On October 4, 2023, Massachusetts Governor Maura Healey signed into law comprehensive tax legislation impacting Massachusetts individuals and families. 

Most notably for estate planners and their clients, the law doubles the Massachusetts estate tax exemption, from $1 million per estate to $2 million per estate.  For estates valued in excess of $2 million, the estate tax will continue to be calculated based on a graduated scale with tax rates ranging from 7.2% to 16%. 

The new law also amends how estate tax is levied on estates valued above the exemption amount.  Previously, almost all assets were taxed if the value of the decedent’s taxable estate exceeded $1 million.  Going forward, by establishing a non-refundable estate tax credit of $99,600, only assets in excess of $2 million will be subject to the tax, effectively eliminating what was often referred to as the “cliff effect” under the prior law.  . 

However, unlike the federal estate tax exemption, the Massachusetts $2 million estate tax exemption is not indexed for inflation, which means that it will remain at the same $2 million level until and if any future changes are made to the law.  Also, unlike the federal estate tax exemption, the Massachusetts exemption is not “portable” between spouses, which means that to the extent it is not used upon the death of the first spouse to die, the unused portion will be forfeit and may not be transferred to the surviving spouse.  Thus, the continued non-portability of the Massachusetts estate tax exemption will continue to have an important effect on how Massachusetts estate plans are drafted where a goal is to minimize or eliminate Massachusetts estate tax.

The law also modifies how the Commonwealth taxes non-residents who die owning certain property in Massachusetts.  Non-residents will still be required to file a Massachusetts estate tax return if their Massachusetts taxable property (e.g. real estate and tangible property physically located in the state) is valued above $2 million.  The tax levied on non-residents will be proportionate to the value of their assets physically located in Massachusetts as compared to the total value of their gross taxable estate. 

Massachusetts residents who die owning property outside of the Commonwealth will have their Massachusetts estate tax reduced proportionately with respect to the value of the assets not physically located in Massachusetts.

Importantly, the new law applies retroactively to the estates of any individuals who died on or after January 1, 2023.  Estates which have already filed an estate tax return for decedents who passed earlier this year and/or paid estate taxes based on the previous exemption should speak with their advisors about the relevant filing that might be submitted to the Department of Revenue in order to request a tax refund.  Similarly, estate representatives of those decedents who died in 2023 and who have yet to file an estate tax return should discuss with their advisors the option of filing for an extension of time to file, particularly as it is expected that the Department of Revenue will be issuing guidance and new estate tax return forms that take the new law into account.

For anyone contemplating estate planning, the increased exemption and other new estate tax rules may be very important to consider, especially concerning the drafting of estate tax-related provisions and possible changes in the titling of assets after estate planning documents are signed.  In short, the new legislation highlights the continued importance of estate and tax planning at the state level.

Another important clarification under the new law relates to the so-called “millionaires’ tax” that went into effect earlier this year.  The millionaires’ tax is a 4 percent surtax on annual taxable income in excess of $1 million.  The bill makes it mandatory for a couple to file a joint Massachusetts income tax return for any year in which the couple files a joint federal income tax return.  The effective date of this rule is January 1, 2024.

The new law also the cuts the tax rate for short-term capital gains (gains realized from the sale of capital assets held for one year or less) from 12 percent to 8.5 percent. This change is effective as of January 1, 2023. The long-term capital gains rate remains unchanged at 5 percent.

If you have any questions about the new tax bill or questions or concerns related to your estate and trust planning, please do not hesitate to contact a member of Casner & Edwards’ Trusts & Estates practice.