Estate Planning In Massachusetts: What Is Portability?
Tax planning is an important part of estate planning—especially for high net worth individuals. As explained by the Internal Revenue Service (IRS), the federal estate tax is “a tax on your right to transfer property at your death.” That being said, most people do not have a federal estate tax liability because the tax is only imposed on estates of $12.9MM or more in 2023. Because most individuals do not die having an estate worth $12.9MM or more, these estates do not need to consider the use of portability in their estate planning documents or use portability as a postmortem tax planning tool. For those estates, however, that anticipate having a value that will equal or exceed the federal estate tax exemption and involve a married individual, the concept of “portability” should be considered as a planning tool that would raise the exemption level to a higher amount, thereby reducing any estate taxes owed to the U.S. Treasury. Here, our Boston estate planning lawyers provide a comprehensive guide to portability in Massachusetts.
Estate Tax and Portability: Understanding the Basics
Estate tax is levied on the transfer of a deceased person’s assets. U.S. federal law provides a substantial estate tax exemption—thereby shielding a portion of the estate from the tax. Portability allows a surviving spouse to utilize any unused exemption from their deceased spouse. For example, if the first-to-die spouse dies having an includable estate worth $5MM, he or she does not have a federal estate tax issue. However, if the second-to-die spouse has an estate worth $15MM, he or she does have a federal estate tax liability. If the surviving spouse elects portability, he or she would “port” or transfer the unused amount on the first-to-die spouse’s estate, that is, $7.9MM in 2023 and port that over to her exemption level of $12.9MM to increase it to $20.8MM (assume he or she died in 2023 as well.) It is a provision that ensures that couples can pass on more to heirs tax-free. However, to benefit from portability, an estate tax return must be timely filed, even if no tax is due. Please note that the current exemption level of $12.9MM is set to expire at the end of 2025, unless Congress votes to extend the current law. Barring congressional action, the inflation-adjusted exemption is expected to return to approximately $7 million ($14 million for married couples) in 2026, effectively reducing the limit by half.
Understanding Portability through an (additional) Example
For 2024, the federal estate tax exemption will be $13.44 million for an individual. If, for example, a person who has an estate worth $13 million and dies in 2024, he or she could distribute the estate’s assets without paying any federal estate tax. Note, that if the decedent died in Massachusetts in 2024, he or she would owe the Massachusetts Department Revenue taxes on the amount over $2MM, that is, tax on $11 milliion. There is no portability in Massachusetts.
Returning to the federal estate tax issue in this example, without filing an estate tax return and a portability election made therein, the decedent he has left $440,000 “on the table”. By filing the federal estate tax return, the surviving spouse will be able to “port” the unused $440,000 from the first spouse to die’s estate and use it later when the surviving spouse passes. If the second to die spouse dies in a later year, say 2026 with an exemption level of $7 million, he or she would still be allowed to “port” the unused $440,000 to increase the exemption level to $7.44MM.
To understand where portability would not be available, if our decedent dying in 2024 has an estate worth $20 million, the estate would be subject to tax on the $6.56 million above the $13.44 million exemption level. Because the exemption amount of $13.44 was fully utilized or claim, there is no unused exemption to transfer to the surviving spouse for later application.
Note: The value of the estate tax exemption is currently scheduled to be cut in half starting in 2026. You may be able to employ proactive estate planning strategies to help preserve the full value of the exemption. An experienced Massachusetts estate planning attorney can help.
Massachusetts has a State-Level Estate Tax (Applies to More People than Federal Tax)
Massachusetts is one of the states in the U.S. that imposes its own state-level estate tax, separate from the federal estate tax. While the federal estate tax exemption has been notably high in recent years, allowing many estates to transfer substantial assets without incurring federal taxes, the filing limit for Massachusetts is significantly lower. Massachusetts law requires estates to file an estate tax form if they are valued at $2 million or more beginning January 1, 2023. . In other words, this means that many estates that are exempt from federal taxation might still be liable for the state estate tax in Massachusetts.
Contact Our Boston estate planning attorneys Today
At Fisher Law LLC, our principal attorney has an advanced tax degree (LL.M) from Boston University School of Law and has been trained at some of the largest law firms in the nation and in Boston. The Firm provide sophisticated, large law firm services in small firm setting that focuses on the client and their families. If you have any specific questions about portability and estate tax plan, please do not hesitate to contact us today. We provide estate planning services, including estate tax planning, throughout the Greater Boston area.