By Cassandra L.M. Prince
On October 4, 2023, Massachusetts Governor Maura Healy signed into law a $1 billion tax reform package (“tax package”). See H.R. 4104, 2023 Leg., 193rd Sess. (Mass. 2023). The enactment of the tax package has garnered much attention as it contains the first tax cuts in more than 20 years in Massachusetts and is intended to boost the affordability in the state for residents and businesses to call Massachusetts their home and to increase the Commonwealth’s economic competitiveness with other states. More specifically, the new law increased the Massachusetts estate tax exemption from $1 million to $2 million and did so retroactively to January 1, 2023.
What is an Estate Tax?
To better understand what an estate tax is, it is important to first understand what is an “estate.” An estate is the total property, real and personal, owned by an individual prior to distribution through a trust or will. See Estate, Wex Legal Dictionary (database updated September 2022). Any individual who owns property (real or personal) has an estate. An estate tax is a levy on the value of the gross estate (this amount less deductions) of a deceased person (“decedent”) as of their date of death before distributions to any beneficiaries of an estate. See G.L. c. 65C, § 2A(a).
There are both federal and state estate taxes. Federal and state estate taxes apply to estates that have reached a certain threshold value as determined by legislation. Not all states have an estate tax. In the United States, Massachusetts is among only12 states that have an estate tax. Prior to the enactment of the tax package, Massachusetts tied with Oregon as having the lowest estate tax exemption amount ($1 million) in the nation. Currently, Massachusetts ranks third as having the lowest estate tax exemption amount in the nation.
What are Key Changes to the Massachusetts Estate Tax?
The tax package provides a credit of $99,600 against the Massachusetts estate tax, which has the effect of increasing the Massachusetts estate tax exemption to $2 million. With this change, Massachusetts residents and non-residents who own property in Massachusetts that have a gross estate valued over $2 million will be required to file an estate tax return and pay an estate tax. See Mass. Gen. Laws ch. 65C, § 2A(g). This change takes effect for estates with dates of death on or after January 1, 2023. Id. For estates of decedents who have died prior to January 1, 2023, the previous estate tax exemption of $1 million will apply. See Massachusetts Department of Revenue (last updated Dec. 1, 2023). It is important to note that unlike the federal estate tax exemption, the Massachusetts estate tax exemption is not adjusted annually for inflation, so this $2 million amount will remain in effect unless and until the Legislature amends it again in the future.
Additionally, the tax package addresses the issue of the “cliff effect” under the previous law, which taxed an entire estate that was over $1 million rather than assets in excess of $1 million. The new law eliminates this cliff effect by taxing assets that are over $2 million only. For example, prior to the tax package, an estate that had a gross estate valued at $1 million would not owe an estate tax. However, an estate that had a gross estate valued at $1.05 million would owe an estate tax of $20,500 on the entire value of the estate rather than the $50,000 in excess of $1 million. See G.L. c. 65C, § 2A(a). In effect, the tax on the entire value of the gross estate valued at $1.05 million eliminated the exemption amount of $1 million. Under the new law, an estate that has a gross estate valued at $2.05 million, would owe an estate tax of $3,600 on the $50,000 in excess of $2 million, which maintains an exemption amount of $2 million.
Lastly, the new law altered the calculation of estate taxes for estates that include real and tangible property outside of Massachusetts. Id. More specifically, the estate tax of an estate would now be reduced by the proportion of the entire gross estate that consists of property outside of Massachusetts. Id. Prior to the new law, if a decedent was domiciled in Massachusetts and owned real property outside of Massachusetts, that real property was not included in the determination of estate tax liability in Massachusetts. After the new law, the real property would be included in the determination of estate tax liability in Massachusetts. For example, prior to the new law, if a decedent was domiciled in Massachusetts and had a gross estate that consisted of Massachusetts property valued at $1 million and real property located in Georgia valued at $1 million, then the real property would not be included as part of the estate of a decedent. In that case, the Massachusetts share of the estate would fall within the exemption amount of $1 million and no tax would be due. Under the new law, if a decedent’s gross estate consisted of Massachusetts property valued at $3 million and real property in Georgia valued at $1 million, then the taxable estate would be reduced by 25% because the real property in Georgia makes up 25% of the entire gross estate. As a result, the estate in Massachusetts would be taxable at 75% as that is the proportion which is only attributable to the Massachusetts property.
Cassandra L.M. Prince is an associate in the Private Client Department at Nutter McClennen & Fish LLP. She advises high net worth individuals and families on all aspects of estate planning, estate administration, and trust administration.