Estate planning when you own real estate located in two states can be tricky. Owning properties in New Hampshire and Massachusetts is no exception. For one thing, the estate and gift tax laws in New Hampshire and Massachusetts are different. New Hampshire imposes no state estate or gift tax. Massachusetts, on the other hand, imposes an estate tax but no gift tax.
The first $2 million of assets in a Massachusetts estate is exempt from Massachusetts estate tax. This exemption applies regardless of whether the estate is the estate of a Massachusetts resident or the estate of a non-resident owning property in Massachusetts.
Let’s first consider the situation of a New Hampshire resident owning real estate in both New Hampshire and Massachusetts. If that is your situation, you should consider transferring your Massachusetts property into an LLC or other legal entity. This simple act can “protect” the Massachusetts property from being subject to Massachusetts estate tax. Placing your Massachusetts property in an LLC converts it from being categorized as real estate. This is because membership in an LLC that owns real estate does not constitute the ownership of the real estate by the LLC member.
In the above example, you might conclude that because you are a New Hampshire resident and your Massachusetts real estate is worth less than the $2 million Massachusetts estate tax exemption, you are home free and don’t need the protection of an LLC for your Massachusetts property. However, that may not be the case.
If, for example, you are a New Hampshire resident and the combined value of your New Hampshire and Massachusetts properties exceeds the $2 million Massachusetts estate tax exemption amount, Massachusetts will impose an estate tax on the excess. This is because Massachusetts requires that the value of all of the real estate you own, wherever located, be included in the Massachusetts estate tax computation. A tentative Massachusetts estate tax is computed on all of your real estate. The fraction the Massachusetts property is of all of your real estate is the fraction of the tentative Massachusetts estate tax your estate will pay to Massachusetts. As already noted, simply putting your Massachusetts real estate into an LLC or other legal entity can avoid Massachusetts estate tax in this situation.
Next, let’s consider the situation where you are a Massachusetts resident owning real estate in both New Hampshire and Massachusetts. Massachusetts will impose its estate tax on your entire estate with one exception – that exception is your out-of-state real estate. This means that if you are a Massachusetts resident owning real estate in New Hampshire, your New Hampshire property will not be subject to Massachusetts estate tax. but the rest of your estate will be.
However, that’s not the end of the story. As noted above, Massachusetts requires that you aggregate the values of all of your real estate, wherever located, and then include the percentage that the value of the Massachusetts real estate is of the aggregate in computing your Massachusetts estate tax. The bottom line is that in this situation the value of your New Hampshire property is factored into the computation of your Massachusetts estate tax.
Is there a way for a Massachusetts resident owning real estate in New Hampshire to reduce the impact of the Massachusetts estate tax in the above situation? Massachusetts does not impose a gift tax, so you could consider gifting your New Hampshire property during your lifetime, but that would be at the expense of a step-up in the basis of the New Hampshire property that otherwise could benefit your intended beneficiary if you instead devised it at your death to that beneficiary.
Another strategy to consider is putting the New Hampshire property into an irrevocable trust to keep it out of your estate for Massachusetts estate tax purposes and still retain enough rights to cause the property to be includible in your Federal estate to garner a step-up in basis for the property at your death.
Fortunately, with thoughtful planning, New Hampshire and Massachusetts residents alike may be able to adopt estate planning strategies that can reduce, or eliminate entirely, the burden of the Massachusetts estate tax. Different strategies are required based on personal circumstances.
New Hampshire and Massachusetts residents owning real estate in both states are wise to consult with their own estate and tax planning attorneys to decide which strategy may be right for them and their families.