Let's recap everything we've covered.

Day 1: Why trusts beat wills. The funding mistake that ruins 40% of trusts. How trusts work when you're incapacitated. How to properly fund your trust.

Day 2: How trust provisions protect problem beneficiaries. Spendthrift provisions. Addiction protections. Divorce protection. Special needs planning. Asset protection from creditors.

Day 3: Massachusetts estate tax traps. The $2 million threshold. Bypass trusts that shelter $4 million. Smart gifting using the $19,000 annual exclusion. Life insurance planning with ILITs.

You now understand living trusts better than 95% of Massachusetts families.

More importantly, you understand what happens when you do nothing.

What Happens Next

You have three choices.

Choice 1: Do nothing

Join the 68% of Massachusetts families with no estate plan. Hope your family figures it out after you're gone. Risk probate court, estate taxes, and family disasters.

Choice 2: DIY it

Use online services. Save money now. Risk creating documents that don't work under Massachusetts law. Leave your family with expensive problems later.

Choice 3: Work with a qualified Massachusetts estate planning attorney

Get it done right. Protect your family. Save tens of thousands in taxes and probate fees. Sleep better knowing your family is protected.

I'm retired. I can't be your attorney.

But I'm happy to refer you to excellent Massachusetts estate planning attorneys who will take great care of you.

Need an Attorney Referral? Fill out one of our forms.

I'll connect you with attorneys I trust who specialize in situations like yours.

Action Steps You Can Take Today

Even before meeting with an attorney, you can start preparing.

Step 1: Calculate your estate value

Use the worksheet I gave you earlier. Add up everything you own. Subtract what you owe. See where you stand.

Step 2: Make a list of your assets

Write down account numbers, locations, and approximate values. This saves time and money when you meet with an attorney.

Step 3: Think about your beneficiaries

Who needs protection? Who's good with money? Who's struggling? Who's going through divorce? Your attorney needs to know this.

Step 4: Consider your trustees

Who could serve as successor trustee? Who has the backbone to enforce tough provisions? Who understands your family?

Step 5: Gather your existing documents

Find any old wills, trusts, or powers of attorney. Your attorney needs to review them.

Step 6: Make a list of questions

Write down everything you want to know. Bring it to your consultation. Get answers to all of it.

One Final Story

Last week I was pulling weeds again.

My wife came outside and said "You know those weeds are just going to come back next year."

"I know," I said. "But if I don't pull them now, they'll spread everywhere. Then next year's problem is ten times worse."

She smiled. "Is this another one of your estate planning stories?"

Maybe. But she's not wrong.

Estate planning problems don't disappear if you ignore them. They spread. They get worse. They become bigger problems for the people you love.
You took this three-day course. You learned what most people never learn. You understand the problems and the solutions.

Now do something about it.

Your family is counting on you. They just don't know it yet.
To your family's protection,

Joel Bernstein, JD, LLM (Tax)

Retired 2025 • 32 Years Protecting Massachusetts Families
Still waking up at 6 AM because old habits die hard

P.S. That middle-class family with the $2.4 million estate? They waited two years to do their planning. By then their house went up another $150,000. Their estate hit $2.55 million. The delay cost their kids an extra $12,000 in taxes. Don't wait.

P.P.S. Ready for an attorney referral? I'll connect you with someone who will take great care of you. No cost. No obligation. Just helping Massachusetts families do this right.

Joel Bernstein does not provide legal or tax advice. This information is general and educational in nature and should not be considered legal or tax advice. Any tax-related information discussed on this page is based on tax laws, regulations, or other guidance that are complex and subject to change. Additional tax rules not discussed here may be applicable to your situation. We recommend that you consult a qualified tax advisor or legal advisor about your individual situation.