Question:

If you are a Massachusetts resident and have $3 million, give away $2.5 million and die four years later, so that your taxable estate is $500,000, do you avoid the Massachusetts estate tax?

Response:

No, but you would reduce it.

The threshold for Massachusetts estate taxation is $1 million. So you would think that if you got your estate below that level, you would avoid any taxation. But in determining whether your estate exceeds the threshold, Massachusetts adds back in all the taxable gifts made by the decedent. Taxable gifts are anything you give to someone else in excess of $16,000 (in 2022) a year. So, in your example, the $2.5 million would be added in and the estate would exceed the threshold.

Non-taxable gifts, those up to $16,000 per recipient per year, are not added back in. So if you can reduce your estate below $1 million by making these smaller gifts, you can, in fact, avoid the estate tax.

For those who have made taxable gifts, the Massachusetts estate tax is determined by calculating both the tax on the estate including the taxable gifts and the tax on the ultimate estate, and then charging the difference between the two. In your example, this would be the difference between the tax on a $3 million estate and a $2.5 million estate. Since the tax on a $3 million estate is about $180,000 and the tax on a $2.5 million estate is about $140,000, the tax on the $500,000 estate in your example would be about $40,000.

Interestingly, were you to reduce your $3 million estate by an amount that left the estate above $1 million, it wouldn’t matter whether the gifts were taxable or nontaxable. If you were to give away $500,000 to reduce your estate to $2.5 million, the tax would be reduced from about $180,000 to about $140,000 regardless of the type of gift.

 

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