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Commonwealth of Massachusetts

The Governor's Budget Recommendation

Tax Expenditure Budget


Part V: Estate Tax and Generation-Skipping Tax

These taxes are imposed on the transfer of property (wealth) by an individual to others.

The Massachusetts estate tax is levied on transfers at death. It was enacted in 1975 to replace an earlier inheritance tax. (The inheritance tax continues to apply to estates of decedents who died before January 1, 1976.) The Massachusetts estate tax ties into the federal estate tax in effect on January 1, 1975. Therefore, subsequent federal estate tax amendments do not apply for Massachusetts.

In 1983, Massachusetts adopted a generation-skipping tax. This tax is imposed on transfers of property to remote generations (usually by means of trusts). It attempts to produce the same amount of tax that would be levied if the property were taxed in each generation. The Massachusetts generation-skipping tax is tied to the federal generation-skipping tax in effect on December 31, 1981.

On January 1, 1993, Massachusetts began to phase out the state estate tax by increasing the exemption from $200,000 to $300,000 and eliminating the $1,500 credit. On January 1, 1996, the exemption will be raised to $600,000. For more details on the elimination of the Massachusetts estate tax and the implementation of a "sponge" tax, see Appendix A, Recent Law Changes Affecting Tax Expenditures. In the federal system, in addition to the estate and generation-skipping taxes, there is also a gift tax. Because the absence of a gift tax creates an incentive to transfer property during one's lifetime, we are treating the absence of a gift tax in Massachusetts as a tax expenditure.

Revenues from the estate tax represented 1.9% of total tax revenues for Fiscal Year 1995.


Estate Tax and Generation-Skipping Tax: Basic Structure

Tax Base: The base of the estate tax is the transfer of Massachusetts property at death. The transfer is a net value, that is, the value of the gross estate less debts, administration expenses, funeral expenses, and claims. The base of the generation-skipping tax is a transfer of property which skips one or more generations.

Taxable Unit: The taxable unit for the estate tax is the individual decedent. The taxable unit for the generation-skipping tax is the "deemed transferor", i.e., the person in the intervening generation through whom the property is deemed to pass to the recipient. The deemed transferor's estate is the measure of the tax rate. The transferee is liable for the tax.

Rate Structure: The estate tax is imposed at graduated rates ranging from 5% of the first $50,000 of taxable estates to 16% on the excess of taxable estates over $4 million. Estates valued below a certain dollar threshold are exempt from the estate tax, and the tax at the ordinary graduated rates is phased in for estates slightly above the threshold. The threshold is $400,000 for decedents dying in 1994, $500,000 in 1995, and $600,000 in 1996. This basic exemption is not considered to be a tax expenditure, but rather the point where the rate structure begins to apply. However, because policy makers may be interested in the effects of adjusting the dollar amount for the exemption, an estimate is provided for it in endnote 1 in the list of estate tax and generation-skipping tax expenditures. The minimum tax is the amount of state death taxes allowable as a credit against the federal estate tax.

The generation-skipping tax is equal to the amount of the credit allowed under the federal generation-skipping tax for Massachusetts transfer tax paid by the deemed transferor's estate on the property transferred.

Taxable Period: The taxable period is the lifetime of the decedent, with the tax required to be paid at least each generation. The estate tax is levied at the decedent's death, with the tax due nine months thereafter. The generation-skipping tax is imposed at the time of the generation-skipping transfer.

Interstate and International Aspects: Under the estate tax, estates of resident decedents are taxed on property included in the federal gross estate, excluding the value of real and tangible personal property located outside the state. Estates of nonresident decedents are generally taxed on real and tangible personal property located in Massachusetts. The generation-skipping tax only applies when the original transferor was a Massachusetts resident at the time of the first transfer or when the property transferred includes Massachusetts property.


Computation of the Massachusetts Estate Tax

Click here to download this chart (RTF format)



Types of Tax Expenditures under the Estate Tax

In the case of the estate tax, tax expenditures can result from any of several aspects of the tax's structure. In practice, estate tax expenditures fall into the following categories:

Exclusions from Transfer Taxation: The Massachusetts estate tax only taxes those transfers that occur on account of the death of the transferor. Other transfers, including most lifetime gifts, are not reported for estate tax purposes and are not subject to tax.

Exclusions from Gross Estate: The gross estate is the starting point for calculation of estate tax liability and, in the absence of tax expenditures, would include all property that is transferred on account of the transferor's death. To the extent that certain types of property are omitted from the gross estate, tax expenditures result.

Preferential Valuations of Property: In general, the property comprising the gross estate is taxed on the basis of its fair market value. Where certain types of property are evaluated on the basis of rules that attribute lower values to them, tax expenditures result.

Deductions from Adjusted Gross Estate: Certain amounts are subtracted from the gross estate to arrive at the adjusted gross estate, and then others are subtracted from the adjusted gross estate to arrive at the taxable estate. Many of these items represent expenses and liabilities of the estate, which reduce the estate that is transferred to heirs and hence should not be included in the basic structure of the estate tax. Other deductions from the adjusted gross estate constitute tax expenditures.


Estate Tax and Generation-Skipping Tax List of Tax Expenditures 1

4.000EXCLUSIONS FROM TRANSFER TAXATION




4.001Nontaxation of Lifetime Transfers

Massachusetts has no gift tax. A tax expenditure results in that lifetime transfers are preferred over transfers at death. However, gifts made within three years of death which are in excess of $10,000 are taxable.

Origin: M.G.L. c. 65C §1(d)
Estimate: $7.1


4.002Nontaxation of Certain Generation-Skipping Transfers

Structural gaps in the generation-skipping tax result in the failure to tax all generation-skipping transfers. Generation-skipping transfers not taxed include outright (nontrust) gifts, income distributions from trusts, transfers from trusts to grandchildren up to $250,000 per child of the original creator of a generation-skipping trust and payments from trusts existing prior to 1976.

Origin: Former IRC §§ 2601-2614 in effect December 31, 1981 M.G.L. c. 5C, § 4A
Estimate: N.A.


4.100EXCLUSIONS FROM GROSS ESTATE




4.101Exemption of Annuities under Qualified Retirement Plans

A decedent's gross estate does not include the value of an annuity or other payment receivable by a beneficiary other than the executor of the decedent's estate under a tax-qualified retirement plan.

Origin: IRC § 2039 in effect January 1, 1975
Estimate: N.A.


4.102Exemption of Life Insurance Proceeds on which the Decedent Paid the Premiums

Where an insured decedent paid the premium on a life insurance policy in the year of death but was not the owner of the policy at death, the value of the protection element purchased by virtue of the premium is not included in his or her gross estate.

Origin: IRC § 2042
Estimate: N.A.


4.200PREFERENTIAL VALUATIONS OF PROPERTY




4.201Special Valuation of Farming Land

Ordinarily, property in an estate is valued at its fair market value, taking into consideration the economically most valuable potential use of the property. In the case of land being used for farming purposes, the estate can elect to value the farm land on the basis of its continued use for farming. As a condition of this alternative valuation method, the land must be kept in farming use for at least fifteen subsequent years. To the extent that the valuation of the land for farming purposes is below its fair market value considering all possible uses, the estate tax on the land is reduced and a tax expenditure results.

Origin: M.G.L. c. 65C, § 5(c); IRC § 2032A
Estimate: N.A.


4.300DEDUCTIONS FROM ADJUSTED GROSS ESTATE




4.301Deduction of Charitable Bequests

A decedent's taxable estate does not include transfers for public, charitable or religious uses. The deduction is limited to property included in the Massachusetts gross estate.

Origin: IRC § 2055 in effect January 1, 1975
Estimate: $13.5


4.302Deduction for Bequest to Surviving Spouse

Massachusetts allows a deduction equal to the amount of property included in the Massachusetts gross estate passing to the surviving spouse.

Comment: Prior to July 1, 1994, Massachusetts limited the marital deduction to 50% of the Massachusetts adjusted gross estate.

Origin: M.G.L. c. 65C, §§ 3(b) and 3A; IRC § 2056 in effect January 1, 1975
Estimate: $96.0


KEY ORIGIN
IRC Federal Internal Revenue Code (26 U.S.C.)
M.G.L. Massachusetts General Laws
ESTIMATES All estimates are in $ millions.



Endnotes
<1> The estimate for the exemption of estates discussed in the introduction to the estate tax and generation-skipping tax is: Exemption $128.5


Click here to go to: APPENDIX A for the Tax Expenditure Budget
Click here for the Tax Expenditure table of contents
Click here for the Main table of contents
Click here to go to the next section: Capital Outlay

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