Taxes are a frustrating but unavoidable part of life. They can also be part of someone’s death. Some taxes are unavoidable even after death. The estate has to help settle the decedent’s income tax obligations and may have separate income tax obligations due to the sale of estate resources.
If an estate is large enough, there might also be estate taxes to consider. Estate taxes can significantly diminish the value of the assets that pass to an individual’s beneficiaries or heirs after they die. They take priority over the rights of heirs or named beneficiaries to inherit from the estate. Residents in Massachusetts have more of a reason to plan for estate taxes than those in other jurisdictions. After all, they may be responsible for paying both state and federal estate taxes.
When is an estate vulnerable to estate taxes?
Federal estate taxes only apply to particularly large states. In 2024, the threshold for federal estate taxes is $13.61 million. Estates worth less than that are not at risk of federal estate taxes. However, the Massachusetts state estate tax applies to many more estates.
In 2024, the current exemption threshold in Massachusetts is $2 million. Estates that are far from reaching the federal threshold may be subject to state estate taxes. Massachusetts estate taxes can range from 0.8% for estates just over the threshold to 16% for estates well over the limit.
While that is not as significant as the maximum 40% tax rate assessed at the federal level, it can still have a major impact on what other people inherit from the estate. There are many ways to address estate taxes ahead of time, including making gifts, planning to transfer assets outside of probate court and funding a trust.
The failure to plan for estate taxes leaves the burden on the representative of the estate and the beneficiaries expecting to inherit from it. As some people like to say, failing to plan ahead when estate taxes are possible is essentially planning to fail.
Creating an estate plan or modifying an existing one to address estate tax risks is a smart move. After all, residents living in Massachusetts have more reason to worry about estate taxes than those who live in other states, and this is just one of the reasons why such efforts are important.