The State-Level Estate Tax Trap: A Closer Look at Massachusetts (and Other States) That Deserve Your Attention

The State-Level Estate Tax Trap: A Closer Look at Massachusetts (and Other States) That Deserve Your Attention

By Anthony Criscuolo, CFP®

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When most people hear the term estate tax, they assume it is a concern only for the ultra-wealthy. That assumption is understandable as the federal estate tax exemption is currently $15 million per person ($30M per married couple). At this level, very few Americans will ever pay federal estate tax. But if you live in Massachusetts – or one of about a dozen other states – focusing only on federal estate taxes can be a costly mistake.

Many states have their own state-level estate tax system, and the rules are often dramatically different from the federal rules. As a result, many successful families who will never face a federal estate tax may still face a substantial state-level estate tax liability. The challenge is that many families do not realize they have an issue until it’s too late to address it efficiently. Like most areas of financial planning, the best time to address estate taxes is years before they become a reality. So, let’s dive deeper into state-level estate taxes – and I know you can barely control your excitement to read on!

More than Massachusetts

Before we really dive in, I want to apologize to Massachusetts – this article will pick on that state to keep the examples and discussion clean, but there are actually about a dozen states that currently impose a state-level estate tax with varying exemption amounts and rules. If you live in any of these states, this planning is for you. And of course, state tax rules can and do change over time, so you should be aware of state-level estate taxes no matter where you live and stay on top of your state’s legislative agenda in case your state chooses to change the laws one day. Below is a brief summary of state-level estate taxes (note: the rules are always changing across the states so you should always consult with a local tax advisor for specific rules and tax advice). And good news for our many Georgia clients – it is not on the list!

The Estate Tax Most People Don’t Realize They Have

Focusing on Massachusetts, the state imposes its own estate tax with a much lower exemption than the federal government. While the federal exemption is currently $15 million per person (in 2026), Massachusetts currently provides an exemption of only $2 million per person (it was actually only $1 million before 2023). At this level, many Massachusetts families can easily exceed the exemption threshold surprisingly quickly.

Consider a married couple with the following assets:

• Primary residence: $2.0 million
• IRA and 401(k) accounts: $2.5 million
• Taxable investment accounts: $1.0 million
• Cash reserves and other assets: $500,000
• Total Estate Value: $6.0 Million

This could easily be a fairly typical balance sheet for many successful Massachusetts families. A home purchased decades ago may have appreciated significantly. Retirement accounts have grown through years of disciplined saving and investing. Investment accounts have accumulated steadily over time.

The important point is not whether a family considers themselves wealthy. The important point is that Massachusetts views a $6 million estate very differently than the federal government does. Many families who have no federal estate tax concerns whatsoever may still face a significant state-level estate tax liability.

Federal estate taxes and Massachusetts estate taxes are two separate systems. Many families spend years focusing on investment returns, retirement planning, and tax-efficient investing while never evaluating whether their estate plan is positioned properly under state tax laws. Estate planning documents are often drafted and then placed in a filing cabinet for decades.

The problem is that wealth grows, laws change, and planning opportunities evolve. A plan that was perfectly reasonable fifteen or twenty years ago may no longer be optimized for today’s circumstances. Estate planning should not be viewed as a legal project that gets completed once. It is an ongoing planning process that should evolve alongside your financial life.

What Could the Tax Actually Be?

Let’s put some numbers behind this discussion and walk through an example. Suppose a Massachusetts married couple accumulates a $6 million estate and leaves everything outright to the surviving spouse. Years later, the surviving spouse passes away with the same $6 million estate. For simplicity, let’s ignore future growth and assume the estate value remains unchanged – but of course if the surviving spouse lives a long time, there could be substantial growth which would only increase the estate tax exposure. Given this $6 million estate:

• The federal estate tax owed would be: $0
• The Massachusetts estate tax owed would be approximately: $600,000

The exact amount depends on the composition of the estate, deductions available at death, and future changes in tax law, but a state-level tax bill in this range is entirely possible under current Massachusetts law.

Think about that for a moment. A family spends decades building wealth, saving diligently, investing prudently, paying down debt, and accumulating assets. Then, at death, roughly ten percent of the family’s net worth leaves the family balance sheet. Not because of poor investment decisions. Not because of market losses. Not because of excessive spending. Simply because estate taxes were never part of the planning conversation. For many families, a state-level estate tax can become one of the largest taxes they ever pay.

The Portability Problem: Why Married Couples Need Special Attention

This is where Massachusetts (and other states) differ significantly from the federal estate tax system. Under federal law, married couples generally have the ability to preserve the unused estate tax exemption of the first spouse through what is known as a portability election. In simple terms, if the first spouse dies without fully using their exemption, the surviving spouse can inherit the unused exemption amount. We covered this topic in a prior article on the federal estate tax and the portability election, and you can revisit that here: Estate Tax & Portability: How a Form 706 Filing May Save Your Family Millions.

Massachusetts does not provide the same portability benefit. That means if no planning is done at the first spouse’s death, a portion – or potentially all – of that spouse’s Massachusetts estate tax exemption can effectively be lost. Let’s look at a simplified example; again, let’s go back to our married couple with a combined net worth of $6 million.

Scenario 1: No Planning

The first spouse dies and leaves everything outright to the surviving spouse. Years later, the now single surviving spouse dies owning the full $6 million estate. The family now has one taxable estate and only one Massachusetts exemption available. This is often what happens when estate plans simply leave everything to the surviving spouse without considering Massachusetts estate tax planning. There would be a $6 million gross estate, less, only one $2 million exemption, leaving $4 million subject to the Massachusetts estate tax.

Scenario 2: Credit Shelter Trust Planning

The first spouse dies and assets equal to the Massachusetts exemption amount are directed into a credit shelter trust (sometimes called a bypass trust or family trust). The surviving spouse can still benefit from those trust assets under the terms of the trust, but those assets are generally excluded from the surviving spouse’s taxable estate later. As a result, the family preserves both spouses’ Massachusetts exemptions. The difference can be substantial. See the summary below which provides an overview of the planning in this example.

This is why many Massachusetts estate plans continue to incorporate credit shelter trust planning even though portability has made those trusts less important for many families at the federal level. Massachusetts still plays by a separate set of rules. For many married couples, one of the most valuable estate planning decisions is simply making sure the first spouse’s exemption is not wasted.

Estate Taxes Are Often a Liquidity Problem Too

When people think about estate taxes, they naturally focus on the amount of tax owed. In reality, the larger issue is sometimes liquidity. Many estates are asset-rich but cash-poor. Imagine a family whose wealth consists primarily of:

• A primary residence worth $2 million
• A vacation property worth $1 million
• Pre-tax IRA and 401(k) retirement accounts worth $2 million
• A closely held family business worth $1 million

The estate may be worth $6 million on paper, but where does the cash come from to pay taxes, legal expenses, accounting fees, and settlement costs? The answer is not always obvious. In some situations, heirs may feel pressure to sell assets they would otherwise prefer to keep. A family vacation property may need to be sold (who knows if it is a good seller’s market at the time). A closely held business may face liquidity challenges. Investment decisions may be driven by tax obligations rather than family goals.

Pre-tax retirement accounts may need to be used to pay the estate tax, creating a huge income tax issue at the same time. Imagine if this family had to take $600,000 out of pre-tax retirement accounts to pay the estate tax – that $600,000 withdrawal would be taxable income, likely subject to an overall 42% income tax rate (37% federal plus 5% MA). So, another $252,000 of income tax is due on top of the estate tax (and the cash to pay this tax bill is also going to have to come out of the retirement account, so you have to pay “tax on the tax”.

I just got chills writing about this huge tax bill! This is why estate planning is not simply a tax discussion – it is also very much a liquidity and cash-flow discussion. The goal is to maximize flexibility and tax-efficiency for future generations.

Now that I have scared you (and myself) with an almost $1 million tax bill, let’s talk about some planning strategies to help reduce these tax bills.

Planning Strategies

There is no universal solution for state-level estate tax planning. All family’s circumstances and goals are different. However, several planning tools are commonly considered.

Credit Shelter Trust Planning

As discussed above, for married couples, properly structured credit shelter trusts may help preserve both spouses’ estate tax exemptions and reduce future estate tax exposure. Given Massachusetts (and many other states) lack of portability, this remains one of the most important planning tools to evaluate.

Strategic Lifetime Gifting

Gifting assets during life may reduce the future size of the taxable estate while shifting future appreciation to children or other beneficiaries. This may include direct gifts or gifting into trusts for children or grandchildren. However, careful planning around the step-up in cost basis needs to be considered.

Life Insurance Review

Many people forget that life insurance proceeds can increase the value of a taxable estate. Reviewing ownership structures may uncover planning opportunities. You may want to move life insurance into trusts or completely surrender old policies if no longer needed. Of course, life insurance may also be a great means to create liquidity and cash to cover the expected estate tax due (this would help prevent forced asset sales or using pre-tax retirement accounts to cover the tax bill).

Charitable Planning

For charitably inclined families, charitable giving can serve both philanthropic and tax-planning objectives. This can be done before death, or by updating estate planning documents to ensure a larger charitable gift occurs at death, which would be tax free.

Regular Estate Plan Reviews

Estate planning documents should be reviewed periodically. A plan drafted ten or fifteen years ago may no longer reflect current laws, asset levels, family circumstances, or planning opportunities.

Domicile Changes

If practical, you may want to consider moving out of Massachusetts to a state without an estate tax. Obviously, you have to balance where you want to live based on your social and family connections, and you may still be able to keep a home and some presence in Massachusetts (generally less than 6 months per year to avoid statutory residency). Moving to a more tax-friendly state could be your best option to truly minimize or completely eliminate the state estate tax. Note however, if you still own a home or other property with nexus in Massachusetts, you could still be subject to a non-resident estate tax based on the value of the property that remains in the state.

The Real Opportunity Is Preserving Family Flexibility

Estate tax discussions often focus exclusively on minimizing taxes. While reducing taxes is certainly worthwhile, it is not always the ultimate objective. The broader goal is preserving family flexibility.

Good planning should help:

• Protect surviving spouses
• Preserve family assets
• Reduce administrative burdens
• Improve outcomes for children and grandchildren
• Create greater certainty during an already difficult time

Taxes are simply one obstacle among many. The larger objective is helping families transfer wealth efficiently, intentionally, and according to their wishes. After all, wealth is not simply a number on a balance sheet – it represents decades of hard work, sacrifice, discipline, and prudent decision-making. Estate planning helps ensure those efforts continue to benefit the people and causes that matter most to you.

A Special Note for Washington State Residents

Hello to our Seattle-area friends – this section is for you! Washington has one of the highest state-level estate tax rates in the country, making estate planning particularly important for many successful families there. The state’s exemption is relatively low at only $3 million per person, adjusted periodically for inflation, and estates exceeding that amount face estate tax rates starting at 10% and going up to 20%.

Washington also does not offer portability between spouses. Similar to Massachusetts, this means careful planning may be needed to preserve both spouses’ state estate tax exemptions. For many married couples, strategies such as credit shelter trusts and periodic reviews of beneficiary designations remain important planning tools.

Washington is also somewhat unique in that it does not impose a state gift tax and generally does not claw back lifetime gifts made shortly before death for state estate tax purposes. This creates an interesting planning opportunity. For families with estates well above Washington’s exemption amount, strategic lifetime gifting may reduce the size of the taxable estate and lower future Washington estate taxes. However, gifting is not always the obvious or best answer. For starters, you may not want to gift away too much of your assets too soon, and death is sometimes unexpected or sudden, so planning for “death bed gifts” may not always work out.

Also, assets gifted during life generally carry over your original tax basis, while assets inherited at death often receive a step-up in basis that can substantially reduce future capital gains taxes for your heirs. In other words, saving estate taxes could create a larger capital gains tax bill for your family down the road. It is also not possible to gift large IRA or 401(k) balances – you would have to take distributions and pay substantial income taxes – then gift the after-tax net proceeds. This is why estate planning should always consider the family’s total after-tax outcomes rather than focusing on any one tax in isolation.

The most effective strategy depends on the size and composition of your estate, the appreciation of your assets, and your family’s long-term goals. Illinois is also another interesting state with an estate tax “cliff,” meaning once your gross estate is above a certain threshold all the assets become subject to the state’s estate tax. We can’t cover every state in detail in one article, but these are just a few examples of how each state has its own unique rules and planning opportunities, reinforcing why estate planning should be reviewed regularly as laws and personal circumstances evolve.

Final Thoughts

Families living in one of the states with a state-level estate tax face a unique challenge. The federal estate tax may never impact them, but a state estate tax very well might. The good news is that estate taxes are one of the few financial risks that can often be planned for years in advanced before they become a problem.

No one knows what future tax laws will look like. No one knows how markets, real estate values, or family circumstances will evolve over time. What we do know is that thoughtful planning creates options, and options are valuable. As we often remind clients, good financial planning is not about predicting the future – it is about planning for the uncertain future ahead.

If you have concerns about state-level estate tax exposure for you or a family member, you should be proactively planning and thinking ahead now. As always, your Bluerock team is here to help.

Anthony Criscuolo, Senior Wealth Manager

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