Question:

In regard to the maximum tax-free estate pass through of $2 million free of estate tax in Massachusetts at the death of the first spouse. In order for that to happen, does anything need to be written into the will or estate plan? Or can the surviving spouse “just do it” at the time of the first spouse’s passing?

Response:

Of course, as with most legal questions, there’s the main answer and then the fine print. The main answer is that the surviving spouse can’t “just do it” in terms of protecting the first spouse’s $2 million exclusion. Instead, the first spouse has to have created and funded a trust to shelter that amount. This is different from how the federal estate tax works, where the surviving spouse can act to protect the unused credit of the first spouse to die, even without trusts created during life by electing “portability” – not that this matters to most people with the first $13.6 million (in 2024) free of federal estate tax, in any case.

To explain this further, estates in Massachusetts exceeding $2 million are subject to tax, though there’s no tax on estates passing to the surviving spouse, no matter how big. But if everything passes to the surviving spouse, it could all be subject to tax upon her subsequent death if her estate exceeds $2 million. So the object of most estate tax planning is to preserve the $2 million “credit” of the first spouse to pass away by setting it aside in trust. These trusts are often called “credit shelter,” “QTIP” or “A and B” trusts, depending on how they are written. The surviving spouse can be the beneficiary of this trust, whatever it is called, with a few restrictions. Using such trusts, both spouses together can pass on up to $4 million tax free.

That’s the main answer. The fine print is that the surviving spouse does have the option of disclaiming money she would receive from the deceased spouse. A disclaimer is an election to have some or all the money she would inherit treated as if she had in fact died first, so it would pass to the next heir or heirs in line. This keeps it out of her estate, reducing the taxes at her death, but also means that she wouldn’t be able to benefit from such assets during her life.

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