Handling the Heavy Massachusetts Estate Tax Burden with Life Insurance

While Donald Trump’s presidential victory made many people optimistic about the possible end of the federal estate tax, Massachusetts residents don’t have much to cheer about. Residents of the state already deal with a low-threshold, high-interest estate tax, and there’s no end in sight.

In 2006, the state penned some changes to its estate tax that specifically noted that, “Future changes to the federal estate tax law will have no impact on the computation of the Massachusetts estate tax.”

It’s safe to assume Massachusetts is always going to have estate tax — and that tax is going to be expensive.

What You Need to Know About Massachusetts Estate Tax

The threshold for filing a Massachusetts estate tax return is a low $1 million. That means if you have a home, retirement savings, or life insurance policies, your estate is likely going to be over that threshold. Massachusetts estate tax doesn’t just impact the very wealthy but the middle class as well.

The tax can go as high as 16%, which is one of the highest rates for state-level estate tax in the United States. Only Washington’s is higher at 20%. The total amount due is calculated based on your gross estate, which will include:

  • Gifts and transfers made during your life without adequate and full consideration
  • Annuities and life insurance policies
  • Joint estates
  • Life insurance proceeds paid to your beneficiaries
  • Property that you had general power of appointment over
  • Any and all property that you had an ownership interest in

The only way to avoid paying out a big property tax bill in Massachusetts is to have an estate reduction plan in place, which will lower the value of your estate while providing for heirs. An irrevocable life insurance trust (ILIT) can be an invaluable way to work around this.

Using an ILIT in Massachusetts

In Massachusetts, insurance benefits are considered part of your estate only if the policy is owned by you. A properly structured trust is an option for keeping assets outside of your estate and to create funding for your heirs on a tax-free basis. Here’s how an ILIT can work for you:

  • ILITs meet the standard for being considered outside of your estate, so policies held within them are outside of your estate as well.
  • You can fund an ILIT using your annual gift tax exemption to avoid gift taxes.
  • The policies within the trust bypass probate and are managed by the trust, giving heirs quick access to funds.
  • Universal life policies will eventually be worth several times what was paid in premium.
  • Beneficiaries receive life insurance proceeds tax free.

Our expertise at Howard Kaye is estate planning. We focus on reducing the size of estates and increasing legacies with life insurance and trusts. These trusts are indispensable to residents of Massachusetts, who are dealing with such a low estate tax threshold. At Howard Kaye, we’ve successfully used strategic trust planning to reduce estate taxes by up to 90%. For more information on our estate tax strategies and solutions, contact us by calling 800-DIE-RICH.