In prior blog posts, we’ve described the new $2 million tax threshold and the question about how “taxable” gifts will be treated. It turns out that the new law also changes the treatment of out-of-state real estate.
Under the old law, out-of-state real estate owned by someone who died as a Massachusetts resident simply was not taxed. Neither was it included in determining whether the decedent’s estate exceeded the former $1 million threshold.
Our understanding of the new law is that out-of-state property now will be included in determining whether an estate will be taxable — whether it exceeds the new $2 million threshold — but that the estate tax will be reduced in proportion to the amount of the estate outside of Massachusetts.
An example should explain how this works. Let’s assume that the estate includes $1.5 million of combined Massachusetts real estate, investments, savings and retirement plans, plus a $1 million vacation property in Maine.
Under the old treatment of out-of-state property (and the new $2 million threshold), this estate would not be taxable because the Massachusetts share is under $2 million.
Under the new treatment of out-of-state property, this estate is taxable but at only 60% of the tax normally paid if all the real estate were in Massachusetts since 40% of the estate is attributable to the Maine vacation home. The normal Massachusetts estate tax on a $2.5 million estate is $39,000. The tax in our example, however, would be reduced to $23,400 ($35,000 x .6 = $23,400).
This is, in fact, the reverse of how the tax has always worked for non-Massachusetts decedents owning property in Massachusetts. Let’s assume the facts in our example are reversed and the decedent was a Maine resident with a $2.5 million estate of which $1 million consists of a vacation house in Massachusetts. In that case, the estate would pay 40% of the normal tax on a $2.5 million estate, or $15,600 ($39,000 x .4 = $15,600).
One problem or irony with the new tax structure for these estates not far above the $2 million threshold, especially when part of the estate is outside of Massachusetts, is that he administrative cost and burden of preparing and filing an accurate estate tax return could seem well out of proportion to the actual tax owed.