Estate Planning Tips for Massachusetts Residents

Written by: Michael Carbone, CFA, CFP^®

What is the goal of estate planning?

Estate planning is the process of giving:

• What you want
• To whom you want
• When you want
• How you want
• If possible, while saving taxes & expenses.

How is estate planning unique to Massachusetts residents?

Strategies For Reducing MA Estate Taxes – Credit Shelter Trusts

Estate planning attorneys often recommend married couples take advantage of the MA exemption by structuring their estate plan such that $1M is gifted to an irrevocable trust upon the death of the first spouse. Credit shelter trusts are often used for these purposes.

How does this work? If instead of leaving all of the family assets to the surviving spouse, the first spouse to die moves $1,000,000 or less into an irrevocable trust, those assets will be taxed in the first spouses estate at $0. Since this $1,000,000 is no longer an asset of the married couple, these assets (and any future growth) will not be taxed upon the death of the second spouse. The surviving spouse is generally the “income beneficiary” of the trust – meaning he/she will be able to spend any income from dividends, interest, etc. on the assets owned by the trust.

This strategy generally makes sense for couples who can afford to live off of the income produced by the $1M (in addition to their other income sources). Said differently, if not being able to access the “principal” of the trust is going to jeopardize the surviving spouses financial health, the potential tax savings may not be worth it.

Also, the assets in the trust will not receive a “tax-basis step-up” upon the passing of the second spouse. So, the expected estate tax savings should outweigh the potential capital gains tax savings if the assets were gifted to heirs outside of the trust.

Also, since the MA estate tax tables are progressive: The larger the taxable estate, the greater the potential tax savings. Large estates have the potential to save tens of thousands and sometimes greater than $100k in MA estate taxes. 

Strategies For Reducing MA Estate Taxes – Lifetime Gifts

Since your future heirs will ultimately inherit your assets, gifts made during your lifetime may also be an effective way to reduce MA estate taxes. Under current law, generally, you can gift up to $16k per year/per spouse/per recipient, without creating any federal estate tax implications.

Strategies For Asset Protection

• Depending on the situation, estate planning attorney’s may recommend gifting money into irrevocable trusts to protect assets from long-term care costs. This can be tricky as Medicaid has a five-year look back – meaning if the assets were put in the trust sooner than five-years ago, they will still be at risk. This is an aggressive strategy as the assets are now owned by the trust and controlled by the trustee. An estate planning attorney will carefully weigh the pro’s and con’s before implementing this strategy.
• Purchasing long-term care insurance may reduce your risk of impoverishing a spouse. This insurance is often expensive.
• Estate planning attorneys often recommend transferring real property such as a home into a “Life Estate”. This a provision in the deed that grants you or your spouse the right to live in the property during your lifetime¹. There are pro’s and con’s that an attorney will weigh before implementing this strategy.

Other Important Documents to Consider

• Last will and testament: This is a document that names your personal representative to handle your affairs and specifies who will receive what. Wills are “validated” by the probate courts.
• Healthcare Proxy: This document designates a person you trust to make medical decisions for you in the event of your incapacitation.
• Durable Power of Attorney: This document designates a person you trust to make financial and legal decisions for you in the event of your incapacitation.
• Revocable Trust: These documents are often used as a more specific way to bequest assets while avoiding probate, etc.

How Does a Financial Advisor Fit into Your Estate Planning Process

• Your financial advisor is often the person who coordinates your estate planning efforts with your legal and tax advisers. A talented advisor will identify potential opportunities to improve your estate plan, that you will ultimately ratify with your estate planning attorney.
• Also, a financial advisor should motivate you to act, as these issues are often easy to push off.

Please don’t hesitate to reach out to discuss these topics in greater depth. I can be reached at 978-455-7799 or Michael.carbone@raymondjames.com.

Thanks for reading!

Michael Carbone, CFA, CFP^®

¹https://www.slnlaw.com/life-estates.html

Important Disclosures

Past performance is not indicative of future results and there is no assurance that any investment strategy will be successful.

Financial and investment planning inherently involve potential tax and legal implications, with which we are generally familiar. We do not, however, practice as lawyers or CPAs and cannot give specific legal or tax advice.  You should always consult with your tax advisor, or your attorney, when making complicated legal or tax decisions, however, we’re glad to work with your tax or legal professional to help you meet your financial goals. Raymond James financial advisors do not render advice on tax or legal matters.

Any opinions are those of Michael Carbone - not necessarily those of Raymond James. The foregoing information has been obtained from sources considered to be reliable, but we not guarantee that is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected.