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The Massachusetts Estate Tax is Back

December 2002

By: Jay J. Lander, Esq.

On January 1, 1997 the Commonwealth of Massachusetts amended its estate tax to become a sponge tax which operated to collect a Massachusetts estate tax for estates of Massachusetts residents dying after January 1, 1997 in an amount equal to the amount allowed as a credit against the federal estate tax under the Internal Revenue Code. This change in the Massachusetts estate tax law was received with great enthusiasm by those Massachusetts residents whose estates would have been subject to a substantial Massachusetts estate tax far in excess of the federal credit allowance thus causing in many situations an actual additional tax over the total federal gross estate tax due.

This favorable arrangement that had the effect of discouraging migration of Massachusetts residents to Florida which also has had a \"sponge tax\" for many years, has been significantly altered as a result of a most recent change in the federal estate tax law. In 2001 Congress amended the federal estate tax law to provide for a phasing out of the federal credit for estate death taxes paid. For example for the estates of decedents dying in the year 2002 the estate death tax credit was reduced by 25% and such reduction was to continue until the total estate death tax credit would be eliminated by 2005.

In order to avoid the reduction and ultimate elimination of the Massachusetts estate tax liability which would occur if tied to the ever decreasing federal estate tax credit for Massachusetts taxes paid, the Massachusetts legislature amended the Massachusetts sponge tax to calculate the tax on the basis of the federal credit for estate death taxes as it would have been calculated under the Internal Revenue code as of December 31, 2000. One result of this change will mean that estates of Massachusetts residents dying after January 1, 2003 may require the filing of tax returns and may produce a Massachusetts estate tax liability even if the total gross estate is less than $1,000,000. For example, the Massachusetts estate tax liability that would result from an estate of $850,000 for decedents dying in 2003 through 2005 could amount to $25,200. Another consequence of the new Massachusetts rule is the production of a Massachusetts estate tax that is in addition to the federal estate tax. For a decedent dying in 2003 through 2006 with an estate of $2,000,000, his estate may have to write a check to the federal government for $385,200 and one to the Commonwealth of Massachusetts for $99,600.

The Massachusetts tax revision may require revisions to existing estate plans to minimize the Massachusetts tax. Gifting strategies for estates of less than the federal exemption may also be revisited to minimize the Massachusetts tax. There may also be a resurgence in the desire to migrate from Massachusetts to more tax friendly states such as Florida which as yet has not \"de-coupled\" its state sponge tax.