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.
- 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.
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