With the federal estate tax exemption up to $5.49 million for 2017, many need no longer worry about their estate incurring federal estate taxes. However, many states have a state estate tax and for Massachusetts residents, the state estate tax exemption is only $1 million. Any Massachusetts estate over that threshold will potentially have to pay state estate taxes and file an estate tax return. We’ll take a look at a Massachusetts Standby Gifting Trust and how you could potentially make gifts a day before death to avoid significant state estate taxes.
When determining if you’ll be subject to a Massachusetts estate tax, there are two things to think about. First, you must figure out whether you’ll need to file an estate tax return. That’s determined by looking at a gross estate plus any taxable gifts made during life. However, there’s a caveat.
Once you’ve determined that you’ll need to file a Massachusetts estate tax return, you’ll have to calculate the Massachusetts estate tax. Your estate won’t be taxed on your gross estate plus taxable gifts, but just on the gross estate.
For example, someone with a $900,000 estate who passed away without any taxable gifts made wouldn’t be subject to state estate taxes. However, if they’d made $400,000 worth of taxable gifts, their estate for filing requirement purposes would be $900,000 + $400,000. Since that’s over $1 million, they’d need to file a Massachusetts estate tax return, but would only be taxed on the $900,000 gross estate.
Once we understand the filing requirement and how the state estate tax is calculated, we can begin doing some planning. Think about it this way: in our previous example, at prevailing tax rates with the $400,000 taxable gift, there would have been a Massachusetts estate tax of $27,000. However, if the $400,000 gift hadn’t been made, the taxable estate would have been $1.3 million with a state estate tax liability of $51,800. So by making a taxable gift, this individual saved about $24,000.
That’s why it’s important to take a complete view of any and all tax liability before making any decisions about gifts. But what about the gifts themselves? If you’re making gifts outright to individuals, you’re essentially shoving that money into their pockets. Doing that can expose assets to creditors in bankruptcy, divorce actions or misuse by heirs. Especially if you’d like to leave assets to a minor or even an heir struggling with substance abuse issues or gambling addiction, this can cause problems.
We often recommend creating a “standby” trust to clients. That way, in the event that they need to do some tax planning and gifting will help, or even if they’re incapacitated or on their deathbed, they still have the option to make gifts into the trust to minimize taxes. It’s there just in case. However, you’ll want to be careful and watch the basis on assets you transfer into the trust.
Low basis, highly appreciated assets may not be prime candidates for transfer into the standby gifting trust since they’d receive a step-up in basis at death. You could accidentally expose heirs to a high capital gains tax if you don’t consider the basis of assets put into the standby gifting trust.
This is a more advanced and complex estate planning technique, so you’ll want to work with an experienced estate planning attorney familiar with this type of trust. For more information on this and other topics, explore our website and contact us to schedule your consultation today!