Adapting to Massachusetts’ Estate Tax Changes

October 29th, 2024

•4 minute read

Key Takeaways

Massachusetts increased its estate tax exemption from $1 million to $2 million and eliminated the estate tax “cliff effect,” providing meaningful tax relief for many residents.

The updated law clarifies that certain out-of-state real estate and tangible personal property owned by Massachusetts residents are not subject to Massachusetts estate tax.

High-net-worth individuals should review their estate plans and property ownership structures with tax and estate planning advisors to take advantage of new planning opportunities and minimize future tax exposure.

*Please note that tax laws and regulations may change, and it’s always best to consult your advisor for the latest guidance. This article is accurate as of October 29, 2024.

On October 4, 2023, Massachusetts Governor Maura Healy signed a landmark $1 billion tax reform package into law, marking the first tax cuts in the state in over two decades. Known as Massachusetts House Bill 4104, this legislation is designed to make the state more competitive and affordable for residents, particularly those with significant wealth. As someone with substantial assets, this new law, which is retroactive to estates of decedents dying after January 1, 2023, could have important implications for your estate planning.

Recently, the Massachusetts legislature delivered more good news to residents of the Commonwealth. On September 16, 2024, the legislature updated the 2023 Act to clarify the treatment of real estate and tangible property located outside Massachusetts in the estate of a Massachusetts resident decedent. The 2024 Act specifies that the value of such property is not subject to the estate tax of a Massachusetts resident decedent. Estates of decedents who died after January 1, 2023 – and filed a Massachusetts Estate Tax Return that included non-Massachusetts real estate or tangible personal property – may be entitled to a refund.

Key Changes in the New Tax Law

The tax reform package introduces several key changes to the Massachusetts estate tax, which could impact how you plan your estate. Here’s a breakdown of what you need to know:

1. Increased Estate Tax Exemption

One of the most significant changes is the increase in the estate tax exemption from $1 million to $2 million. This change is retroactive to January 1, 2023, meaning that estates of individuals who passed away this year can benefit from the higher exemption. Previously, Massachusetts had one of the lowest estate tax exemptions in the country, but this increase brings some relief, though it remains on the lower end compared to other states.

2. Elimination of the “Cliff Effect”

Under the old law, if your estate slightly exceeded the $1 million exemption, the entire value of your estate was subject to taxation. This scenario could result in a hefty tax bill even for relatively modest estates. The new law eliminates this “cliff effect,” ensuring that only the portion of your estate that exceeds $2 million is taxed. For example, if your estate is valued at $2.1 million, only the $100,000 above the exemption will be taxed rather than the entire estate.

Strategic Considerations for High-Net-Worth Individuals

Evaluating Property Ownership:
If you own or plan to acquire property outside the state, it might be beneficial to consider how to hold the out-of-state property. For instance, directly owned property located outside Massachusetts will not be subject to Massachusetts estate tax; however, real estate owned or titled in the name of an LLC could be considered intangible property and subject to estate tax in Massachusetts.

Estate Planning Opportunities:
While the increase in the estate tax exemption is helpful, it may not be sufficient for ultra-high-net-worth individuals. However, it does open the door to more strategic estate planning, particularly if you have assets spread across multiple states. This could be an opportune time to reassess your estate plan and explore ways to minimize your estate tax liability.

The Impact of Inflation:
It’s important to note that the $2 million exemption is not indexed for inflation. Over time, as inflation erodes the real value of this exemption, it may cover a smaller portion of your estate. Staying proactive with your estate planning can help mitigate the impact of this limitation.

Planning Opportunities

This new tax law substantially changes Massachusetts estate tax, but how much it benefits you depends on your individual situation.

If you own or are considering purchasing out-of-state property, now is an excellent time to review your estate plan and consider how this new law and the recent changes to it can work to your advantage.

If you hold a complex portfolio with assets in and out of Massachusetts, now is the time to start a conversation with your CPA or estate planning attorney. They can help you navigate the new law’s provisions and identify strategies to optimize your estate plan. Don’t wait—reaching out now will give you the best chance to take full advantage of these changes before year-end.

Frequently Asked Questions (FAQ’s)

Massachusetts increased the estate tax exemption from $1 million to $2 million and eliminated the “cliff effect,” which previously taxed the full estate once the exemption threshold was exceeded.

Under the prior law, estates exceeding the exemption amount were taxed on the full estate value rather than only the amount above the exemption threshold.

Under the updated law, certain out-of-state real estate and tangible personal property owned directly by Massachusetts residents are generally excluded from Massachusetts estate tax.

The recent law changes create new estate planning opportunities that may help reduce estate taxes and improve long-term wealth transfer strategies.