Massachusetts Estate Tax

Massachusetts imposes its own estate tax on estates that have a total value of more than $1 million. That means that even if the estate you’re handling isn’t large enough to owe federal estate tax, it might need to pay a separate Massachusetts estate tax. The top state tax rate is 16%.

Which Estates Must File

For 2011 deaths, if the gross estate of a Massachusetts resident has a value of more than $1 million, the executor must file a state estate tax return. (Under current law, federal estate tax returns are required only for estates worth more than $5 million in 2011, and $5.12 million in 2012.) That doesn’t necessarily mean the estate will owe tax; some expenses can be subtracted from the gross estate, and some property (for example, property left to the surviving spouse) is not taxed.

It’s not just state residents who may owe Massachusetts estate tax; the state also taxes assets that are physically in the state. So if a deceased nonresident owned valuable real estate in Massachusetts or kept other tangible assets in the state, the estate may need to file a Massachusetts estate tax return.

Adding Up the Gross Estate

To determine whether or not a Massachusetts estate tax return is required, add up the value of the deceased person’s gross estate. Be sure to include:

• Massachusetts real estate
• Bank accounts, certificates of deposit, and investment accounts, including those for which a payable-on-death beneficiary was named
• Vehicles and other personal property kept in the state
• Proceeds from life insurance policies on the deceased person’s life, unless that person didn’t own the policy
• Retirement account funds
• Business interests (sole proprietorship, limited liability company, or small corporation)

If any assets were owned with someone else, count only the value of the deceased person’s interest. For example, if the deceased person owned a house with her husband, include half of its value. If, however, property was held in joint tenancy, then include the total value except for funds that the other person contributed. For example, the full value of a joint tenancy bank account would be included, unless the other owner actually made contributions to the account.

Also include:

• Taxable gifts made during life. If the deceased person made taxable gifts (more than the annual exclusion amount, which is currently $13,000 per year per recipient), then add the taxable amount of those gifts to the value of the estate.
• Some transfers made fewer than three years before death. If the deceased person transferred a life insurance policy to an irrevocable life insurance trust within three years of death, you must include the value of the policy in the estate.
• Assets held in a trust. The value of assets the deceased person held in a revocable living trust or other trusts the deceased person controlled is included in the taxable estate.

No ‘Portability’ Provision in Massachusetts

Federal law currently allows spouses to share their individual federal estate tax exemptions. If the first spouse to die doesn’t use up all of his or her entire $5 million federal estate tax exemption, then the second spouse’s estate can use the unused portion of the first spouse’s exemption amount. This is called the “portability” provision, and it’s set to expire at the end of 2012, but Congress may choose to extend it. Like other federal tax breaks, this one does not apply to legally married same-sex couples.

Spouses cannot share their individual estate tax exemptions for Massachusetts estate tax purposes.

Property Left to a Surviving Spouse

Property left to a surviving spouse is exempt from state estate tax, no matter what the amount.

Filing the Tax Return

The executor must file the Massachusetts estate tax return (Form M-706) and pay any tax due nine months after the date of death. (If there’s no probate proceeding, and no executor or administrator is appointed, then it’s the responsibility of whoever took possession of the deceased person’s property.) You can use Form M-4768 to apply for a six-month extension to file (or up to three years if you show “undue hardship”), but that doesn’t extend the time to pay the amount of tax you estimate is due. If the payment isn’t made on time, there’s a late filing penalty, and interest starts to accrue on the unpaid tax.

With the return, also include:

• federal estate tax return (IRS Form 706), even if you aren’t required to file it with the IRS
• death certificate
• if you’re filing the federal return, a Federal Closing Letter
• if the estate contains real estate, a Certificate Releasing Massachusetts Estate Tax Lien (Form M-792)

You can find Massachusetts estate tax return information and downloadable forms at the website of the state department of revenue. 

Expert Help With Estate Tax Returns

Preparing a federal or Massachusetts estate tax return requires the help of an expert. Both state and federal returns are long and complicated—and if a Massachusetts return is required, you’ll have to prepare a federal one as well. Hire a lawyer or CPA who has lots of recent experience with state and federal estate tax returns and procedures; the fee will probably be several thousand dollars, but it will be worth it.