Question:

Assuming a couple with a Massachusetts joint taxable estate of $5 million, I see how you say to use a trust for the benefit of surviving spouse with $2 million (where surviving spouse is sole trustee) and reduce taxable estate to $3 million. What must be done to reduce taxable estate to $1 million thus using the Massachusetts $2 million exemption for BOTH spouses?

Response:

Unfortunately, the Massachusetts estate tax system does not have “portability” like the federal one, which is why we use trusts in estate tax planning. The Internal Revenue Service only taxes estates to the extent they exceed the threshold of $13.6 million (in 2024). Nothing under the threshold is taxed. Further, the surviving spouse can elect to have the unused portion of this threshold added to their own, allowing married couples to exclude more than $27 million from estate taxation without any planning at all. (These thresholds are slated to be cut in half for people dying in 2026 or later, still a rather high amount.)

The Massachusetts estate tax threshold was recently raised from $1 million to $2 million. But Massachusetts does not have portability. This means that unless married couples engage in estate planning, they will lose the $2 million exemption of the first spouse to pass away. The usual method of protecting this exemption is to split assets between the spouses so that the property of the first spouse to die goes to a so-called “credit shelter” trust for the surviving spouse’s benefit. The trust is written so that the funds, while available to the surviving spouse, are not considered to belong to them and will not be taxed upon their death.

In your example, if $2 million is sheltered when the first spouse passes away, and the surviving spouse has $3 million upon their death, $1 million of their combined $5 million estate will be subject to tax. (There are also ways to reduce this further. For instance, if the holdings of the credit shelter trust increase due to investment returns, they are still not taxed when the surviving spouse dies. The surviving spouse can also make gifts to family members and other beneficiaries to reduce the size of their estate and reduce the resulting tax.)

 

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