After Massachusetts raised the threshold for the Massachusetts estate tax from $1 million to $2 million last year, I wrote a couple of blog posts about how gifts would be treated under the new law.
Massachusetts Non-Taxation of Gifts
The issue has to do with the unusual treatment of gifts under Massachusetts law. Unlike the federal estate tax system, we have no gift tax in Massachusetts. To explain the difference, for federal purposes, when someone dies, all gifts that they made during their lifetime above the gift tax exclusion amount ($18,000 per recipient in 2024) are added back in to determine the tax paid by the estate. However, this is relevant to very few estates since the estate tax threshold is so high, $13.6 million for the estates of people dying in 2024.
The Prior Law
Under the Massachusetts estate tax system in place prior to last year, despite the fact that the threshold for taxation was $1 million, some estates under that level were taxed because taxable gifts were added back into the estates for purposes of determining whether they were taxable. Yet the gifts were not taxed. This will be more clear in an example:
Let’s assume an individual died with a total estate of $900,000 but had given away $300,000 in taxable gifts during their life. Since $900,000 plus $300,000 totals $1.2 million and this exceeded the $1 million threshold, this decedent’s estate would have been subject to estate taxation, but only the $900,000 actually in the estate would have been subject to tax.
Thus, someone with a short life expectancy and an estate over $1 million could reduce, but not eliminate, the tax on their estate by making large gifts.
The New Law
The question is what happens under the new law. It’s clear that such “deathbed” gifts are even more beneficial in terms of reducing estate taxes. This is because the new law gives all estates a $99,600 credit which is calculated to zero out any taxes that might otherwise be due on estates up to $2 million.
So, by way of example, an estate that totals $1.8 million will not have to pay a Massachusetts estate tax even if the decedent gave away $400,000 in taxable gifts during their life.
But Must a Return Be Filed?
But does such an estate have to file a Massachusetts if estate tax return even though no estate tax is due? When I wrote on this topic last year, we did not know the state’s opinion on this issue. Now we do. In its “Instructions for Massachusetts Estate Tax Return Form M-706,” the Department of Revenue says:
To determine whether a return must be filed for a
decedent’s estate, add:
- the adjusted taxable gifts . . .
made by the decedent after December 31, 1976; . . .
Thus, the bottom line is that in situations such as those in our example where there’s no estate tax due, but the estate exceeds the $2 million threshold when taxable gifts are added back in, an estate tax return must still be filed.
This is similar to situations where the decedent’s estate exceeds $2 million but no tax is owed due to property passing to the surviving spouse, which is eligible for the marital deduction, or to gifts to charities, which qualify for the charitable deduction. They must all still file Massachusetts estate tax returns.