Simplify your trust now that the MA estate tax law has changed?

With the passing of the new Massachusetts tax law increasing the estate tax exemption, many residents who have an existing trust, and an estate between $1 and $2 million, are wondering:

“Should I simplify my trust? Should I remove the tax shelter?”

It may be worth it.

When your Credit Shelter Trust is no longer needed

Prior to this new law, a commonly used strategy to lower estate taxes was to create a trust that will shelter up to $1 million if you’re married, so that a couple could pass up to $2 million or more without an estate tax. The trust to do this job is a Credit Shelter Trust (CST) also known as bypass, B trust, family, or exemption trusts.

The credit shelter trusts, today, for smaller estates would be unnecessary and may actually make settling your estate slightly more cumbersome and complicated as they could:

• Restrict access to the couples’ funds for the surviving spouse, which would no longer be necessary. 
• Cost more in capital gains. Most of these trusts have been drawn with a mandatory shelter based on a formula. This formula seems innocuous but can actually end up costing the family in capital gains taxes because of a complication with “tax basis” calculations, especially if there’s been an appreciation in value between the deaths of the spouses.

With the 2023 tax reform in Massachusetts, it may make sense for residents in the $1 to $2 million range of assets to simplify their trust by removing the tax shelter and improve the capital gains outcome. We would not recommend eliminating the tax shelter provisions if your estate is close to $2 million.

How to simplify your trust:

The trust and tax shelter up to $2 million can possibly be simplified after the death of the first spouse with an action by the Trust Protector if your trust is equipped with one. The Protector can alter the tax provisions to achieve the result you are looking for. (If your trust is from our office, one of our partners often serves in this role.) But this requires affirmative action and probably will cost more time and expense than addressing the matter up front (before death). 

You should review your trust to see how best to simplify it:

1. Determine whether the tax shelter is mandatory.
2. Research whether the Trust Protector can eliminate the unnecessary burdensome structure.

In re-writing trusts in 2023 and beyond, we will apply a new approach to reduce estate taxes:

• Unmarried or widowed individuals with estates under $2 million
  There will be no estate tax at your death.
• Married couples with estates over $2 million
  We still need trusts to shelter the estates of couples above $2 million because there’s no “portability” of exemption between spouses, i.e., you cannot add your deceased spouse’s exemption to yours unless you have a trust that creates a tax shelter in the state of Massachusetts. Our new approach is to require the trustee or executor to elect how much of an exemption from estate tax (if any) to take. This is known as the “QTIP Election.” In nearly all trust updates going forward, this revision would be recommended.
• Single person with an estate over $2 million, or a married couple over $4 million
  You should look seriously at other means of reducing your taxable estate. We can put you on a track to reduce your taxable estate, other things being equal, to coordinate with your age, inflation, and life expectancy. Common techniques can include:
  • annually transferring assets to irrevocable trusts
  • purchasing property outside of Massachusetts
  • permanent life insurance held in trust
  • reducing the value for tax purposes using limited liability company (LLC) planning
• Estates over $10 million
  In 2023, a $10 million estate is taxed at approximately $968,000. By reducing the value of the estate for estate tax purposes to, say, $6 million, it would reduce the tax to $411,000, a savings of $557,000. The strategies to reduce the tax do not work for everyone in every circumstance. For example, retirement accounts are especially hard to reduce in value. If they are a significant part of your estate, we will need to take a look at all options.

Stay informed

The need to apply advanced tax-saving techniques is alive and well while they still work. There are rumblings in Washington every time power changes hands about clamping down on some of our stallwart strategies. Stay informed of the laws and trends, and what you can do about them. This reinforces the importance of our TrustSupport™ program, which is available to all clients of the firm.

If you have questions about how to simplify your trust, schedule a complimentary appointment with our Managing Paralegal, Paula Nolan.