As a follow-up to my July 2016 blog commemorating the 100th anniversary of the federal estate tax, and as promised in that post (and better late than never), we are recognizing the less-significant-but-still-worth-commemorating 40th anniversary of the Massachusetts Estate Tax.
The Massachusetts estate tax, like the federal estate tax, is a transfer tax that taxes the value of a decedent’s estate before the estate assets are passed on to the heirs who receive assets from the estate.
Before the current version of the Massachusetts estate tax (enacted in 2003), the tax was a so-called “sponge” tax, calculated based on the credit provided by the federal estate tax for estate tax paid to a state. When the federal government began phasing out its estate tax in 2001, Massachusetts “decoupled” from the federal estate tax, and implemented its current system of computing a separate state estate tax equal to the federal credit for state death taxes as it existed on December 31, 2000.
So when does a Massachusetts estate tax return have to be filed? The estate of every resident of Massachusetts who dies with an estate valued at $1 million or more must file a Massachusetts Estate Tax return within nine months of the date of death. If you are not a Massachusetts resident but own real estate in Massachusetts, you must also pay an estate tax to the Commonwealth at your death, assuming the total value of your estate is over $1 million.
What is an “estate”? In the estate tax world, your “estate” consists of any asset you own or control. So, for example, your home, your bank accounts, your investment accounts, your IRAs or 401k, your car, and your life insurance (if it is owned by you) are all assets that together constitute your “estate” and are countable when determining if your estate is worth more than $1 million at the time of your death.
If you have to file a return, will you have to pay tax? The answer is “it depends.” No matter how valuable your estate, if you leave your assets all to your spouse or all to charity, you will not have to pay any estate tax. Assets left to anyone else are subject to estate tax, which must be paid within nine months of the date of death. Unlike the federal estate tax, if the estate meets the $1 million filing threshold, the full value of the estate (less a $60,000 exemption) is subject to Massachusetts estate tax, not just the amount in excess of $1 million. The estate tax is computed on the value of the taxable estate (the value of your assets less deductions for funeral expenses, administrative expenses, debts, and assets passing to charity or a spouse), with rates ranging from 0.8% to 16% for estates in excess of $10 million.
If taxable gifts (gifts made in excess of the gift tax annual exclusion) are made during a deceased person’s lifetime, the total taxable gifts are added to the value of the estate on the date of death to determine whether or not the value of the estate is in excess of the $1 million filing threshold and an estate tax return must be filed. However, the estate tax is computed only on the value of the assets owned by the deceased on the date of death.
The Massachusetts Department of Revenue chose to celebrate the Massachusetts estate tax’s 40th anniversary by implementing the electronic filing of estate tax returns. An exciting development for those of us in the estate tax world, or at least it promises to be once the kinks are worked out!
If you have questions about the Massachusetts estate tax, whether your heirs may have to pay tax, how much they may have to pay, and what can be done to reduce the estate tax owed, call our office and schedule a time to meet with one of our estate planning attorneys. Estate tax planning is one of our favorite things to do!