A Couple With $4 Million Discovers State's Estate Tax Could Cost Heirs $280,000

Twelve states and the District of Columbia impose estate taxes with thresholds far below the federal exemption. Massachusetts exempts estates up to $2 million per individual, which can trap families when planning is not done. At the first spouse’s death, assets can pass to the survivor under the unlimited marital deduction with no tax. At the second death, the survivor’s estate may be taxed because only the survivor’s $2 million exemption is available, while the first spouse’s exemption is lost if it was not captured through trust planning. For a Massachusetts couple with about $4 million net worth, the second-death Massachusetts estate tax exposure can be roughly $280,000, reducing what heirs receive. State exemptions are fixed and not indexed, so inflation erodes their real value over time.

"Twelve states and the District of Columbia run their own estate taxes with far lower thresholds. This scenario appears constantly on retirement forums. A Bogleheads thread recently featured a Massachusetts widow learning mid-probate that her late husband's failure to fund a trust had cost her family roughly six figures. Massachusetts exempts estates up to $2 million per individual, far lower than the federal threshold. Without specific trust planning, a surviving spouse and/or heirs can be stuck with a big tax bill."

"At the first spouse's death, everything passes to the survivor under the unlimited marital deduction. No tax. The trap springs at the second death, when the survivor owns the full $4 million but has access to only a single $2 million exemption. The first spouse's exemption evaporated because nothing was done to capture it. The state's rate schedule starts at the $40,000 mark of the old federal credit table and works up to 16% on amounts above $10 million."

"So the taxable $2 million produces approximately $182,000 in Massachusetts estate tax, with the federal credit-table gross math pushing the effective figure to roughly $280,000. What's at stake: Whether heirs receive $4 million or closer to $3.72 million. Household: Married couple, both age 70, residing in Massachusetts. Net worth: Approximately $4 million across home, IRAs, and brokerage. Federal estate tax exposure: $0. State estate tax exposure at second death: Roughly $280,000 without trust planning."

"Inflation worsens this over time. State exemptions are fixed in statute and do not index. With headline PCE inflation running at around 3.5% year over year, the real value of that $2 million exemption shrinks every year. Each year of inac"

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