Estate Tax Planning
Avoid MA Estate Tax: Non-Residents
Mass Estate Tax for Non-residents: How it works
Many families have found that a change of residency - typically by spending winters in a warmer climate - can help to reduce the tax liability they would otherwise face as a Massachusetts resident. Florida is a consistent choice for many of our clients. Florida boasts no income taxes and a real estate tax reduction for residents and another reduction for seniors. Once a change of residency from Massachusetts to Florida takes place, in many instances income tax liability to Massachusetts can be eliminated (check with your income tax professional because there are restrictions and exceptions). Many out of state residents wrongly believe that just because they are no longer subject to the Massachusetts Income Tax they are also free of the Massachusetts Estate Tax. Sadly, this is not necessarily the case!
Massachusetts levies an Estate Tax (sometimes referred to as a Death Tax) on the estates of out of state residents. According to Massachusetts General Laws chapter 65 section 2A (b):
(b) A tax is hereby imposed upon the transfer of real property situated in this Commonwealth and upon tangible personal property having an actual situs in this Commonwealth of every person who at the time of his death was not a resident of this Commonwealth. The amount of this tax is a sum equal to the proportion of the credit which the value of Massachusetts real and tangible personal property taxed in this Commonwealth which qualifies for such credit bears to the value of the decedent’s total federal gross estate. (emphasis added).
What this means is that if you own real estate or tangible personal property located in Massachusetts, the Commonwealth can levy an estate tax against those assets! Here is an example:
Let's say you are single and a Florida resident who owns a home on Cape Cod. We will also assume that your estate size is $3 million. For purposes of this example, let's say that your Cape Cod home and its contents are worth $1 million. Now to calculate the Massachusetts Estate Tax liability of our hypothetical, we calculate the estate tax liability of a Massachusetts resident:$3,000,000.00 Gross Estate Less: $1,000,000.00 MA Estate Tax Exemption $2,000,000.00 Taxable Estate
The MA Estate Tax for a Massachusetts resident in this example is $182,000.00.
Next we adjust for the fact that this example is for a Florida resident. Since we have $1 million worth of property located in Massachusetts and our total estate size is $3 million, we establish a ratio:
Because in this example the Massachusetts property is one third of the total estate of the Florida resident, the Florida resident's Massachusetts estate tax liability is one third of the Massachusetts resident's estate tax liability ($182,000 x 1/3 = $60,667).
You may be asking: If you are not a Massachusetts resident, why should your family have to pay more than $60,000 to the Commonwealth of Massachusetts?
With proper planning, they won't have to!
Mass Estate Tax for Non-residents: How to Avoid It
To avoid the Massachusetts Estate Tax the theory is quite simple: Don't own Real Estate or Tangible Personal Property located in Massachusetts! Now I don't mean you should sell your Cape Cod home or give it all away to the kids! While you may do those things if you want, it is much better planning to keep these important assets for your own use and enjoyment.
The trick is not to get rid of what you own - it's to change what you own or how you own it!
Several people have asked "What if I transfer my Massachusetts real estate to my Living Trust? Won't that end my Massachusetts Estate Tax liability?" Unfortunately the asnwer is "No. While placing your Massachusetts home into your revocable, living trust will provide many benefits, like probate avoidance, assets owned by a revocable trust are still a part of your taxable estate and still subject to the Massachusetts Estate Tax."
However, there are some situations where a married couple can use a Joint Trust to shelter the Massachusetts real estate from estate taxes at the death of the first spouse. But since most couples have seperate trusts this technique may not be available to you unless you convert your seperate trusts into a Joint Trust.
There are several types of Irrevocable Trusts that avoid the Massachusetts Estate Tax. Placing your Massachusetts real estate into such an irrevocalbe trust may remove the real estate from your estate. Often these trusts are established for a spouse. If you already have a revocable trust, it may have "A/B" planning built into it. With an A/B Trust, at the death of the first spouse a seperate share is set up that gives the surviving spouse the right to the income from the trust assets plus the right to access the trust principal for reasons of health, education, maintenance and support. The assets in this share of the trust gives the spouse access to the assets after the death of the first spouse to die, but under the tax code the assets don't belong to the surviving spouse. This technique is very common and is built into most revocable trusts. Historically, this technique is used to reduce estate taxes, but it is only used after the death of the first spouse. But you might ask, "If it makes sense to set up a trust for my spouse after I die to avoid estate taxes, doesn't it make just as much sense to set up such a trust while I'm alive?" For many families the answer is a resounding "YES!" This type of trust is called a Spousal Access Trust and it is a popular tool for avoiding the Massachusetts Estate Tax.
Clients with investment real estate may wish to consider organizing an Limited Liability Company (LLC). LLCs have a number of advantages, including asset protection and potential income tax benefits. But they also can help to avoid the Massachusetts Estate Tax. An out of state resident can organize an LLC and transfer his/her Massachusetts real estate into the LLC. Now the LLC owns the Massachusetts real estate, and the out of state resident owns the LLC. Since Massachusetts does levy an estate tax on intangible personal property, like LLC membership shares, the out of state resident is no longer subject to the Massachusetts Estate Tax on the Massachusetts real estate owned by the LLC.
There are a number of planning techniques that may be used to avoid the Massachusetts Estate Tax. Some of the available techniques include: