Under the Massachusetts estate tax law in place until last month, lifetime gifts had a unique treatment. They were not taxed either during life or at death. But to the extent they exceeded $17,000 per individual in any calendar year — the current federal gift tax exclusion — they were added back into the donor’s estate to determine whether it exceeded the $1 million estate tax threshold.
Let’s explain this by way of 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 be subject to estate taxation, but only the $900,000 actually in the estate would be 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.
(This treatment is very different from the federal treatment of taxable gifts, which adds them back into the estate and subjects them to tax, but only if the estate exceeds $12.9 million.)
First Look
The question is whether the same rules apply under the new law. In my preliminary look at the new law in my blog post last month, I read it to totally eliminate gifts as a factor in estate tax calculations and also raised the question as to whether this was really what the legislature intended. Since then, others have read the law differently from me, assuming that the Department of Revenue would continue to add back in lifetime taxable gifts to determine whether an estate exceeded the new $2 million threshold.
The reason I opined that lifetime taxable gifts would not be added back into the estates of Massachusetts residents dying after January 1st of this year is that the new law includes the following provision:
(g) The estates of decedents dying on or after January 1, 2023 shall not be required to pay
any tax under subsections (a) and (b) if the value of the federal taxable estate is not more than
$2,000,000.
A Question of Definitions
The next question is what’s included in the “federal taxable estate”? This term is not defined in Massachusetts law. Massachusetts law refers back to the Internal Revenue Code in effect on December 31, 2000 (in fact the whole Massachusetts estate tax is based on the Code in effect back then). My partner, Sarah Hartline, took a look at the Code in effect in 2000 and concludes: “If you go back to the Internal Revenue Code in effect on December 31, 2000 – specifically the Form 709 (1999) and instructions – federal taxable estate does not include gifts. The federal taxable estate is line 3 of the 709, before gifts are added back in.” This is also how it’s defined on the Department of Revenue’s website.
However, the Massachusetts estate tax law at M.G.L. Ch. 65C, Sec. 1 (d), specifically defines the “federal gross estate” as including taxable gifts. So, what we have is the legislature using two separate terms, federal “gross” estate and federal “taxable” estate. The rules of construction we learned back in law school were that when the legislature can use the same term but chooses to use a different one, that difference should have meaning. I would argue that this is especially the case where the legislature included the very specific provision cited above about estates under $2 million.
The Jury is Still Out
Nevertheless, while I believe this is the correct reading of the law, I would not guarantee that the Department of Revenue will agree. Lifetime gifts that bring an estate under the $2 million threshold will still reduce the size of the estate to be taxed and may or may not make it avoid taxation all together. We will have to see how the dust settles on this.
