Death & Taxes: What You Need to Know About Estate Taxes & Getting Your Affairs In Order

They say nothing is sure but death and taxes, but the other thing I’m sure about is that getting your affairs in order is simply smart, even if nothing makes this topic sexy.

Estate taxes are something almost no one thinks about (anymore) because the Federal exemption is around $12M. People with $12M have people to think about this stuff for them. In addition, estate taxes by definition don’t affect your actual life. If you lose a spouse, you don’t pay estate taxes: it passes entirely to the remaining spouse tax-free. It only comes due when you die. Sounds like something that is absolutely NOT YOUR PROBLEM.

However, Massachusetts has a ridiculously low estate tax exemption that gets pretty much anyone who dies with a paid-for-house, a nice car, and a life insurance policy. A million dollars as a net worth mark isn’t common, but it isn’t uncommon, either, particularly if you include all the people who need to plan for death who don’t actually die for twenty more years. (It’s really common to have $500K saved in a 401(k) for retirement at age 70. Add in a house and a car and maybe a life insurance policy and you definitely have a net worth over $1M. My guess is that this is about 20% of the population of Massachusetts.) 

Estate tax was meant to prevent the transfer of dynastic wealth. It’s not supposed to hit the middle class, but the lack of indexing for inflation has made it do just that. Most people aren’t aware of this wrinkle … nor do they know that a simple piece of paper can save about $60K if you get decent financial planning. And a bunch of the people who do care and do plan won’t actually die until they’ve spent their savings and are now under $1M.  All in all it’s not a sexy issue. But I still want you to care, because there are steps you can take that could matter:

Make sure 529 plans have an alternate custodian or they land in your probate estate. 

Make sure your POA allows the agent to make gifts. 

Give limited powers of appointment to spouses of a credit shelter trust so they can add a second trustee (a kid) to the trust for when they become incapacitated. Then also get it an EIN and retitle it with the investment company before the trustee dies.

Consider the use of disclaimers and setting up beneficiaries three levels deep. So kids could be first and disclaim to Mom who disclaims to marital trust. Or spouse could disclaim to marital trust. Or Marital trust could disclaim to kids.

Assign S Corp stock and LLC interests to your credit shelter trust with a simple signed piece of paper saying so that you put with your wills.

What about deathbed gifts? They definitely reduce MA tax, but only by the amount of the gift. The remaining estate is still taxed if the tripwire is tripped by an estate over $1M when taxable gifts are added back. In other words, they may not have the benefit you think they will. 

Death isn’t the only thing triggering getting affairs in order. Long-term care needs can, too, and things can get complicated fast. Do you have to use up long-term care insurance policies before applying for MassHealth? Is there a way to preserve real estate for your heirs? These are the kinds of questions you need to get clear on, ideally before you need to know the answer.  

MassHealth lets you have $1500 in a “burial” account plus $2000. You can’t have a face value of life insurance of over $1500, either. There’s value in getting a plain-vanilla immediate annuity to turn assets into income, as MassHealth does pay nursing home care even if you have a high income. Should you get a new car? Have income-producing property? Pay off loans during your drawdown period while getting to that $2000? Is a Home Equity Conversion Mortgage a good idea? These kinds of questions should be part of your planning. And some issues—like how to get your house to an heir instead of Medicaid—you’ll need a lawyer.