Massachusetts Estate Tax Overview
The tax applies to any resident of the Commonwealth at the time of his death as well as to any nonresident who owns any property or interest in any property within the Commonwealth at the time of his death. The Massachusetts Estate Tax is an "ad valorem" tax, which means that it is an assessed percentage of the value or valuation of the property to be taxed. The Massachusetts Estate Tax is imposed on all property transferred by a decedent (real or personal property) and includes real estate, interests in real estate, stocks, bonds, mortgages, notes , and bank accounts.
In general terms, a Massachusetts Estate Tax return must be filed if the decedent’s taxable estate exceeds $1 million. However, because the taxable estate is not allowed to take into consideration any Massachusetts marital deductions, a Massachusetts Estate Tax return has to be filed in total for a decedent whose gross estate is, at a minimum, $1,402,160.00. There is also an additional Connecticut gift tax for property passing to Connecticut beneficiaries from a Connecticut decedent, even if there is no Massachusetts estate tax due.
Massachusetts Estate Tax vs. Federal Estate Tax
The Massachusetts estate tax is very different than the federal estate tax, and there are several key differences estate holders and heirs should be aware of; in particular, the amount exempt from estate tax. The Massachusetts estate tax exemption has remained $40,000 since 1987, whereas the federal exemption is over $12 million. It may be worth your while to work with a trusted Massachusetts estate planning attorney to determine how to navigate these laws within your estate strategy.
Another key difference is that the Massachusetts estate tax kicks in much earlier, at $1 million. Almost 5,000 estates are likely subject to the Massachusetts estate tax this year alone, according to the Massachusetts Department of Revenue.
Massachusetts is also one of the few states that collects estate tax from all bequests, no matter how close the relationship is between the decedent and the heir. In many states, bequests of large amounts to a spouse or child may be exempt, but this does not apply in Massachusetts.
Who Must File a Massachusetts Estate Tax
If the value of your gross estate exceeds $1 million, then there is an automatic requirement that an estate tax return be filed, regardless of whether Massachusetts estate tax will be levied.
The executor must file a Massachusetts estate tax return where the decedent’s Massachusetts gross estate is more than any of the following amounts:
• The value of all property owned by the decedent in the U.S.
• The value of all property in the decedent’s possession or control in the U.S.
• The value of all tangible property in the decedent’s possession or control in the U.S. regardless of where else the property may be located
• The net amount of all property transferred to the decedent during the previous three years under irrevocable trusts of which the decedent was a grantor
• The value of all stocks and bonds in foreign corporations controlled directly or indirectly by the decedent
• The value of all investments in foreign corporations owned beneficially by the decedent
In most situations, Massachusetts law tends to mimic federal law for estate taxes. As such, the Massachusetts estate tax is reported on IRS Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, with the addition of Massachusetts Schedules M-1 and M-2. When it comes to valuing property held in a business or farm operated in Massachusetts, for estate tax purposes, Section 2032A is often considered.
Massachusetts Estate Tax Exemptions and Deductions
Massachusetts estate tax is calculated based on the size of a decedent’s estate. An estate comprises all real estate, personal property, financial accounts and any other assets in which the decedent had an interest. In 2017, a Massachusetts estate tax return, Form M-706, must be filed for estates with a gross value of $1 million or more. If any estate tax is due it must be paid within nine months of the date of death.
The Massachusetts estate tax is an "add-on" estate tax imposed on Massachusetts decedents in addition to the federal estate tax. Federal estate tax law exempts an individual’s gross estate up to a certain amount. For 2017, the exemption amount is $5.49 million. The federal estate tax rate ranges from 18 percent to 40 percent depending upon the value of the decedent’s estate. As mentioned above, Massachusetts also imposes an estate tax after first deducting the $5.49 million exemption pursuant to federal law. The Massachusetts estate tax rate ranges from 0.8 percent to 16 percent of the taxable estate. The top tax rate applies to estates with a value of more than $10.98 million, up to the highest possible Massachusetts estate tax rate of 16 percent.
Once the $5.49 million exemption is applied to the gross value of the estate, the remainder of the estate is subject to the Massachusetts estate tax. In addition, Massachusetts law allows for deductions from the gross value of the estate, including:
Familial deductions include deductions for Massachusetts charitable institutions, state tuition and hospital costs, debts, funeral expenses, the monetary value of household goods, and family burial lots. Deductions for familial expenses may also include funeral and administrative expenses. Administrative expenses include the amount of simple interest accrued on any payment made past the due date. Items that fall under this category may include compensation or commissions to the executor, administrator or trustee and other estate administration expenses.
Charitable deductions are available for property bequeathed to Massachusetts charities. Charitable deductions for individuals, corporations and organizations include property that will pass pursuant to the terms of the will or by intestate succession, but only if the charitable deduction is allowed under federal law.
How Massachusetts Estate Tax is Calculated
Each step in the formula grows successively smaller, and is calculated on the estate net of "deductions" (Massachusetts General Laws Section 65A) and "exemptions" (Section 6 of Chapter 200A). The same formula is used regardless of the size of the estate. Exemptions are not indexed for inflation and have not changed since 2004 . They do not apply to gifts. Deductions include Massachusetts estate taxes and debts. Calculations are performed to three decimal places and fractions round up for this purpose. The final rate used is obtained from a chart published by the Massachusetts Department of Revenue, which is available on its website.
Massachusetts Estate Tax Filing and Payment Due Dates
The filing and payment deadlines for Massachusetts estate taxes vary depending on the size of the estate, as well as the time of death. The Massachusetts estate tax is imposed on all persons whose date of death occurred on or after January 1, 2006 and has a Massachusetts Gross Estate that exceeds the Massachusetts Exemption Amounts. The MA Gross Estate includes anything within the decedent’s control at the time of death.
An estate due in Massachusetts will therefore be considered taxable if the decedent died on or after January 1, 2006 and had an estate of more than $40,000. If the decedent was a resident, the entire estate will be taxable. If the decedent was a non-resident, only assets located in MA or taxable in MA, will be subject to tax. Timing and Amount of Tax The Massachusetts estate tax is paid out of the assets of the estate. The tax applies to the estate of every Massachusetts domiciliary decedent unless the decedent’s gross estate plus adjusted taxable gifts, exceeds the applicable exclusion amount. In addition, the tax is applied to the estate of every nonresident decedent under certain conditions. MA Estate Tax Payment Process Form M-706 should be filed (a) on or before nine months after the date of the decedent’s death if the Massachusetts gross estate exceeds $1 million and (b) within 20 days after the date of the decedent’s death if the Massachusetts gross estate exceeds $40,000 but does not exceed $1 million. For estates with a Massachusetts gross estate that exceeds the applicable exclusion amount as noted above, but is less than $40,000, the Personal Representative must still file Form M-706, but the Personal Representative is not required to pay any estate tax. The personal representative of a decedent’s estate who is required to file must send a copy of the federal estate tax return to the Massachusetts Department of Revenue (the DOR). If the decedent is a nonresident, the M-706 should only include the decedent’s real and tangible personal property located in Massachusetts. The most common penalty for failure to timely file a Massachusetts estate tax return is the imposition of interest and penalties for late payments. Penalties include: There are no provisions in the Massachusetts tax law for any extensions of time to file Form M-706, however, estates owing no estate tax are not required to file Form M-706 until 16 months after the date of death. If the MA estate tax is not paid, the Commonwealth of Massachusetts can impose a lien on real estate located in Massachusetts, the lien attaches automatically upon death. An estate that owes tax to the Commonwealth of Massachusetts cannot be transferred to heirs until the tax is paid.
Massachusetts Estate Tax Law Changes
There have been a number of recent changes related to Massachusetts estate tax laws. The most notable change occurred as of January 1, 2017, when the Massachusetts Department of Revenue raised the estate tax exemption amount from $1 million to equal the federal estate tax exemption amount. For 2017, the Massachusetts estate tax exemption amount is $2.0 million.
In addition, there have been recent court decisions which have significantly affected the taxability of certain assets. For example, if you own an interest in a family limited partnership or irrevocable trust and you are a trustee of that entity, you may have inadvertently triggered a Massachusetts estate tax at your death if you did not include the present value of your fiduciary powers in determining whether the taxable net worth exceeded the exemption amount. This occurs because the Massachusetts estate tax applies to the value of your "taxable net worth as of the date of your death". The tax applies at your death not only to property owned by you on that date but also to property you are able to direct the disposition of at the time of your death.
As a slightly more technical, and yet very real, example of how this rule applies, take the following scenario: you are a beneficiary of a trust and you are the trustee. At your death, you have the power to direct the trustee to pay or apply trust assets for your benefit at your death. You also have the power to replace the trustee with an independent third party so that once you die the new trustee is in control of the trust assets. Therefore, at your death you have the ability to direct the disposition of a trust. And, at your death, the value of that power (the present value of the right to have the property distributed to you vis-a-vis the new trustee) must be added to your taxable net worth in order to determine if you have a taxable estate.
The issue this raises is that if the combination value of your assets and the present value of your power to direct the target trust exceeds the exemption amount ($2.0 million in 2017), you have inadvertently triggered an estate tax.
Therefore, in order to eliminate this unintended tax, some basic planning can be done which simply excludes the value of the discretionary powers from the determination of taxable net worth. By amending the terms of the trust to either remove your death power or provide that you have to pass away during your term as trustee, you can eliminate the value of the power from the estate tax calculation, thus preserving your exemption amount and saving potential significant taxes.
Such amendments are fairly quick and inexpensive. They can be done before or after death. But the sooner this is done, the better, because the tax can get very large, and the interest and penalties after your death can be even larger.
Finally, there are also additional changes which provide additional relief. For example, if you are a managed funds trustee and your managed account is over $2 million, or is within $50,000 of that amount, you may want to consider removing the trustee in order to prevent the Massachusetts death tax from being levied on that account. If you do the analysis before you act, you will make no error. However, if you perform the analysis after removing a trustee, you may have difficulty receiving a refund.
We have several clients who have taken action to fix these issues in advance. We have also worked with clients who have decided to wait and have had to return to our office again and again to ultimately end up doing the same thing that we had originally recommended. We strongly recommend that you take advantage of these solutions now.
Massachusetts Estate Tax Planning Tips
Effective estate tax planning in Massachusetts is essential to minimize the tax liabilities for your estate and to ensure that all tax obligations are properly handled. Here are some tips in estate tax planning to help you along the way.
- Insurance. Life insurance can be an effective tool to use in estate planning, especially in planning for the estate tax. However, if you do not structure the policy correctly, the proceeds from the policy may actually be included in your estate. If there is even a possibility that an insured person may die before the policy is funded, using insurance in estate plans could increase the estate tax burden. This is often referred to as "insurable interest" and is one of the cornerstones in proper estate tax planning.
- Review Your Estate Plan. You should regularly review your estate plan with your attorney . A common misconception is to believe that the estate plan you signed 5 or 10 years ago is still adequate. Laws, responsibilities, properties, and marital statuses all change with time. You should review your estate plan at least once a year to make sure that it is appropriate for you.
- Update Financial Documents. Along with your estate plan you should also update your financial paperwork to account for any changes in your finances. These include wills, living trusts, living wills, health care proxies, durable power of attorney, and beneficiary designations of life insurance policies and retirement accounts.
- Rely on Experts. Even if you have a lot of knowledge about life insurance policies, trusts, and estate planning, unless you are an expert at estate tax planning for Massachusetts, you need to realize that you will benefit from relying on the experts who do this everyday.