Taxpayers often utilize gifting as part of their estate plan. However, determining the applicability of the Massachusetts estate tax can lead to some unexpected results when there are lifetime gifts.
The federal estate tax does not kick in until the total of value of assets owned at death plus the value of lifetime gifts exceeds the $11.4M federal lifetime exemption—a high hurdle for most. The federal lifetime exemption is indexed for inflation annually. Estate tax rates are applied when the net taxable estate amount “exceeds” the $11.4M exemption, with federal tax rates topping out at 40% for net taxable estates over $1M. Keep in mind that in 2026, the lifetime exemption is scheduled to sunset back to 2017 levels of $5.5M.
When comparing the federal $11.4M lifetime exemption approach, some think of the Massachusetts $1M exemption in a similar way, in that “this is the amount you need to stay below” on assets owned at death to avoid Massachusetts estate tax. This is not always the case.The Massachusetts $1M exemption is really a threshold to determine if the estate has a Form M-706 return “filing obligation”. An estate has a Massachusetts filing obligation when assets owned at death plus the value of lifetime gifts exceeds $1M, even if the value is exceeded by only $1 (not a typo, one dollar!). The Massachusetts tax rates, which top out at 16%, are applied only to the assets owned at death.
The best way to illustrate this is through an example:
- Sam made no lifetime gifts and passed away owning $2.5M in assets. The $2.5M gross estate is over the $1M filing threshold. Sam’s personal representative will need to file a Form M-706 and the estate will owe $ 138,800 in estate tax.
- Assume Sam had made $1.6M worth of taxable lifetime gifts and passed away owning $900K in assets. The $2.5M gross estate is over the $1M filing threshold. Sam’s personal representative will need to file a Form M-706 and the estate will owe $ 27,600 in estate tax.
- Assume Sam had made $301K worth of taxable gifts during his lifetime and passed away owning $700K in assets. The $1.01M gross estate is just over the $1M filing threshold. Sam’s personal representative will need to file a Form M-706 and the estate will owe $ 18,000 in estate tax.
- Assume Sam made $200K worth of taxable gifts and passed away owning $700K in assets. The Gross estate of $900K is below the $1M filing threshold. There is no filing requirement, therefore no tax due.
“But wait! I did not think Massachusetts had a tax on gifts.” They don’t—where there were lifetime gifts and an estate tax in examples above, the tax rates were only applied to the value of assets owned at death, not the gift values. Therefore, lifetime gifting can still produce a significant Massachusetts estate tax savings.
The Massachusetts $1M filing threshold is a low hurdle by today’s standards. Massachusetts does not index the exemption annually, so it’s been the same amount for some time. Include the value of your home, accumulated retirement asset, other investments, and life insurance policies, and you’re likely well over the $1M threshold. At a top Massachusetts tax rate of 16%, there is still a significant tax savings to be had here with some estate planning, even if you are well below the federal lifetime exemption.
If you have any questions about estate tax and gifting at the state or federal level, please leave a comment below, or feel free to contact me directly, I’m happy to help!