With changes to state-wide taxes coming in Massachusetts, this news service talks to a large US wealth management player for more detail about the implications.

Fiduciary Trust Company recently commented in these pages about tax changes from the state government of Massachusetts. The developments are a reminder of how different states approach tax and the considerations that wealth advisors have to make. 

The state has introduced a surtax of 4 per cent on those in the state earning $1 million or more. This “Massachusetts Millionaires Tax” applies to income above $1 million reported on a tax return and can be earned or unearned income.

Family Wealth Report spoke recently to Jody King, director of wealth planning, Fiduciary Trust Company.

“It is significant,” King said of the MMT, noting that this is a measure that has gotten nation-wide attention. “[Massachusetts] it is perceived as being even less attractive as a state [because of tax].” She referred also to the “pass-through” aspect of tax: “The taxable income from a business structured as an S-corp or as a partnership for tax purpose passes through to its owners, with the income reported on their personal income tax returns. The result can be that all or a part of this income could be subject to the MMT on the owner’s income tax return if their overall return has taxable income in excess of $1 million.”  

Another area where the firm is talking to clients is the impact of the surtax on Roth plans.

“This applies to Roth conversations where someone decides they would like to convert a traditional IRA (individual retirement account) into a Roth IRA. At the point of conversion, the value of the amount of the traditional IRA being converted to a Roth IRA is included in the individual’s taxable income. As a result, all or a portion of a Roth conversion could be subject to the MMT if the conversion results in the taxpayer having taxable income for Massachusetts purposes in excess of $1 million for that year,” she said. 

(A traditional IRA is usually funded with pre-tax assets and then enjoys tax-deferred growth where there is no current tax unless funds are withdrawn from the traditional IRA, at the point of withdrawal they are subject to ordinary income tax. Traditional IRAs have required minimum distributions (RMDs) once an owner reaches a certain age. This is compared with a Roth IRA where taxes are paid on the assets as they go into the Roth IRA but then grow tax-free with generally no taxes being due on amounts withdrawn, and no RMDs. This can be a very attractive reason to convert traditional IRA assets to Roth assets for certain individuals, especially if they plan to pass the assets on to future generations or their estate will be subject to federal or state estate tax, FTC notes.)

The doubling of the state estate tax exemptions means that while the state was once one of the worst places in which to die for tax purposes, it is no longer, she said. Now there are two states with lower estate tax thresholds than Massachusetts.

Looking ahead, King said HNW individuals should still consider the value of structures such as New Hampshire trusts. (New Hampshire has no state income tax.)

A point to consider is that rising interest rates mean that individuals who have debt with adjustable borrowing costs are keen to repay it. “People are starting to think about how to pay it down,” King said. One consequence of the pandemic and associated crisis is that they value enjoyment of life and want to reflect and re-set on what they do with their money.

FWR asked King whether, although there are still issues and some problems with the “optics” of types of tax hikes, she thought that Massachusetts is a reasonably attractive place for people to locate to, when the totality of tax/benefits are considered? 
“I think this is an 'it depends' on what is important to someone. If taxes are the biggest factor, then it has gotten better but there are other states that have more attractive estate and income tax structures, and some states with less attractive structures. If someone values what Massachusetts has to offer – high quality medical care, an educated workforce, strong job market, quality public education, access to cultural events/sites, outdoor recreational opportunities, for example – then it can be a very compelling place to live,” she said.

When talking to prospective clients, what did King think were the mistakes people often make about tax, estate planning and wealth transfer?
“I think the one of the biggest mistakes is letting tax impact be the primary or an overweighted factor in decision-making. All good decisions should start with goals identification – what are you trying to accomplish and why? Taxes can be a factor but usually should not be the biggest factor,” she said.

“Examples of this are: moving to a state they do not want to actually live in to avoid income/estate taxes; not converting traditional IRA assets to Roth IRA assets because they do not want to pay income taxes currently even though they know the IRA assets will eventually pass to children who will have to pay income taxes on them later (and the IRA will likely be subject to estate taxes as well); not taking capital gains (due to an unwillingness to pay capital gains tax) to reduce the risk associated with low basis and/or concentrated positions when the investment thesis would indicate the gains should be taken; or establishing irrevocable trusts to use federal estate tax exemption without fully understanding the future consequences,” King continued.

“Two other mistakes to note are being under insured – particularly when it comes to excess liability (umbrella) insurance and not reviewing your estate plan on a regular basis as family dynamics and financial pictures change,” King concluded.