Question:

I am eager to understand how the new Massachusetts estate tax legislation may impact our estate planning strategies. Specifically, I am curious to know whether it includes provisions for portability of the $2 million exemption to the surviving spouse, similar to what is found in federal law. Are there any other changes or considerations that might prompt a reevaluation of the existing bypass trust structure that we currently have in place.

Response:

No, Massachusetts did not adopt portability as part of its update of the estate tax. As you appear to know, under the federal estate tax law, a surviving spouse may, in effect, inherit the unused portion of the estate tax threshold from a deceased spouse. They do this by filing an estate tax return that might otherwise not be necessary. Of course, very people have to worry about the federal estate tax at all with the current (2023) threshold at $12.9 million, but this is slated to be cut in half for anyone dying after 2025, which could include a lot more estates.

Portability

Here’s how portability works. Let’s say a couple has $20 million and they give everything to one another at death. There would be no estate tax due when the first spouse dies, both because their estate is below the threshold and because there’s a complete marital deduction for anything passing to a surviving spouse.

However, if the surviving spouse still has the total $20 million at death, their estate will exceed the threshold and be subject to an estate tax (of about $2.8 million). They can avoid this entirely by filing an estate tax return when the first spouse dies and electing portability. This allows their estate to add the deceased spouse’s threshold to their own so that they can give away a total of almost $26 million at death tax free. This amount, again, will be cut in half after 2025, making it more relevant to more people, though still not most. (I won’t get into the rules about what happens when one spouse before the end of 2025 and the other spouse after the threshold has been cut in half.)

There are two main advantages of portability. First, it “saves” couples who have not done any estate tax planning. Second, it avoids the need to administer “bypass”  or “credit shelter” trusts to which you refer.

New Massachusetts Estate Tax Law

Turning back to Massachusetts, since it did not adopt portability and the threshold, while increased from $1 million to $2 million, is still much lower than the federal threshold. So, many more married couples in Massachusetts should consider estate tax planning. The standard plan is to split assets between the spouses and for each spouse to create a trust to shelter up to $2 million of their estate from being included in the surviving spouse’s estate. These are known as “bypass,”  “credit shelter” or “QTIP” trusts, depending on how they are structured. That way, together, the couple can pass on up to $4 million tax free.

Now, finally, to your second question, whether you should change your existing plan. Probably not, unless you’re pretty certain your combined estate will not exceed $2 million.

Is There Still a Benefit to Estate Tax Planning?

In contrast, if you were a couple who had not already created an estate tax plan, under the new law it’s much less likely to be necessary. First, all those estates between $1 million and $2 million are no longer taxable. Second, even if the estate of the surviving spouse ends up exceeding $2 million, any tax will be much smaller than under the prior law. This is because the way the legislature implemented the change was to establish a $99,600 estate tax credit for all estates. In effect, this cut the tax by $100,000 even for larger estates that are still subject to taxation. You might well decide that you would rather pay any tax due rather than do estate tax planning now that the cost of not doing planning is $100,000 less than it would have been previously.

On the other hand, there are other benefits to standard estate tax planning, including probate avoidance, financial management in the event of incapacity, creditor protection, protection of family in the event the surviving spouse remarries, and avoiding the need to file an estate tax return.