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Can Saving One Penny Cost Your Estate $33,200 in Massachusetts Estate Taxes?

January 4, 2016

If you are a Massachusetts resident, a difference in a mere one penny in your net worth at death can result in $33,200.00 in Massachusetts estate taxes. The Massachusetts estate tax kicks in on a taxable estate of $1,000,000.00, and the estate tax on an estate of exactly $1,000,000.00 is $33,200.00. If instead the decedent’s taxable estate is one penny less, or $99,999.99, the tax is zero. Due to the thoughtless way the Massachusetts estate tax law was implemented, if a decedent’s Massachusetts taxable estate is between $1,000,000.00 and 1,033,000.00, the persons inheriting from that estate actually inherit less than if the taxable estate had been $99,999.99.

This strange estate tax result is based on a 2002 reaction (or thoughtless overreaction) by the Massachusetts state legislature to the so-called Bush tax cuts that occurred in 2001. A few years earlier, the previous Massachusetts estate tax had been repealed because a study had found that the existence of the Massachusetts estate tax caused a net loss in overall tax receipts due to older persons changing their domicile to avoid the estate tax.

When the latest version of the Massachusetts estate tax was implemented, the 2001 Bush tax cuts were phasing out the amount of the federal estate tax that had been shared with the states (known as the sponge tax or the “credit for state death taxes”), and the Massachusetts state legislature then passed legislation that allowed Massachusetts to continue receiving the same amount of estate tax revenue. Instead of coming from the federal government, the estate tax is now payable directly to the Commonwealth of Massachusetts by the decedent’s estate.

The odd implementation of the Massachusetts estate tax is highlighted by the manner in which the tax is calculated. In order to figure out the current Massachusetts estate tax, a 1999 Form 706, the Federal Estate Tax Return, must be filed. A blank copy of the 1999 Form 706, along with instructions, can be found on the Estate Tax page on the Massachusetts Department of Revenue’s website. Preparation of the 1999 Form 706 must be done to determine how much the Commonwealth of Massachusetts would have received if the federal estate tax exemption were now $1,000,000.00 and the federal tax law had not changed in 2001 to eliminate the credit for state death taxes. When the 1999 Form 706 is completed, the amount that the Commonwealth of Massachusetts receives as the Massachusetts estate tax is found on line 15, the credit for state death taxes.

Some simple last-minute moves can often be made by Massachusetts residents (and non-residents) to minimize or avoid paying the Massachusetts estate tax on amounts over $999,999.99.  Where the federal estate and gift tax exemption is now $5,450,000.00 in 2016, it may be time for the Massachusetts state legislature to take a moment to think the Massachusetts estate tax through so that it becomes more fair or sensible.

One Comment leave one →
  1. January 5, 2016 10:38 am

    Brian,

    You make a point. I always explain the $1M “cliff” about the M-706. Thus it’s $0 or $33,200. But I see your adjectives: “odd” “strange” “thoughtless”). I am not quite as harsh about the change in the law early this millennium, as a public revenue policy.
    Numerous states at that time adopted a Sponge Tax (and my guess is the Massachusetts Estate Tax Bureau dropped back to 1 or 2 employees).
    BTW, if avoiding the payment of Massachusetts Estate Taxes is a primary goal of a client, I note that there is no gift tax in Massachusetts, and explain those possibilities to my clients.

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