On October 4, 2023, the Massachusetts estate tax was updated for the first time in seventeen years (the "2023 Act"). Primarily, the 2023 Act created a $2,000,000 exemption from the estate tax for all decedents who died on or after January 1, 2023.
On September 16, 2024, just prior to the first anniversary of the 2023 Act, the Massachusetts estate tax was again updated (the "2024 Act"). The 2024 Act clarified a key ambiguity in the new law regarding how real estate and tangible property outside of Massachusetts is taxed in a Massachusetts resident decedent's estate. The Legislature has made it crystal clear: the value of real estate and tangible property outside of Massachusetts is not taxable in a Massachusetts resident decedent's estate.
Now that we have had a year of working under the new law and with the Massachusetts Department of Revenue—and a clarification from the Legislature—here are some key concepts to know about the Massachusetts estate tax:
- The Act— Differences Between 2023 and
2024: The Massachusetts estate tax is assessed against a
decedent's federal taxable estate, which includes all property
a decedent may own both inside and outside of Massachusetts. Under
the 2023 Act, the Massachusetts estate tax for a resident decedent
was determined by computing a tax on the value of the
decedent's entire federal taxable estate, whether the property
was inside Massachusetts or outside of Massachusetts, and then
reducing that resulting amount by the fraction attributable to
property located outside of Massachusetts. For a Massachusetts
resident decedent with non-Massachusetts real estate or tangible
personal property, this fractional approach had the effect of
increasing the estate tax payable to Massachusetts by exposing the
estate to higher estate tax brackets. The 2024 Act changes the
calculation method by directing that a Massachusetts resident
decedent's federal taxable estate is to be reduced by the value
of real estate or tangible personal property outside of
Massachusetts before the tax is calculated, instead of relying on
the fractional approach. As a result, real property and tangible
personal property outside of Massachusetts are no longer part of
the Massachusetts estate tax calculation for a Massachusetts
resident decedent and will not cause the estate to ride up the
Massachusetts estate tax brackets.
- Estates of decedents dying after January 1, 2023, who filed a
Massachusetts Estate Tax Return which included non-Massachusetts
real estate or tangible personal property may be entitled to a
refund.
- Clients should review their ownership of real estate to
determine whether the changes of the 2024 Act lead to different
planning opportunities for both residents and non-residents of
Massachusetts. As an example, if a Massachusetts resident owns a
second home that is located outside of Massachusetts via an LLC,
the LLC interest could be considered intangible property and
therefore subject to estate tax in Massachusetts. However, if the
interest in the second home is owned directly, it should not be
included in the decedent's Massachusetts taxable estate.
- Estates of decedents dying after January 1, 2023, who filed a
Massachusetts Estate Tax Return which included non-Massachusetts
real estate or tangible personal property may be entitled to a
refund.
- Lifetime Gifts Have Become a More Powerful Tool to
Minimize the Impact of the Massachusetts Estate Tax: Prior
to the 2023 Act, lifetime gifts reduced the amount that could pass
free of Massachusetts estate tax at a decedent's death. Under
the 2023 Act, that is no longer the case. Regardless of the amount
of an individual's lifetime gifts, the 2023 Act provides that
the first $2,000,000 subject to Massachusetts estate tax would pass
Massachusetts estate tax-free from a decedent.
- A $99,600 Credit for All: The estates of both
Massachusetts resident and non-resident decedents receive a $99,600
credit against the Massachusetts estate tax. For a Massachusetts
resident decedent, this shelters exactly $2,000,000 of a
decedent's taxable estate. Non-resident decedents pay the
Massachusetts estate tax based on the fraction that their
Massachusetts property bears to their total federal gross estate.
Under the 2023 Act, the estate of a non-resident decedent receives
a full $99,600 credit, without proration.
- Massachusetts Estate Tax Return Filing Requirements in Question: Under the 2023 Act, a decedent's estate is only required to file a Massachusetts Estate Tax Return (Form M-706) if the decedent's gross estate less allowable deductions exceeds $2,000,000. This is at odds with the current Instructions for Massachusetts Estate Tax Return Form M-706, which state that if lifetime taxable gifts plus the value of the gross estate exceed $2,000,000, a return is required. We are hopeful that the Massachusetts Department of Revenue will issue further guidance or a correction to the instructions so that there is clarity with respect to filing requirements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
