Owning Real Estate in Other States
What Does It Mean for Estate-tax Liability in Massachusetts?
By Elizabeth Dougal, Esq.
Massachusetts estate-planning clients frequently ask whether they should transfer their vacation property, typically located in Florida or New Hampshire, to a limited liability company. The answer is almost always ‘no.’
Why? Because Massachusetts does not tax out-of-state real estate held individually. However, it does tax out-of-state intangible assets. The transfer of the real estate to a limited liability company would convert that real estate to an intangible asset for purposes of the application of the Massachusetts estate tax.
Let’s say you are a Massachusetts resident with a vacation condominium in Florida valued at $300,000. You die with $800,000 of other assets in Massachusetts. Massachusetts imposes an estate tax up to 16% on a Massachusetts taxable estate of more than $1 million. Massachusetts does not impose its estate tax on real property held individually outside of Massachusetts. Hence, in this scenario, you would owe no Massachusetts estate tax.
What if you transferred that $300,000 Florida condominium to a limited liability company? You sometimes rent it out and want the limited liability company to decrease any liability exposure. Now, when you die, your Massachusetts estate is $1.1 million, thus subject to Massachusetts estate tax. The transfer of the condominium to the limited liability company converted it to an intangible asset includable for Massachusetts estate tax purposes. You could have managed your risk to limit potential liability through the acquisition of appropriate liability insurance instead of transferring it to a limited liability company.
You might also consider transferring your out-of-state property to an entity for probate avoidance, privacy, or ease of future transferability. For these purposes, the use of a simple ‘living’ or revocable trust might accomplish your goal. Massachusetts cannot impose Massachusetts estate tax on real property located outside of Massachusetts, whether held individually or within an arrangement that is the equivalent of individual ownership. A revocable trust is such an arrangement.
One last caveat on the example involving the Florida condominium mentioned above: Florida has no estate tax. Neither does New Hampshire. You may experience a different outcome in states with an estate tax. You will want to consult an estate tax advisor to determine if the state where the property is located has a higher estate tax rate than Massachusetts. If so, use of a limited liability company or other entity may be warranted.
Still, in general, you want to avoid dying as a Massachusetts resident with an estate over $1 million that includes real estate in a limited liability company, unless the real estate is located in Massachusetts or a state with at least an equivalent estate tax.
Elizabeth Dougal is an attorney with Bulkley Richardson and a member of the firm’s Trusts & Estates department.