How to Avoid the Massachusetts Estate Tax

Estate tax is a levy imposed on the transfer of a deceased person’s assets to their heirs. Many states, including Massachusetts, impose their own separate estate taxes, often with different thresholds and rules. The Massachusetts estate tax can significantly reduce the inheritance beneficiaries receive if an estate is not properly planned. This article provides an overview of strategies that can help minimize or even avoid the Massachusetts estate tax.

Understanding the Taxable Estate in Massachusetts

The “gross estate” for Massachusetts estate tax purposes includes nearly all property an individual owns or controls at the time of death. This broad definition encompasses assets regardless of their location, though real estate and tangible personal property outside Massachusetts may not be included in some calculations. Assets typically included are real estate, bank accounts, investment accounts, retirement accounts like IRAs and 401(k)s, life insurance policies owned by the decedent, and personal property items such as automobiles and jewelry.

For decedents dying on or after January 1, 2023, a Massachusetts estate tax return must be filed if the gross estate, combined with certain adjusted taxable gifts made during life, exceeds $2 million. If the gross estate exceeds $2 million, the tax applies to the entire estate, not just the amount over the threshold. Massachusetts estate tax rates are progressive, meaning higher estate values are subject to higher marginal tax rates, ranging from 7.2% to a maximum of 16% for the largest estates.

Strategies for Reducing Estate Value

Making gifts during one’s lifetime is an effective approach to reducing the taxable estate. Each individual can gift up to a certain amount per recipient each year without incurring federal gift tax reporting requirements or using their lifetime exemption. For 2025, this annual gift tax exclusion is $19,000 per person per recipient. These gifts remove assets from the gross estate, potentially lowering the estate’s total value below the Massachusetts estate tax threshold. To be effective for estate tax purposes, these must be “completed gifts” where the donor relinquishes all control over the gifted asset.

Charitable giving also provides a method for reducing the taxable estate. Direct bequests to qualified charities at death are fully deductible from the gross estate, which can significantly lower or even eliminate estate tax liability. Specific charitable trusts can also be established to remove assets from the estate. For instance, a Charitable Remainder Trust (CRT) allows an individual to donate assets to a charity while retaining an income stream from the trust for a set term or for life, with the remainder going to the charity.

Life insurance planning offers another strategy to reduce estate value. Life insurance proceeds can be included in the insured’s taxable estate if the policy is owned by the decedent at death. To prevent this, an Irrevocable Life Insurance Trust (ILIT) can be established to own the policy. When structured correctly, the death benefit from a policy held by an ILIT is not considered part of the insured’s taxable estate. For an existing policy transferred to an ILIT, the insured must survive for three years after the transfer for the proceeds to be excluded from the estate.

Strategic Use of Trusts

Trusts are tools used in estate planning to manage assets and minimize estate taxes. Irrevocable trusts, once established, cannot be altered or revoked, and assets transferred into them are removed from the grantor’s taxable estate. This distinction is important because assets held in a revocable living trust, while avoiding probate, are still included in the gross estate for estate tax calculations.

One common type is the Irrevocable Life Insurance Trust (ILIT), which holds life insurance policies outside the grantor’s estate. The ILIT ensures that the death benefit of the policy does not contribute to the taxable estate, which is beneficial for larger policies that could push an estate over the Massachusetts exemption threshold.

Marital trusts, such as Qualified Terminable Interest Property (QTIP) trusts, allow married couples to maximize the marital deduction and defer estate taxes. These trusts provide for a surviving spouse’s income needs while ensuring the assets ultimately pass to beneficiaries chosen by the deceased spouse, such as children from a prior marriage. While the marital deduction typically defers tax until the second spouse’s death, careful planning with QTIPs can help utilize both spouses’ exemption amounts in Massachusetts, which does not have federal-style portability.

Bypass trusts, also known as credit shelter trusts, are another important tool for married couples. These trusts are designed to utilize the individual Massachusetts estate tax exemption of the first spouse to die. Assets up to the exemption amount are placed into the bypass trust, sheltering them from estate tax upon the second spouse’s death. This strategy prevents the combined assets of both spouses from being subject to estate tax solely under the surviving spouse’s exemption, which would occur if all assets passed directly to the survivor.

Leveraging Deductions and Exemptions

Beyond strategies that reduce the gross estate, certain deductions and exemptions can further lower an estate’s taxable value. The unlimited marital deduction allows for the transfer of an unlimited amount of assets to a surviving spouse free of estate tax. This deduction often defers estate tax liability until the death of the second spouse, allowing married couples more time to plan and manage their combined assets.

Charitable contributions made at death are fully deductible from the gross estate. Any assets bequeathed to qualified charitable organizations reduce the taxable estate.

Certain debts and administrative expenses incurred in settling an estate are also deductible. These include funeral expenses, legal fees for estate administration, accountant fees, and executor fees. Valid debts owed by the decedent at the time of death, such as mortgages, credit card balances, and certain taxes, can be subtracted from the gross estate, reducing the amount subject to taxation.