Q: Is my Massachusetts real estate subject to Massachusetts estate tax even if I am not a Massachusetts resident?
Many out-of-state residents own real estate in Massachusetts such as a summer home on the Cape or a secluded getaway in the Berkshires. What many don’t realize is that their estates could be subject to Massachusetts estate tax, even if they are not a Massachusetts resident.
Here’s what you need to know:
What is the Massachusetts estate tax?
The estate tax is a tax on the transfer of assets at death. Massachusetts taxes the total value of all assets a person owned at death (less applicable deductions), which is referred to as the taxable estate.
Massachusetts has a $2 million estate tax exemption. Meaning, there is generally no filing requirement if the value of the decedent’s estate is less than $2 million. If the estate is over $2 million, then, for Massachusetts residents, a tax is assessed on the value of their Massachusetts estate over the exemption (at rates ranging between 7% and 16%).
How is the estate tax assessed on non-residents?
For out-of-state residents, Massachusetts imposes an estate tax on real estate and personal property physically located in Massachusetts based on the proportion the Massachusetts assets bear against the decedent’s entire estate.
For example, imagine an unmarried Florida resident who dies owning a $2 million vacation home in Cape Cod and $8 million in other assets located in Florida ($10 million in total). Since the decedent owns real estate in Massachusetts and his taxable estate is worth over $2 million, a Massachusetts estate tax return is required. Here, Massachusetts calculates the estate tax owed on the decedent’s worldwide estate, which is about $1,067,600. Next, the assessed tax is multiplied by the percentage the Massachusetts property bears against the entire estate (20% in this example), which is $213,520. Finally, the Massachusetts estate tax exemption is applied as a credit (-$99,600) at the end of the calculation. As a result, the decedent’s estate owes $113,920.
Why does this matter?
Massachusetts places an automatic estate tax lien on Massachusetts real estate to ensure payment of estate taxes regardless if a tax is owed. Meaning, the decedent’s Massachusetts real property cannot be sold until the estate tax return is filed, the tax (if any) is paid and an estate tax lien release is issued by the Commonwealth. Failure to file a return can also result in significant penalty and interest being owed.
How can a non-resident plan for the MA Estate Tax?
Non-residents should engage a Massachusetts trusts and estates attorney to review possible planning strategies to address the MA estate tax or remove the asset from their Massachusetts taxable estate. This includes transferring the property into an LLC or gifting the property to an irrevocable trust.