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Question:

My wife and I live in the great state of Massachusetts and have each funded our own individual credit shelter trusts for $1 million. Beyond that we have about $500,000 in a joint bank account with beneficiaries and a house in joint ownership worth about $350,000. My understanding is if we were to both pass away and our taxable estate remain at its current level we would be subject to the Massachusetts estate tax based on a taxable estate of $850,000.

Response:

That’s right. The Massachusetts estate tax threshold currently is $1 million (tied with Oregon as the lowest in the nation). There’s no tax when the first spouse passes away because of the 100% marital deduction. And your plan will shelter $1 million when the first of you passes away, leaving the surviving spouse with $1.85 million of your combined $2.85 million estate. The tax on this under current law would be approximately $85,000.

There are ways to reduce this by spending and gifting. But I would not be too worried about it. There are proposals before the legislature to raise the threshold to $2 million or $3 million. If they end up at the higher figure, that would entirely eliminate the tax in your case (unless your estate continues to grow).

If they raise it just to $2 million, you will need to maintain your credit shelter trusts which would permit you to pass on up to $4 million tax free. Depending on how your estate grows over time, you may want to allocate more from you joint bank account to your credit shelter trusts in order to make certain the survivor does not end up with more than $2 million, since you’re already close at $1.85 million.

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