Mass Estate Tax Question

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arsenalfan
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Joined: Mon Dec 09, 2013 12:26 am

Mass Estate Tax Question

Post by arsenalfan » Wed Oct 09, 2019 4:11 pm

Looking for BH assistance with Mass Estate Law.

I'm executor of a Massachusetts Estate, which has 3 properties worth ~$800k each, and $2.3 MM in IRA funds. It will be divided 50/50 to 2 beneficiaries.

The Estate created 3 separate realty trusts, one for each property.

Can anyone tell me how will this be taxed?

1. I presume no federal tax as under the exemption.
2. Any Mass estate tax? Is the idea behind creating 3 separate realty trusts so each is valued < $1MM Massachusetts Estate Tax?
3. Will the IRAs be taxed?

Thanks in advance, just trying to understand the situation.

bsteiner
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Location: NYC/NJ/FL

Re: Mass Estate Tax Question

Post by bsteiner » Thu Oct 10, 2019 9:48 pm

The Federal estate tax exclusion amount is $11.4 million, so there won't be any Federal estate tax since the estate is only $4.7 million (ignoring any taxable gifts during lifetime).

The Massachusetts estate tax exclusion amount is $1 million. Since the estate is over $1 million, there will be Massachusetts estate tax. Except for spouses and charity, it doesn't matter who gets what, or whether it's outright or in trust.

There should have been four trusts, one for each beneficiary's share of the retirement benefits and one for each beneficiary's share of the other assets.

Assuming the IRAs are traditional rather than Roth, and ignoring any basis, the IRA distributions are taxable when received. If they were payable outright, each beneficiary may stretch his/her share over his/her life expectancy. If they were payable in trust, assuming the trusts qualify for the stretch, the trustees may stretch the distributions over the life expectancy of the oldest beneficiary.

RudyS
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Re: Mass Estate Tax Question

Post by RudyS » Fri Oct 11, 2019 9:37 pm

bsteiner wrote:
Thu Oct 10, 2019 9:48 pm
The Federal estate tax exclusion amount is $11.4 million, so there won't be any Federal estate tax since the estate is only $4.7 million (ignoring any taxable gifts during lifetime).

The Massachusetts estate tax exclusion amount is $1 million. Since the estate is over $1 million, there will be Massachusetts estate tax. Except for spouses and charity, it doesn't matter who gets what, or whether it's outright or in trust.

There should have been four trusts, one for each beneficiary's share of the retirement benefits and one for each beneficiary's share of the other assets.

Assuming the IRAs are traditional rather than Roth, and ignoring any basis, the IRA distributions are taxable when received. If they were payable outright, each beneficiary may stretch his/her share over his/her life expectancy. If they were payable in trust, assuming the trusts qualify for the stretch, the trustees may stretch the distributions over the life expectancy of the oldest beneficiary.
Very timely for me too, having just moved to Massachusetts. I think I do understand the use of trusts for the non-IRA funds to get a $1MM exemption from the MA estate tax, but I do now have a question about my IRA. You (bsteiner) mentioned trusts for the retirement assets. My plan was to just rely on beneficiary statements in my IRAs. Is there any advantage by having these in a trust?

bsteiner
Posts: 4304
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: Mass Estate Tax Question

Post by bsteiner » Sat Oct 12, 2019 12:01 pm

RudyS wrote:
Fri Oct 11, 2019 9:37 pm
bsteiner wrote:
Thu Oct 10, 2019 9:48 pm
The Federal estate tax exclusion amount is $11.4 million, so there won't be any Federal estate tax since the estate is only $4.7 million (ignoring any taxable gifts during lifetime).

The Massachusetts estate tax exclusion amount is $1 million. Since the estate is over $1 million, there will be Massachusetts estate tax. Except for spouses and charity, it doesn't matter who gets what, or whether it's outright or in trust.

There should have been four trusts, one for each beneficiary's share of the retirement benefits and one for each beneficiary's share of the other assets.

Assuming the IRAs are traditional rather than Roth, and ignoring any basis, the IRA distributions are taxable when received. If they were payable outright, each beneficiary may stretch his/her share over his/her life expectancy. If they were payable in trust, assuming the trusts qualify for the stretch, the trustees may stretch the distributions over the life expectancy of the oldest beneficiary.
Very timely for me too, having just moved to Massachusetts. I think I do understand the use of trusts for the non-IRA funds to get a $1MM exemption from the MA estate tax, but I do now have a question about my IRA. You (bsteiner) mentioned trusts for the retirement assets. My plan was to just rely on beneficiary statements in my IRAs. Is there any advantage by having these in a trust?
There are two different issues.

Since the Massachusetts estate tax exclusion amount is $1 million, and Massachusetts allows state-only QTIP elections, a common plan for married people more concerned about the Massachusetts estate tax than the Federal estate tax is to create a credit shelter trust for the $1 million Massachusetts exempt amount. There are several ways to deal with the excess above $1 million.

You can't "have" your IRA in a trust. But you can leave your IRA to your beneficiaries in trust by so providing on your beneficiary designation form.

Most married people leave their IRA to their spouse so the spouse can roll it over, name new beneficiaries, and possibly do Roth conversions. If you don't have $1 million of other assets, you have to choose between the income tax benefits of leaving the IRA to the spouse and giving up some of your $1 million Massachusetts exempt amount and the estate tax benefits of using IRA assets to fill up the $1 million state credit shelter trust (after using your other assets).

At the second spouse's death, our clients provide for their children in separate trusts for their benefit rather than outright. This keeps the children's inheritances out of their estates for estate tax benefits, and protects their inheritances from their creditors and spouses, and Medicaid. They generally leave their IRAs to their children in trust rather than outright for the same reasons. The terms of the trusts would be in your Will. You would then designate the trusts as beneficiaries of your IRA in your beneficiary designation form (or in a rider to it).

RudyS
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Re: Mass Estate Tax Question

Post by RudyS » Sat Oct 12, 2019 3:23 pm

Thank you for the clear and comprehensive answer! And thank you for your continuing assistance to all the Bogleheads on this forum!

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