Massachusetts Estate Tax Exemption 2024: What you need to know if your home and assets top $2 million

Benjamin Franklin once said, “Nothing is certain except death and taxes.” Truer words have never been spoken, especially when it comes to your financial legacy. If your total assets including your properties, business, investments, and savings have crossed that $2 million mark, you’ll find that death and taxes are inextricably linked in the form of the Massachusetts estate tax. You won’t be on the hook for the bill personally, but this so-called “death tax” can significantly erode the gift you leave behind for your family or community.

In the spirit of confronting life’s certainties head-on, here’s an overview of how you can navigate the intersection of “death and taxes” with confidence and chart your own course toward a secure financial legacy.

What is the Massachusetts estate tax exemption in 2024?

The Massachusetts estate tax exemption in 2024 is currently set at $2,000,000 per person. If you are a resident of Massachusetts, your estate will be subject to the commonwealth’s estate tax unless your total estate value is under that exemption amount. And if your home is worth $500,000 or more, there’s a good chance your estate will surpass the threshold.

The Massachusetts estate tax exemption protects the first $2 million of your assets from the state-level estate tax which ranges from 0.8% to 16% depending on the total size of the estate. A new tax package, signed in 2023, addressed the “cliff effect” where even a dollar over the threshold could make the entire estate taxable; now estates will only owe taxes on the portion over the threshold– a big win for residents. 

The other big change that affects MA residents has to do with property owned outside Massachusetts. Previously, your Vermont ski cabin or Maine beach house wasn’t counted toward your Massachusetts estate total. Now, out-of-state assets are factored into your estate’s value based on the percentage of your estate they make up. For example, if you had assets totaling $1.5 million in MA and a second home in Florida valued at $1 million, your Massachusetts estate is worth $2.5 million. If both homes were in Massachusetts, it would potentially create an estate tax burden of $35,000. However, since only 60% of your estate’s total value is in the commonwealth, you would owe 60% of that bill, or $23,400.

If applicable, the Massachusetts estate tax is levied in addition to the federal estate tax. However, the filing threshold for federal estate taxes in 2024 is $13,610,000 per person, meaning most families are not impacted by this federal tax.

Why do estate taxes matter?

Imagine you’ve spent a whole day on the Cape building a gorgeous sandcastle, only to have the tide wash half your moat and several of your towers away. That’s essentially what could happen to your wealth if you don’t plan for Massachusetts estate taxes. Without a plan, a good chunk of the money you’ve saved and invested could end up going to the state instead of to the people you care about!

Estate taxes must be collected before your estate can be passed on to your heirs. Without careful planning, these taxes can shrink your financial legacy by as much as 16%, and could force the sale of assets, like your home or other property, that you intended to pass on to your children and grandchildren. That’s why tax planning is such a large part of a complete estate plan.

Example 1: Joan and Terry’s Journey from Brooklyn Brownstones to Berkshire Bliss

Retired couple Joan and Terry love the lights of NYC, but these days, they’re no match for the natural sights of the Berkshires. When COVID turned the world upside down, they decided it was the perfect time to finally sell their Brooklyn apartment and make their charming Sheffield, MA home their full-time residence. 

But amid the euphoria of embracing the beauty and culture of their new full-time home, they forgot one very practical—yet unavoidable—aspect of their new lives: death and taxes. In the state of New York, their estate, which totals a comfortable $4.25 million, would have been covered by the state’s generous estate tax exemption of $6,940,000. Joan and Terry would have owed $0 in estate taxes, ensuring that every cent would go toward their grandchildren’s education funds and their family’s financial well-being.

Their move to Massachusetts had major implications for their financial plans. With the Bay State’s exemption threshold at just $2 million, Joan and Terry discovered that their estate could be taxed to the tune of more than $123,000. That’s not just pocket change; it’s nearly four years of college tuition for a grandchild. Essentially, it’s a whole lot of money not making its way to the next generation.

Joan and Terry weren’t about to pack up and head back to the city. With the help of a financial advisor knowledgeable about estate planning, they could utilize trusts and other tools to protect their assets so they can focus on what really matters to them: family, home, and a financially secure future.

Example 2: A Connecticut Grandmother’s New Chapter in Lenox

Gloria, a lively grandmother who loved nothing more than an August matinee at Tanglewood, was ready for a fresh start. After living in Westport, Connecticut, for 30 years, Gloria faced a tough year with the passing of her loving husband, which made her grandchildren even more central to her life. She packed her bags, rented the house, and moved to Lenox, MA, the town her oldest daughter and her four kids called home, and set about making her new condo feel just as welcoming as the house she left behind.

Gloria and her late husband had worked diligently for many years, building an impressive nest egg and estate worth nearly $7 million, including their $1.25 million home in Westport which Gloria is now renting out. In Connecticut, where the estate tax exemption is a whopping $13.61 million, Gloria would have had the peace of mind of knowing that her estate could pass on to her grandchildren completely untouched by estate taxes.

But Gloria’s move to the Berkshires came with an eyebrow-raising financial footnote: a potential estate tax liability of more than $290,000! The Massachusetts estate tax exemption of just $2 million would leave most of her wealth subject to estate taxes – especially after 2023’s estate tax changes added the value of her CT home to the equation.

Not one to give up a fight, Gloria took action. She consulted with financial advisors well-versed in the intricacies of Massachusetts estate law. With some strategic planning, which included the use of trusts and gifting strategies, Gloria found ways to significantly reduce her estate’s tax liability. She even involved her grown children in the process to ensure that everyone understood her wishes and the protective measures she was taking. Now, tens, if not hundreds of thousands of dollars that may have gone directly to the state can instead be used for family vacations and celebrations and fund her grandkids’ college and entrepreneurial dreams.

*Situations and characters are fictional and designed to illustrate a concept.

How do I avoid estate taxes in Massachusetts?

If your estate is larger than $2 million, there are steps you can take to limit the estate tax burden for your heirs while maintaining your quality of life. It’s never too early to start creating a plan. In fact, waiting to create a strategy for your estate can limit the options available to reduce estate taxes so I advise my clients to start preparing as soon as possible.

Estate Planning

At its core, estate planning is about how you want to be remembered. Your estate plan may include several different tools and documents, but the key to avoiding estate tax lies in an irrevocable living trust.

This living trust can be used to manage your assets during your life, even if you’re incapacitated. When you pass away, the assets in the trust are distributed according to the terms outlined in the document. Unlike a will, a trust can dictate how heirs can spend the money left to them, make stipulations about inheritances, or include incentives for accomplishments like graduation, marriage, or launching a business. A trust also allows your assets to bypass probate court and transfer to your heirs without a lengthy and expensive legal process.

But how does a trust reduce your Massachusetts estate tax? Assets placed into an irrevocable trust are not included in your gross estate for estate tax purposes; the trust must utilize an independent trustee (not one of your children) and you, the grantor, cannot maintain control over the trust during your life. Upon your passing, the assets transferred into the trust are no longer considered part of your taxable estate, thus reducing your estate’s overall tax liability.

Strategic Gifting

Some people give generously to charity throughout their lives to support their favorite causes and reduce their tax liability, or plan to leave a significant portion of their assets to charity upon their death. Others hold back because they worry too much charitable giving will deprive their family of their inheritance. But what if I told you, there are ways to do both? You can give to charity and your heirs, now and later, and reduce future estate taxes while you do it.

Qualified charitable distributions

If you have a traditional IRA with a large balance, you may find yourself having to make big withdrawals each year to meet your required minimum distribution. This can create some hefty tax bills! If you’re at least 73 years of age, you may be able to make qualified charitable distributions instead, up to $105,000 per year. This way, you can make gifts directly from your IRA to your favorite charity – and avoid paying taxes on the withdrawal.

Give to your family now

When your children inherit your tax-deferred IRA, they will be obligated to pay all the tax on the account. If your heirs are at the height of their careers when you pass away, you may be leaving them some significant tax bills!

One way you can shrink your IRA and your heirs’ future tax bills without diminishing your gift to them is to start distributing those inheritances now. Gifting within the federal exemption amount ($18,000 in 2024) can reduce your overall estate size while providing tax-free income to your family. As an added benefit, giving everyone their inheritance now lets you see them enjoy it.

A financial advisor with experience in estate planning can help you determine which gifting options are best for you.

Roth conversions

Since future taxes are unknown, it can be beneficial to retirees to create streams of both tax-free and taxable income. A Roth conversion allows you to turn tax-deferred funds in your traditional IRA into a post-tax Roth IRA. When you make the conversion, you’ll pay taxes on the income (paying taxes when your tax rate is known), creating a tax-free source of income and “spending down” your estate. By paying taxes now, you’re reducing the value of your estate, which can reduce estate taxes later. Plus, your heirs can someday receive the income from your Roth IRA without paying income tax.

Life Insurance

Life insurance can play a crucial part in your estate plan and in protecting your legacy from Massachusetts estate taxes. In every insurance policy, there are three key roles: the insured, the owner, and the beneficiary. The insured is the person whose life the contract is insuring, the owner is the controller of the policy, and the beneficiary is the party that receives the death benefit. 

One of the most valuable benefits of a life insurance policy is that the death benefit provides nontaxable income to the beneficiary. It can, however, be included in the value of your estate and be subject to federal and Massachusetts estate taxes.

Life insurance as a way to shelter inheritances from Massachusetts estate taxes

If you want to avoid having the value of your life insurance policy included in your estate, you have two options:

1. Let someone else hold your policy. If you are not the owner of your life insurance policy, you can shelter the proceeds from being included in your estate. You will, however, give up control of your policy. The owner of your policy, whether a spouse or child, can make changes, surrender the policy, or access its cash value without your consent. Not everyone is comfortable with this option.

2. Create an irrevocable life insurance trust (ILIT). An ILIT is a type of irrevocable trust, meaning it cannot be changed or revoked. Its purpose is to avoid state and federal estate taxes and carry out the wishes of the insured by serving as the owner of their life insurance policy. The best way to use an ILIT is to create it prior to obtaining life insurance, because if you re-title an insurance policy into your trust and pass away within three years, the value of the policy will be included in your estate. There is no such waiting period if the trust is made first. 

Life insurance as a way to pay Massachusetts estate taxes

Life insurance can also be used as a way to pay estate taxes, especially if you are grossly over the Massachusetts exemption amount. Purchasing a large life insurance policy can provide your heirs with the liquidity they will need to pay estate taxes, and it usually pays for itself in the end.

For example, if you live in Massachusetts and have a $10,000,000 estate and a $2,000,000 life insurance policy, your heirs will receive the $2,000,000 benefit tax free. They can then use the benefit to pay the roughly $1,000,000 estate tax bill. What they do with the remaining $1,000,000 is up to them.

Collaborating with a financial advisor who has the knowledge and skills to put all the pieces together is crucial in avoiding estate taxes. As a Certified Estate and Trust Specialist, I work with clients to create comprehensive financial plans that incorporate both estate planning and tax planning. My goal is to help people with taxable estates reach their goals today and leave an impactful legacy for their families and communities tomorrow.

If you’re ready to start optimizing your estate, I’d love to speak with you. Schedule a 15-minute “get to know you” meeting with me today!

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Discover how the rich avoid taxes (and you can, too)

Estate planning is just one way to reduce your tax bill and keep more of what’s yours. In his book, Don’t Run Out of Money in Retirement, Berkshire Money Management CEO and Chief Investment Officer Allen Harris explores several methods used by the wealthiest Americans to shrink their taxes and how you can use those strategies to protect your own wealth.