Estate Planning - Revocable Trusts - Massachusetts

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
Small Law Survivor
Posts: 958
Joined: Tue Nov 17, 2015 5:36 pm

Estate Planning - Revocable Trusts - Massachusetts

Post by Small Law Survivor »

I'm redoing our estate planning documents, and the attorney I'm using has confused me, and may be confused herself!

The issue is this:

To avoid the Massachusetts estate tax (in part) she recommends creating two revocable trusts and funding them each with $1 million. No problem, except that our ability to fund the trusts with taxable money will decline over time as we spend down our taxable account during retirement. When I asked her about this, she said that as taxable assets decline we could refresh the account with my traditional IRA, or even our Roth IRAs. This would mean splitting money off from these accounts and moving them into the trust.

Is this advice correct?


It also seems very labor intensive to be moving IRA money in and out of trusts. The attorney has advised that this could save $140,000 in Massachusetts estate taxes. To be honest I'd (almost) rather move to Florida than have to mess around with this :)

I'd appreciate any thoughts/observations

Thanks in advance.

Small Law Survivor
70 yrs, semi-retired lawyer, 50/40/10 s/b/c, 70/30 dom/int'l. Plan: 4% WR until age 70, 3% after social security kicks in. Boglehead since day 1 (and M* Diehard before that) under various other names
User avatar
Lee_WSP
Posts: 6701
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Estate Planning - Revocable Trusts - Massachusetts

Post by Lee_WSP »

Doesn't make sense to me either. A revocable trust is generally disregarded.

Perhaps she meant two irrevocable trusts whose growth would then be free of the state's estate tax? You could even get a little extra in there by making them intentionally defective (supercharged).
bsteiner
Posts: 6449
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: Estate Planning - Revocable Trusts - Massachusetts

Post by bsteiner »

Massachusetts adopted the Uniform Probate Code and the Uniform Trust Code in 2012, which simplified the procedures, in particular eliminating the requirement for testamentary trusts to file periodic accountings with the court. Before then, you might have used revocable trusts. If the lawyer was used to them, she might still be using them, even though there's generally no need for them now.

Massachusetts has a state estate tax, with a $1 million exclusion amount, and no portability. So a typical estate plan for a couple in Massachusetts would be for each spouse's Will to have a $1 million credit shelter trust for the benefit of the spouse and issue. That trust, including the income and growth on it during the surviving spouse's lifetime, would avoid estate tax in the surviving spouse's estate.
User avatar
JazzTime
Posts: 47
Joined: Mon Oct 25, 2021 8:43 am

Re: Estate Planning - Revocable Trusts - Massachusetts

Post by JazzTime »

My amateur* understanding is that to insure that each spouse receives the $1MM MA exemption, it is important that each spouse separately has $1MM in assets. That can be done by opening an individual account in the name of each spouse and funding it with $1MM. Or each spouse can create a revocable trust, open an account in the name of the trust, and fund it with $1MM. Another approach is for each spouse to open an individual account and fund it with $1MM, then create a trust and name the trust as the beneficiary of the account. Perhaps there are other approaches.

To avoid the MA estate tax, one only has the option (aside from moving) to transfer the assets out of the estate. One way of doing this is by gifting the assets to an IRRevocable trust - perhaps one for each spouse, making the other spouse the first beneficiary (i.e., a SLAT). The revocable trust can support you during your lifetime, then will pass to your beneficiaries on death.

I suspect you may have misspoken or misunderstood when you said moving IRA money in and out of trusts. I suspect your attorney probably meant that you can pay your living expenses after retirement from distributions (RMD's?) taken out of your IRA's. You probably should clarify that.

*amateur: By amateur, I mean amateur with just enough knowledge to be dangerous. The above is merely a shorthand summary. I'm sure your attorney can explain things better. As can other BHers with experience in these matters.
fittan
Posts: 316
Joined: Wed Mar 30, 2016 1:58 pm

Re: Estate Planning - Revocable Trusts - Massachusetts

Post by fittan »

Fellow MA resident here, I created an revocable AB trust couple of years back. Below is an article from the law firm I used (they are based in Woburn). I also included a good youtube video below. Here's what I understood from my attorney.

1) You DO NOT have to split/fund your asset now.

2) After you create your trust, you MUST "move" all your assets (home, savings account, brokerage, etc) into it.

3) AFTER the death of the first spouse, the attorney will then help setup the AB trust. Let's assume a couple has $2 million asset. The attorney will direct $1 million into "pot A". The fund this "pot A" is exempted from estate tax, can grow tax free, can be used by surviving spouse (with certain restrictions) AND upon death of 2nd spouse, goes tax free to your children.

The other $1 million goes to the surviving spouse "pot B". When surviving spouse pass, the $1 million also passes tax free to children.

4) Without the AB trust setup, when first spouse dies, $1 million goes to surviving tax free BUT the $1 million exemption is lost forever. Now the surviving spouse has $2 million, and when she/he passes, the ENTIRE $2 million gets tax at say 7%.

https://maheritagelawcenter.com/what-is-an-ab-trust-2/

https://www.youtube.com/watch?v=gHVDFU3 ... thPlanning
bsteiner
Posts: 6449
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: Estate Planning - Revocable Trusts - Massachusetts

Post by bsteiner »

A and B are archaic names for marital (QTIP) and credit shelter (family) (bypass) trusts.

You can create the same credit shelter trust either in a Will or in a revocable trust. It’s misleading to suggest that you need a revocable trust to do this.
Post Reply