Out-of-state Property Now Excluded from State Tax

Good News for Massachusetts Estates

By Hyman Darling, Esq.

In the fall of 2023, the Commonwealth increased the exemption for estate taxes for Massachusetts residents from the $1 million exemption (with the cliff) to $2 million with no cliff. The prior tax law was that each resident had an exemption of $1 million, but if the $1 million threshold was exceeded, then the exemption disappeared, and the tax was assessed on all assets back to the first dollar.

Therefore, the new Massachusetts estate-tax exemption is now a true $2 million exemption, such that only estates in excess of that amount are taxed. The law is retroactive and applies to all decedents dying on Jan. 1, 2023, and thereafter. The rates now start at 7% and increase at a graduated rate up to 16%.

Within the bill, however, Massachusetts attempted to tax real estate outside of Massachusetts owned by Massachusetts residents. Even the Department of Revenue’s instructions for completing the M-706 included language requiring that the non-state property of Massachusetts residents was to be included in the calculation of the estate tax. Under the Dassori v. Commissioner of Revenue case, however, the court ruled that the attempt by Massachusetts to estate-tax Massachusetts residents on their non-Massachusetts real estate was unconstitutional.

Hyman Darling

“The new Massachusetts estate-tax exemption is now a true $2 million exemption, such that only estates in excess of that amount are taxed.”

Good news — MGL Chapter 65C Sec. 2A was amended on Sept. 19 and now excludes the value of out-of-state property for estate-taxation purposes of Massachusetts residents. This law is also retroactive for deaths on or after Jan. 1, 2023. Non-Massachusetts residents who own property in Massachusetts will still need to file an estate-tax return where assets are in excess of the exemption, but these estates may have their Massachusetts estate tax reduced to a nominal amount as they are also entitled to the credit of $99,600 (the previous estate tax on $2 million).

For Massachusetts residents, we no longer need to list the out-of-state real estate with the value of -0- on the estate-tax return, claiming that the inclusion of the asset is unconstitutional. For example, if a Massachusetts resident has real estate and other assets in Massachusetts with a total value of $1.9 million and out-of-state real estate worth $1 million, a Massachusetts estate-tax return will no longer be necessary, and the fiduciary may file an affidavit of no tax due, in lieu of filing the estate-tax return to obtain a release of lien.

Massachusetts law provides that, when a person dies owning real estate within the Commonwealth, a lien automatically attaches to the real estate. This is how the state ensures that taxes will be paid. If the Massachusetts estate is less than $2 million, an affidavit may be filed in the Registry of Deeds, which releases the lien. If the estate is greater than $2 million, then a tax return is required to be filed to obtain a release of lien, even if no tax is due.

Of course, if the estate is large enough, a federal estate tax may have to be filed, as well as a state return for any state that still has estate taxes if the decedent owned property there. A good planning tool would now be to purchase property out of Massachusetts, which lowers the estate for tax purposes in the state. The CPA, investment advisor, and lawyer should be involved as a team in the planning process to determine the options available to lower estate taxes if possible.

Hyman Darling, a shareholder at Bacon Wilson and chair of the firm’s Estate Planning and Elder Law department, is recognized as the area’s pre-eminent estate planner, with extensive experience with all aspects of estate planning, trusts, tax law, probate and estates, guardianships, special-needs trusts and planning, elder law, and long-term care planning, and additional specialties including adoption and real estate; (413) 781-0560.