If you reside in a state other than Massachusetts but own real estate or tangible personal property in the Commonwealth, your property here will probably be subject to the Massachusetts estate tax – unless you have sound planning advice and guidance from a Cape Cod estate planning lawyer.
A change of residency can often help you reduce the income tax liability you face as a Massachusetts resident. However, just because you are no longer a resident subject to the state income tax, non-residency does not necessarily mean you are no longer subject to the Massachusetts estate tax.
How does the estate tax in Massachusetts work if you are not a resident but you own real estate or tangible personal property in this state? Is there a way to avoid the estate tax? If you own property in Massachusetts but are not a resident, keep reading to learn the answers to these questions.
How Does the Massachusetts State Estate Tax Work?
The current Massachusetts estate tax exemption is $1 million. For an estate valued at less than $1 million upon the owner’s death, there is no estate tax. For an estate that is valued at or above $1 million, the tax must be paid before any assets may be transferred to the beneficiaries. As with any inheritance, debts and taxes must be paid before an heir may inherit.
However, the state’s estate tax applies to the full value of the estate, not merely to the part of the estate that exceeds the exemption amount. If an estate is worth $3 million, the entire estate – not just the $2 million above the exemption amount – is subject to the estate tax in Massachusetts.
If the value of your estate hovers around the $1 million figure, the wrong estate planning strategy could impose a crushing tax burden on your beneficiaries, but an astute Massachusetts estate planning lawyer can suggest several ways to keep the value of your estate below $1 million.
If your estate is subject to the estate tax in Massachusetts, how much will have to be paid to the state? It’s a complicated question, and the answer to that question is, “It depends.” However, as of 2022, the Massachusetts estate tax rate is a graduated rate that begins at 8% and works up to the highest rate of 16 percent.
How Does the Estate Tax in Massachusetts Apply to Non-Residents?
By statute (MGL ch 65C sec. 4), Massachusetts has the right to tax a resident of another state if they own real estate or tangible personal property located within the Commonwealth of Massachusetts.
Section 4. (a) A tax is hereby imposed on the transfer of a nonresident decedent’s real and tangible personal property having an actual situs in Massachusetts, if such property would have been included in the Massachusetts gross estate had the decedent been a resident.
(b) The tax imposed under subsection (a) shall be an amount which bears the same ratio to the tax that would be due if the decedent had been a resident as (i) the value of all real and tangible personal property, diminished by any mortgage or lien thereon, having an actual situs in Massachusetts, the transfer of which is subject to tax under said subsection (a) bears to (ii) the value of the decedent’s Massachusetts gross estate, diminished by any mortgage or lien or property included therein, determined as if he had been a resident.
Here’s how the Massachusetts estate tax applies to non-residents. Let’s say that you’re a resident of Florida, single, and you own a home in Dennis. Then, let’s say that your estate is valued at $3 million, and your Osterville home represents one-third of your estate because it’s worth $1 million.
If you were a resident of Massachusetts and if your entire estate were located here, your estate tax would amount to $182,000, but as a resident of Florida, your home in Massachusetts constitutes only one-third of your total estate.
You would thus pay one-third of the estate tax that a resident of Massachusetts would pay, or $60,667. If you would prefer not to pay over $60,000 to a state where you’re not a resident, a Cape Cod estate planning attorney can help you plan to avoid the estate tax in Massachusetts.
A Revocable Trust Will Not Protect Your Estate from the Massachusetts Estate Tax
Many of the people who own real estate or tangible personal property in Massachusetts have set up revocable living trusts. Transferring your Massachusetts assets into a revocable trust will avoid probate in Massachusetts, but it may not give those properties protection from the Massachusetts estate tax. Incidentally, the same is true for irrevocable Medicaid Planning Trusts (MPTs).
It’s true that a revocable living trust provides a number of advantages and lets your estate avoid the probate process, but any Massachusetts property that is owned by your revocable trust (and most MPTs) is still considered part of your taxable estate and remains subject to the estate tax in Massachusetts.
How Can Non-Residents Avoid the Massachusetts Estate Tax?
It is often best to keep things simple. For married couples, there is a very easy option. No sophisticated estate planning is needed. A properly drafted joint revocable trust may be used to eliminate the Massachusetts estate tax.
If you are using revocable trusts to avoid probate, your trust may be amended. Most married couples use separate trusts – one trust for one spouse and a second trust for the other. By amending and merging those separate trusts into one joint trust, it is possible to eliminate any Massachusetts estate tax liability. A Cape Cod estate planning lawyer can help you and your spouse establish a joint trust or help you merge your individual trusts into a joint trust.
With a joint trust, at the death of the first spouse, the Massachusetts real estate may be allocated to an irrevocable portion of the trust (sometimes referred to as a credit shelter trust), as long as the net value of the real estate is less than $1 million. Because the irrevocable trust is built in a way that the surviving spouse can use the real estate but not “own” it under the tax code, the Massachusetts real estate will not be a part of the survivor’s estate at death. This effectively allows a widowed spouse to avoid the Massachusetts estate tax on Massachusetts real estate when the second spouse dies.
What if you are not married? Or what if my Massachusetts real estate is worth more than $1 million?
However, an out-of-state resident who owns property in this state may have several other practical alternatives for avoiding or reducing the Massachusetts estate tax. A Cape Cod estate planning attorney can help you determine which technique makes the most sense for you and your family.
Out-of-state residents who own investment real estate in this state may consider setting up a limited liability company, which is one strategy for avoiding the Massachusetts estate tax. When you transfer your real estate in Massachusetts into your LLC, the LLC becomes its legal owner. By statute, Massachusetts levies a tax on real or tangible personal property “owned” by a decedent and located in the Commonwealth.
Massachusetts does not subject the intangible personal property of a non-resident, including limited liability company membership shares, to its estate tax, so any of your properties that legally belong to your limited liability company would no longer be considered a part of your taxable estate.
But be warned: just creating an LLC and transferring your real estate to an LLC is not enough. Your LLC must have a legitimate business purpose, that includes generating some form of revenue. So your LLC will need to charge fair market rent on the real estate it owns to be legitimate. The trick is how to structure the rent so that it does not create taxable income in Massachusetts. There are many other considerations that your Massachusetts estate planning attorney can help with.
What Are Your Other Alternatives?
If you are an out-of-state resident who owns a home or other real estate in Massachusetts, another strategy for avoiding the Massachusetts estate tax is the creation of one of several types of irrevocable trusts.
Some examples of irrevocable trusts include:
(1) the sale of the Massachusetts real estate to a deceased spouse’s credit shelter trust (this preserves ones federal estate tax exemption but that this may have a capital gains tax consequence),
(2) the sale of the real estate to a Massachusetts Estate Tax Avoidance Trusts (this technique preserves your federal estate tax exemption and has no capital gains tax exposure), and
(3) transfers to a Qualified Personal Residence Trust (QPRT). A QPRT is a special type of irrevocable trust into which you give your primary or secondary home and reserve the right to use the home for a term or period of years. QPRTs use a portion of your federal estate tax exemption and do not expose you to capital gains taxes (but your heirs will receive your cost basis). QPRTs also have a risk of failure. If you die before the term ends, the real estate will be pulled back into your estate, thereby subjecting your estate to the estate tax you were trying to avoid.
These are just a few examples of the types of irrevocable trusts that may be used to eliminate the Massachusetts estate tax. Which technique will work best for you depends on your particular needs and circumstances.
What Is a Spousal Access Trust?
If you are married, a trust like a Spousal Access Trust allows you to give your Massachusetts real estate and tangible personal property to a trust for your spouse. And you can be sure that your spouse will greatly appreciate the gift!
A spousal access trust is an irrevocable trust prepared by one spouse for the other’s benefit. A spousal access trust is funded by gifts from the donor spouse while both spouses are still alive. It may be written in such a way that if your spouse dies before you, the assets owned by the trust may be transferred to an irrevocable trust for your benefit.
What Option Is Right For You?
Several other types of trusts – and several other estate planning approaches – may allow an out-of-state resident who owns tangible property or real estate in Massachusetts to reduce or avoid this state’s estate tax.
The option that’s best for you can only be determined by consulting a Massachusetts estate planning lawyer. Your estate planning lawyer will evaluate your assets and properties and recommend the best way for you to reduce or avoid having to pay the Massachusetts estate tax.
