by Dorothy M. Bickford

In 2002, the Commonwealth of Massachusetts re-enacted an estate tax in response to certain provisions of the federal Economic Growth and Tax Relief Reconciliation Act of 2001 (the 2001 Tax Act). Before the 2001 Tax Act, a portion of the federal estate tax was allocated and paid to the state in which the person had lived if the estate paid a federal estate tax. If an estate paid no federal estate tax, it also paid no state estate tax. The 2001 Tax Act eliminated the allocation to the states, gradually, with the full elimination going into effect this year. This has caused each state to lose a great deal of revenue, beginning in 2002. The elimination of the state portion of the federal estate tax has contributed to the budget crisis affecting state governments now.

The Massachusetts estate tax law that was in effect before the Bush tax cuts provided that the Massachusetts estate tax would be exactly that amount that the Commonwealth was entitled to get under the federal estate tax law. Now that the federal law has been changed to reduce and eliminate what Massachusetts could collect out of the federal tax, the Massachusetts Legislature responded by enacting a separate estate tax which became effective on January 1, 2003.

Under the Massachusetts estate tax law, the amount exempt from the Massachusetts estate tax this year is $850,000 (the exemption amount). The Massachusetts exemption amount will increase to $1 million in 2006 and will remain at $1 million thereafter. It will not be affected by the federal estate tax exemption. The Massachusetts estate tax will be in addition to any federal tax owed. The estates of all Massachusetts decedents will be required to file Massachusetts estate tax returns if the value of the decedent's assets exceeds the exemption amount in the year of death. In addition to having to file a return, a Massachusetts estate tax may also be owed, even if no federal tax is due, but that may depend upon the exact language of your estate planning documents.

For example, if a Massachusetts resident died in 2003 with assets having a value of $1 million, there was no federal estate tax owed. But that same resident did owe a tax to the Commonwealth on $300,000, which was the difference in 2003 between the Massachusetts exemption amount and the federal exemption amount. This tax would have been $33,200 in 2003.

As the federal exemption increases, the difference between the Massachusetts exempt amount and the federal exempt amount will widen. The result is that a larger Massachusetts estate tax will be due. For example in 2006, when the Massachusetts exemption is $1 million and the federal exemption is $2 million, the Massachusetts estate tax will be $99,600. In 2009, when the federal exemption is $3.5 million and the Massachusetts exemption is still $1 million, the Massachusetts estate tax will be $229,200.

If your current estate plan provides that a trust is to be established at your death and funded with the maximum amount exempt from federal estate tax, then your estate will owe a tax to Massachusetts on the difference between the maximum federal exemption and the maximum Massachusetts exemption. If your estate plan provides that everything goes to your spouse at your death, then you will not be affected by the Massachusetts estate tax until both you and your spouse have died. At that time, a tax may be payable to the Commonwealth, depending on the value of the assets the survivor of you still has, and it is more likely that a federal estate tax may also be due.

Can you avoid paying the Massachusetts estate tax on the death of the first of you and your spouse to pass away without increasing your spouse's federal estate tax? Yes, under a regulation issued by the Department of Revenue. However, your estate plan may need to be revised to create one trust that is exempt from both the federal estate tax and the Massachusetts estate tax, a second trust that is exempt from the federal estate tax because of the federal exemption limit which will also qualify for a marital deduction for Massachusetts estate tax purposes, and a third trust that will qualify for the estate tax marital deduction for both Massachusetts and federal estate tax purposes. This is complicated, so an example may help.

If a husband dies in 2006 with assets valued at $1.5 million, then his estate would owe no federal estate tax because the federal exemption will be $2 million. However, the Massachusetts exemption will only be $1 million, so a tax would be owed to the Commonwealth of $99,600. Assuming the husband left all of his assets to a trust to provide for his wife and children, the Massachusetts tax would have to be paid even though no federal estate tax would be owed. However, if the husband had left $1 million to a trust for his wife and children and $500,000 to a special kind of trust for his wife only (a QTIP trust), there would be no Massachusetts or federal estate tax owed at the husband's death.

It is strongly recommended that you review the value of your combined assets to see if you and your spouse would be subject to the Massachusetts estate tax. You would be if you have combined assets valued at $850,000 or more. If so, then you have to make some choices. You may decide to revise your estate plan to defer paying any estate taxes, either to the IRS or to the Commonwealth, until both of you have passed away. Alternatively, you may decide that the payment of the Massachusetts estate tax on the death of the first of you and your spouse to die is not so burdensome that you want to do anything to avoid it.

To assist you in your review and understanding of these tax law changes, see the following table. Please remember that the Massachusetts estate tax is already in effect so that any changes that you think might be necessary should be made as soon as possible. Please also remember that both Congress and the Legislature may make additional changes to these tax structures, depending on politics and revenue needs.

Year	Massachusetts Exempt Amt	Federal Exempt Amt	Mass. Estate Tax on Difference
2003	$700,000	$1 million	$33,200
2004	$850,000	$1.5 million	$64,400
2005	$950,000	$1.5 million	$64,400
2006	$1 million	$2 million	$99,600
2007	$1 million	$2 million	$99,600
2008	$1 million	$2 million	$99,600
2009	$1 million	$3.5 million	$229,200
2010	$1 million	no estate tax	tax on everything over exemption
2011	$1 million	$1 million	$0

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