"Decoupling": Not the Divorce Kind, the Estate Tax Kind

What is “decoupling” in the estate tax sense?  At one time Massachusetts and the federal estate tax ran in tandem, but no more.  Beginning on January 1, 2003, at time when the federal estate tax exemption increased, Massachusetts decided that it did not wish to lose revenue so they set their own exemption amount   As of January 2011, a Massachusetts resident or one with property valued over $1,000,000, less certain expenses, will pay a Massachusetts estate taxes, whereas there is no federal estate tax until the value of the estate is more than $5,000,000 less expenses.  As a result, Massachusetts residents or non residents who own property in the Commonwealth may owe a Massachusetts estate tax even though there is no federal estate tax liability.

Estate planners must be aware of the “decoupling” and draft trusts that will protect as much of the estate as possible or in the event that there will be an estate tax that it is minimized and not due until the death of the second spouse to die.  Gifting is an option that should be considered when estate planners and their clients are looking to minimize the Massachusetts estate tax consequences.  The redistribution of assets amongst spouses must also be closely scrutinized to ensure estate taxes payable to the Commonwealth are kept to a minimum and paid upon the death of the second spouse to die.  Proper advice from a qualified estate planning attorney is essential under these rules to avoid Massachusetts residents paying extra estate taxes.