By Kevin E.Hines, CPA, MST, CSEP
Partner Meyers Brothers Kalicka, P.C.
Have you heard? Massachusetts has “decoupled”, not follow, the federal estate tax law as of 12/31/02. This is not much of a surprise considering the widening gap between projected revenues and State spending. I will review some of the history of Massachusetts Estate tax law, why our elected officials have chosen to “decouple” and what impact this may have on Massachusetts decedents.
First, some recent history of the Massachusetts Estate Tax law. Massachusetts was one of the last states to adopt a “Pick-up” tax for assessing estate taxes to its resident decedents. Prior to this change, which was phased in between 1993 and 1997, there was an exodus of residents to other more tax-favorable states such as Florida. This “Pick-up” tax is equal to a federal tax credit allowed for payment of tax to the decedent’s resident state. This federal credit effectively shifts some of the estate tax revenue from the federal government to each of the states. So Massachusetts jumped on the band wagon to slow the exodus of taxpayers by changing its estate tax law to be in conformity with the majority of other states. This “pick-up” tax is applicable to decedents dying after December 31, 1996. This change in estate taxes along with other reductions in taxes had helped Massachusetts drop its moniker “Taxachusetts”.
With great fan fair in June 2001, the federal government passed a new tax law that began to phase out the federal estate tax. Under this new federal law, the estate value that can be excluded from tax is phased in from $1,000,000 beginning in 2002 to $3,500,000 in the year 2009. In 2010, the federal estate tax is to be completely repealed for just one year. It will return to the law in effect on 6/7/01 beginning in the year 2011 (sunset provision) if there are no further extensions or changes. Part of this new federal law is the elimination of the credits allowed for estate taxes paid by the decedent to individual states. This credit reduction is being phased in over a four year period to the detriment of most state taxing agencies.
The elimination of state credits is what caused Massachusetts to “decouple” from the federal estate tax. I would say that their action was a reaction to the federal government’s change in estate tax law. If there had not been a change to Massachusetts’ law, by the year 2005 Massachusetts would collect no estate tax dollars. The “Decoupling” will bring the Massachusetts estate tax law back to the federal law in effect as of December 31, 2000 and hold that law in place enabling Massachusetts to once again collect estate taxes.
Under this Massachusetts law change, the decedent’s estate is obligated to pay a tax once the taxable estate threshold has been exceeded. Below are tables that detail the taxable estate threshold and estimate of estate tax payable at various taxable levels. It should be noted that other states either have adopted or are considering similar tax law changes that have been adopted by Massachusetts to replace their lost revenue.
For federal estate tax purposes, the estate of the decedent will be entitled to deduct the amount paid to any state for tax as a deduction against the federal tax under current federal law through 2009. You should consult your estate tax advisors to understand how both the federal and Massachusetts estate tax law changes will affect you. As a general rule, individuals should consult their estate plan advisors anytime there is a significant life event alteration, an estate tax law change, but at least once every two to three years.
| Estate Tax Exclusion for the Federal Tax Law as in effect on December 31, 2000 | |
| And for Massachusetts decedents dying after 12/31/02 | |
| Year | Taxable Estate |
| 2002-2003 | $700,000 |
| 2004 | $850,000 |
| 2005 | $950,000 |
| 2006 and after | $1,000,000 |
Decedent will be obligated for Massachusetts tax if taxable estate exceeds the above amounts
| Estimate of Massachusetts Estate Tax | ||
| For Decedents Dying after 12/31/2002 | ||
| Taxable Estate | Tax Obligation | Average Tax Rate |
| 1,000,000 | 33,200 | 5.0 |
| 2,000,000 | 99,600 | 6.1 |
| 3,000,000 | 182,000 | 7.0 |
| 5,000,000 | 391,600 | 7.8 |
| 10,000,000 | 1,067,600 | 10.7 |
Assumption: All decedent’s property is located in Massachusetts and subject to Massachusetts estate tax.
Kevin E. Hines, CPA, MST, , CVA, CSEP is a Partner with Meyers Brothers, P.C., 167 Dwight Road, Longmeadow, focusing in the areas of estate planning, business valuation and litigation support, taxes and small business consulting (413) 567-6101, Ext. 167