By Daniel M Surprenant, Esq., CELA | Managing Partner
Your home, life insurance policies, and retirement accounts can make estate tax planning relevant even if you do not consider yourself wealthy. For years, rising home values and these other assets pushed everyday Massachusetts homeowners and retirees above the state’s long-standing $1 million estate tax threshold—often leaving families with an unexpected tax bill.
The Massachusetts estate tax landscape underwent a major shift when the state officially doubled its estate tax exemption to $2 million per person (or $4 million for a married couple with proper planning) for individuals passing away on or after January 1, 2023. The legislation was signed on October 4, 2023, but applies retroactively to deaths occurring on or after January 1, 2023.
My advice is not to assume that a higher exemption means your trust no longer needs attention. The change offers substantial relief for Massachusetts families, but careful trust planning still matters if you want to make the most of it and avoid unnecessary taxes.
1. How Can Married Couples Protect Up to $4 Million from Massachusetts Estate Tax Through Trust Planning?
For deaths on or after January 1, 2023, Massachusetts provides a $99,600 estate tax credit. The credit eliminates the tax for estates valued at $2 million or less and reduces the tax for larger estates, removing the old “cliff effect.” If an estate exceeds $2 million, however, the tax is calculated under the applicable estate tax rules—not simply as a flat tax on the excess. The date of death also affects the calculation: further computation changes apply to deaths on or after August 1, 2025.
However, the state exemption is strictly “use-it-or-lose-it” for each individual. If a married couple simply passes all assets directly to the surviving spouse via joint ownership or a simple will, the first spouse’s $2 million exemption is wasted. When the second spouse later passes away, their estate can only apply a single $2 million exemption. This exposes the remaining $2 million of a $4 million estate to graduated estate tax rates ranging from 7.2% to 16%.
A Family sub-trust can help married couples prevent the loss of the first spouse’s exemption. This is a Bypass Trust, also called a Credit Shelter Trust, used within a Revocable Living Trust structure.
How It Works:
- At the First Death: Rather than transferring all assets directly to the surviving spouse, assets up to the state exemption amount fund the Family sub-trust.
- Protection for the Surviving Spouse: The surviving spouse can still retain access to the income and principal of the Family sub-trust for their health, education, maintenance, and support throughout their lifetime.
- At the Second Death: Because the assets in the Family sub-trust belong to a separate, irrevocable vehicle for tax purposes, they do not count toward the surviving spouse’s taxable estate.
By fully funding the Family sub-trust with up to $2 million upon the first spouse’s death, a married couple effectively shelters up to $4 million from Massachusetts estate taxes.
| A Real-World Example of Tax Savings Consider a married couple with a combined estate worth $4 million. • Without Planning: The first spouse dies and leaves everything to the survivor. No tax is due then. But when the surviving spouse dies with the $4 million estate, they only have a single $2 million exemption. The remaining $2 million is taxed by Massachusetts, resulting in an estate tax bill of approximately $280,000 for their children. • With a Family Sub-Trust: The first $2 million funds the Family sub-trust at the first death, and the remaining $2 million belongs to the surviving spouse. When the second spouse passes away, both $2 million shares are completely sheltered. The estate tax bill drops to $0, saving the family approximately $280,000. |
Good News for Our Clients
If you already have an estate plan established through our firm containing provisions to create and fund a Family sub-trust, your trust is designed to adapt to this statutory change automatically. Because our formulas refer to the maximum applicable state exemption amount, your plan will naturally capture and utilize the full, larger $2 million Massachusetts estate tax exemption upon the first spouse’s death.
2. Estates Between $1 Million and $2 Million: How Can a Family Sub-Trust Affect Step-Up in Basis?
While the doubled exemption is welcome news, it creates a unique consideration for estates valued between $1 million and $2 million. Under the prior law (for deaths before January 1, 2023), an estate worth $1.5 million faced Massachusetts estate tax, making the use of a Family sub-trust essential. Under current rules, an estate of this size owes $0 in Massachusetts estate tax, even with a single exemption.
If estate tax is no longer the concern, what should we look at next? Capital gains tax—the tax your beneficiaries may face when they sell inherited assets. To understand that trade-off, we need to look at a rule called a “step-up in basis.”
What is a Step-Up in Basis?
“Basis” is generally the amount you originally paid for an asset, like a house or a stock, plus the cost of any capital improvements. For example, if you bought a home decades ago for $200,000 (and have not put money into capital improvements of the home), your basis is $200,000. If that home is worth $1.2 million today and you sell it, you would owe capital gains tax on the $1 million profit.
When your children inherit that home, their basis generally becomes its fair market value at your death, rather than what you originally paid. In this example, if the home is worth $1.2 million at your death, their basis generally becomes $1.2 million. If they then sell it for that amount, there would generally be $0 in capital gains tax, assuming no other relevant adjustments. An alternate valuation date may apply in qualifying estates.
The Problem: Capital Gains Tax vs. Estate Tax
When assets fund a Family sub-trust, they receive a step-up in basis at the first spouse’s death. However, because those trust assets bypass the second spouse’s estate to avoid estate tax, they do not receive a second step-up in basis when the second spouse passes away.
If your total marital estate is under $2 million, your family no longer has a Massachusetts estate tax liability. Keeping highly appreciated assets (like real estate or stock portfolios) inside a Family sub-trust may unnecessarily subject your children or beneficiaries to steep capital gains taxes when they eventually sell those assets.
Action Item for Surviving Spouses
Schedule a consultation before making changes to an existing Family sub-trust. This review is especially relevant if you are a surviving spouse whose joint estate is between $1 million and $2 million and the Family sub-trust was funded under the former $1 million exemption rules. We can review whether modifying the Family sub-trust or changing how its assets are held is legally available and appropriate to pursue a second step-up in basis.
Depending on the trust’s terms and powers of appointment, legal mechanisms may be available to bring those assets back into your gross estate, ensuring your beneficiaries receive a full, second step-up in basis while remaining completely clear of the Massachusetts estate tax.
Summary Checklist: What Should You Do Next?
- Married couples with estates over $2 million: Verify your trusts are properly structured and that your assets are properly titled to fund both sides of your plan, securing your full $4 million combined protection.
- Surviving spouses with estates under $2 million: Review whether an existing Family sub-trust should be adjusted to capture full step-up in basis benefits.
- Individuals with out-of-state property or changing finances: Ensure your plan reflects modern Massachusetts statutory updates and recent administrative guidance.
Schedule an Estate Plan Review
If you have questions about your Family sub-trust or how these rules affect your estate plan, please contact our office to schedule a review. We look forward to helping you understand your options.
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