A. INTRODUCTION

The Massachusetts estate tax law, M.G.L. c. 65C. was enacted in 1975 and is applicable to all estates of decedents dying on or after January 1, 1976. The Massachusetts estate tax is a transfer tax imposed on the value of all property in the estate of a decedent at the date of death, and not on the value of property received by each beneficiary. It applies in general to the estates of decedents who are Massachusetts residents at the date of death and to the estates of non-resident decedents who own real and tangible personal property located in Massachusetts at the date of death.

The Massachusetts estate tax law is patterned after the Internal Revenue Code (Code), as amended and in effect on January 1, 1975. Later amendments to the federal estate tax law do not apply to the Massachusetts estate tax law, except when federal provisions have been specifically incorporated by Massachusetts legislative amendment.

Chapter 711 of the Acts of 1985 substantially revised the Massachusetts estate tax law for the first time in ten years and adopted certain provisions of the Code as amended and in effect on January 1, 1985. Certain sections of the new legislation apply to estates of decedents dying on or after January 1, 1986, and others are effective upon passage of the legislation on December 31, 1985. The purposes of this release are to provide a summary of the amendments and to answer the most common questions raised by these changes.

B. DEFINITIONS

For purposes of this Technical Information Release, the following terms have the following meanings:

Alternate Valuation - the value of all property included in the decedent's gross estate at the alternate valuation date, which in general is six months after the date of decedent's death.

Code - the Internal Revenue Code of the United States, as amended and in effect on January 1, 1975, unless otherwise indicated.

Commissioner - the Commissioner of Revenue.

Credit - for estates of decedents dying on or after January 1, 1986, a credit of $1500, or the amount of the Massachusetts estate tax liability computed on the Massachusetts taxable estate, whichever is less.

Domicile - the place which is an individual's true, fixed and permanent home, determined by established common law principles and the facts and circumstances in each case.

Executor - the person named in a will to execute the provisions of the will; if there is no will, the administrator appointed by the probate court to settle an estate; and if there is no executor or administrator appointed, any person in actual or constructive possession of any property of the decedent who is charged with filing the estate tax return and paying the tax.

Exemption - for estates of decedents dying on or after January 1, 1986, if the Massachusetts net estate is $200,000 or less, there is an exemption equal to the Massachusetts net estate; but if the Massachusetts net estate is greater than $200,000, there is no exemption.

Fair Market Value - the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of the relevant facts.

Federal Gross Estate - the gross estate as defined under the Code, except that for estates of decedents dying on or after January 1, 1986:

1) notwithstanding Code § 2035, the gross estate includes the value of all property in which the decedent had an interest and made a transfer by trust or otherwise within three years of death except where

a) a bona fide sale for adequate and full consideration is made, or

b) the value of the property transferred to any donee is $10,000 or less during the calendar year, and

2) notwithstanding Code § 2040, the gross estate includes one-half of the value of any property held by the decedent and spouse as joint tenants or as tenants by the entirety, where the decedent and spouse are the only joint tenants.

Lien - in general, a Massachusetts estate tax lien on all property included in the Massachusetts gross estate which arises at the date of death of every Massachusetts decedent and every non-resident decedent who owns real estate and tangible personal property located in Massachusetts. This lien arises by operation of law, and continues until the estate tax liability is paid in full or until ten years from the date of death of the decedent, whichever is earlier.

Massachusetts Gross Estate - the federal gross estate, whether or not a federal estate tax return is required to be filed, less the value of real and tangible personal property located outside Massachusetts, plus for estates of decedents dying on or after January 1, 1986, the value of any property

1) in which the decedent at death had a qualifying income interest for life under M.G.L. c. 65C, § 3A(c) or made a transfer of property which would require the property to be included the gross estate, and

2) for which a deduction was allowed for Massachusetts estate tax purposes.

Massachusetts Net Estate - the Massachusetts gross estate less allowable deductions for funeral expenses, claims against the estate, and unpaid mortgages or liens on property included in the Massachusetts gross estate.

Massachusetts Adjusted Gross Estate - the Massachusetts net estate less-administrative expenses, expenses incurred in administering property not subject to claims, and net losses.

Massachusetts Taxable Estate - the Massachusetts adjusted gross estate less the allowable charitable deduction and marital deduction.

Non-resident Decedent - a person whose domicile at the date of death is outside Massachusetts.

Resident Decedent - a person whose domicile at the date of death is in Massachusetts.

Qualified Terminable Interest Property (QTIP) - for Massachusetts estate tax purposes, property

1) which is included in the Massachusetts gross estate,

2) which passes from the decedent,

3) in which the surviving spouse has a qualifying income interest for life, and

4) to which an election under M.G.L. c. 65C, § 3A is made for this property to qualify for the Massachusetts marital deduction.

Qualifying Income Interest for Life - property interest as to which

1) all of the income from the property is payable to the surviving spouse annually or more frequently, and

2) no person has a power to appoint any part of the property to any person other than the surviving spouse during the spouse's lifetime.

Special Use Valuation - for Massachusetts estate tax purposes, if the decedent's gross estate includes Massachusetts real property used for farming purposes, an election which the executor makes to value such property for farm use in accordance with Code § 2032A in effect on January 1, 1985.

20% provision - for estates of decedents dying on or after January 1, 1986, the statutory rule which provides that the Massachusetts estate tax liability not be more than 20% of the amount of the Massachusetts net estate which exceeds $200,000.

Valuation - in general, the value of all property included in the Massachusetts gross estate at the fair market value at the date of death of the decedent, except when alternate valuation or special use valuation is elected.

C. GENERAL INFORMATION

1. What change did the new legislation make in filing requirements?

a) Under M.G.L. c. 62C, § 17, as amended, and applicable to estates of decedents dying on or after January 1, 1986, a Massachusetts estate tax return (Form M-706) must be filed if the resident or non-resident decedent's Massachusetts gross estate is over $200,000, or if a Massachusetts release of estate tax lien (Form M-792) or Massachusetts estate tax closing letter (Form M.E.C.L.) is needed.

b) Under M.G.L. c. 62C, § 17, before amendment, and applicable to estates of decedents dying before January 1, 1986, a Massachusetts estate tax return (Form M-706) must be filed when the decedent's federal (not Massachusetts) gross estate is over $60,000, or if a Massachusetts release of estate tax lien (Form M-792) or Massachusetts estate tax closing letter (Form M.E.C.L.) is needed.

2. What changes did the new legislation make in the computation of the Massachusetts estate tax?

a) Under M.G.L. c. 65C, § 2(a) and 3(a), as amended, and applicable to estates of decedents dying on or after January 1, 1986:

1) Exemption - where the Massachusetts net estate is $200,000 or less, there is an exemption equal to the Massachusetts net estate, and there is no estate tax due; but where the Massachusetts net estate is over $200,000, there is no exemption.

2) Credit - where the Massachusetts net estate is greater than $200,000, determine the Massachusetts taxable estate and using the Massachusetts estate tax table, compute the Massachusetts estate tax. Then subtract a credit of $1500 or the amount of Massachusetts estate tax liability, whichever is less.

3) Exception: 20% provision - the Massachusetts estate tax liability will not be greater than 20% of the amount of the Massachusetts net estate that exceeds $200,000.

b) Under M.G.L. c. 65C, § 2(a) and 3(a), before amendment and applicable to estates of decedents dying before January 1, 1986, where the Massachusetts net estate is $60,000 or less, there is an exemption equal to the Massachusetts net estate and no tax is due. Where the Massachusetts net estate is over $60,000, the exemption is $30,000.

3. What change did the new legislation make in the computation of the Massachusetts estate tax for the estate of a non-resident decedent?

a) Under M.G.L. c. 65CF § 4(b), the executor of the estate of a non-resident decedent with real estate and tangible personal property located in Massachusetts must file a Massachusetts estate tax return and also a Massachusetts non-resident decedent affidavit (Form-NRA), which provides the formula to compute the Massachusetts estate tax for a non-resident decedent. Under M.G.L. c. 65C, § 4(b)f as amended, effective December 31, 1985, the formula is a ratio, the numerator of which is the value of Massachusetts real and tangible personal property less any mortgage or lien, and the denominator of which is the value of the Massachusetts gross estate less any mortgage or lien on Massachusetts property, multiplied by the estate tax computed as if the decedent were a Massachusetts resident. The result is the total Massachusetts estate tax for the estate of a non-resident decedent.

The formula is as follows:

Value of Mass. real and tangible personal property Tax computed Mass. less any mortgage or lien as if decedent estate tax X were a Mass. = for non-resident resident decedent Value of Mass. gross estate less any mortgage or lien on Mass. property

b) Under M.G.L. c. 65C, § 4(b), before amendment, Massachusetts included the full value of Massachusetts real estate, undiminished by any mortgage or lien in the numerator and denominator of the ratio in the non-resident computation.

4. What change did the new legislation make in the Massachusetts election of alternate valuation?

a) Under M.G.L. c. 65C, § 5(a), as amended, and applicable to estates of decedents dying on or after January 1, 1986, the executor must elect alternate valuation for Massachusetts estate tax purposes if alternate valuation is elected for federal estate tax purposes. The executor may now elect alternate valuation for Massachusetts estate tax purposes if no federal estate tax is payable, whether or not a federal estate tax return is required to be filed. The election of alternate valuation is made in accordance with Code § 2032 in effect on January 1, 1985, as follows:

1) the election must decrease the Massachusetts gross estate and the Massachusetts estate tax liability;

2) the election must be made within one year after the due date of the estate tax return or one year after the expiration of a valid extension to file the return; and

3) the election must be irrevocable.

b) Under M.G.L. c. 65C, § 5, before amendment, and applicable to estates of decedents dying before January 1, 1986, if the executor elects alternate valuation on the federal estate tax return, it must be used for the Massachusetts estate tax return; if it is not elected for the federal estate tax return or if no federal estate tax return is required to be filed, alternate valuation cannot be used for the Massachusetts estate tax return.

5. What changes did the new legislation make in the Massachusetts treatment of the federal credit for state death taxes?

a) Under M.G.L. c. 65C, § 2(b), as amended, effective December 31, 1985, if the maximum federal credit for state death taxes allowable to the estate of a resident or non-resident decedent is greater than the Massachusetts estate tax imposed under M.G.L. c. 65C, § 2(a) or 4(b), any excess of the allowable federal credit is added to the Massachusetts estate tax. This provision now expressly applies to the estates of non-resident as well as resident decedents.

For an estate of a decedent domiciled outside of the United States, whose gross estate consists only of intangible personal property located in Massachusetts, in order to apply the federal credit for state death taxes the Massachusetts estate tax is computed as if the decedent had been a Massachusetts resident, and not by the formula discussed in (C)(3) above.

Under M.G.L. c. 65C, § 2(b), as amended, effective December 31, 1985, for purposes of applying the federal credit for state death taxes to the estate of a Massachusetts resident or non-resident decedent, the Massachusetts taxable estate includes the value of QTIP property which has been included in the federal gross estate but not in the Massachusetts gross estate.

b) Under M.G.L. c. 65C, § 2(b), before amendment, effective before December 31, 1985, the federal credit for state death taxes expressly applies to resident decedents.

6. What change did the new legislation make in the requirements for reporting federal estate tax changes?

a) Under M.G.L. c. 62C, § 30, as amended, effective December 18, 1985, if there is a change in the federal taxable estate, the executor must submit to the Commissioner, within two months of receipt, a copy of the federal final determination, with the Massachusetts report of federal estate tax change (Form M-706 FC) and payment of any additional Massachusetts estate tax due, with interest. Any estate failing to comply with this provision will be assessed a penalty of $100 or 10% of the additional tax, whichever is less.

Under M.G.L. c. 62C, § 30, before amendment, the executor is not required to file with the Commissioner the federal final determination of an estate tax change received before December 18, 1985, but it is recommended that it be filed in order to protect the executor from personal liability.

7. What changes did the new legislation make in the application of the Internal Revenue Code and regulations for Massachusetts estate tax purposes?

Under M.G.L. c. 65C, as amended, Massachusetts continues to apply the Internal Revenue Code in effect on January 1, 1975, and the regulations thereunder so far as consistent with Massachusetts law, except as follows:

1) Massachusetts applies the Code in effect on January 1, 1985, and regulations thereunder, to the following:

i) alternate valuation (Code § 2032), under M.G.L. c. 65C, § 5(a);

ii) actuarial tables for the valuation of annuities (Code § 2031), under M.G.L. c. 65C, § 5(b);

iii) special use valuation (Code § 2032A), under M.G.L. c. 65C, § 5(c);

iv) reformation of charitable instruments (Code § 2055(e)), under M.G.L. c.65C, § 3(c).

2) Because of differences between Massachusetts law and the Internal Revenue Code, Massachusetts applies the Code in effect on January 1, 1985, and regulations thereunder, only so far as consistent with Massachusetts law, to the following:

i) property owned jointly by husband and wife (Code § 2040), under M.G.L. c. 65C, § 1(d);

ii) QTIP inclusion in gross estate (Code § 2044), under M.G.L. c. 65C, S 1(f);

iii) QTIP for marital deduction (Code § 2056), under M.G.L. c. 65C, § 3A.

3) Massachusetts applies Code § 2035, in effect from December 31, 1976 through December 31, 1981, and the regulations thereunder, so far as consistent with Massachusetts law, to property transferred within three years of date of death, under M.G.L. c. 65C, § 1(d).

4) Also, Massachusetts applies Code § 2602, in effect on December 31, 1981, to the generation-skipping tax, under M.G.L. c. 65C, § 4A.

Under M.G.L. c. 65C, before amendment, and in general for estates of decedents dying before January 1, 1986, Massachusetts applies the Code in effect on January 1, 1975, and regulations thereunder so far as consistent with Massachusetts law.

D. MASSACHUSETTS GROSS ESTATE

1. What change did the new legislation make in the inclusion in the Massachusetts gross estate of property owned jointly by a husband and wife?

Under M.G.L. c. 65c, § 1(d), as amended, and applicable to estates of decedents dying on or after January 1, 1986, the Massachusetts gross estate includes one-half of the value of all property owned by the decedent and surviving spouse as joint tenants or tenants by the entirety, regardless of which spouse furnished the contribution to the property. In order to be eligible for this treatment, joint property must be owned only by the husband and wife with no other joint owner. If property is owned jointly by the decedent and any other person except the spouse, it is included in the Massachusetts gross estate of the first joint owner to die, unless contribution is shown by affidavit and supporting evidence.

b) Under M.G.L. c. 65C, § 1(d), before amendment, and applicable to the estates of decedents dying before January 1, 1986, the Massachusetts gross estate of the first joint owner to die includes the full value of all jointly owned property, including property owned jointly by the decedent and surviving spouse, unless contribution is shown by affidavit and supporting evidence.

2. What change did the new legislation make in the inclusion in the Massachusetts gross estate of property transferred within three years of death?

Under M.G.L. c. 65C,§ 1(d), as amended, and applicable to estates of decedents dying on or after January 1, 1986, the Massachusetts gross estate includes the value of all property transferred by the decedent within three years of the date of the decedent's death, except for the following:

1) a bona fide sale for full and adequate consideration;

2) property with a value of $10,000 or less transferred to any person during a calendar year;

3) property transferred more than three years before the date of death. This property is also excluded from the $10,000 threshold for that calendar year.

If the total property transferred to any person is greater than $10,000 during a calendar year, the full value of the property transferred is included in the Massachusetts gross estate. All property transferred before January 1, 1986, and within three years of the date of death, is also included in the Massachusetts gross estate.

Under M.G.L. c. 65C, before amendment, and applicable to estates of decedents dying before January 1, 1986, the Massachusetts gross estate includes the full value of all property over $3,000 transferred within three years of the date of death, except for property transferred for full and adequate consideration. There is a rebuttable presumption that the property was transferred in contemplation of death.

3.What change did the new legislation make in the valuation of annuities, life estates, and other partial property interests?

Under M.G.L. c. 65C, § 5(b), as amended, effective December 31, 1985, the Massachusetts gross estate includes the value of annuities, life estates, and other partial property interests, determined according to the 10% unisex actuarial tables in effect at the decedent's date of death, under Code § 2031, in effect on January 1, 1985.

b) Under M.G.L. c. 65C, § 5(b), before amendment, effective before December 31, 1985, the value of annuities, life estates, and other partial property interests is determined according to the 6% male and female actuarial tables under Code § 2031, as amended and in effect on January 1, 1975.

4. What change did the new legislation make in the valuation of Massachusetts real property devoted to farm use?

Under M.G.L. c. 65C, § 5(c), as amended, and applicable to estates of decedents dying on or after January 1, 1986, if the Massachusetts gross estate includes Massachusetts real property devoted to farm use, the executor may elect special use valuation for that property, if the estate qualifies under Code § 2032A, in effect on January 1, 1985. Under special use valuation, farm property is valued on its actual use as a farm.

1) Special use valuation election

If a federal estate tax return is required to be filed, the Massachusetts election of special use valuation must be consistent with the federal election. The executor must make the election of special use valuation on the Massachusetts estate tax return (Form M-706) and must also complete and attach new Form M-706 N. The executor may make this election on a late return, but only if it is the first Massachusetts estate tax return filed. Once made, the election is irrevocable.

2) Massachusetts estate tax lien

Under M.G.L. c. 65C, § 14(f), as amended, and applicable to estates of decedents dying on or after January 1, 1986, if Massachusetts farm property qualifying for special use valuation is disposed of or ceases to be used for farming within ten years from the decedent's death, a Massachusetts estate tax lien equal to the amount of additional tax due under Code § 2032A, in effect on January 1, 1985, attaches to the property. This lien arises when the election of special use valuation is made. Any additional tax is due within six months of the disposition or cessation of farm use for this property.

Under M.G.L. c. 65C, before amendment, and applicable to estates of decedents dying before January 1, 1986, the Massachusetts gross estate includes the value of all Massachusetts real estate, including farm property, at its fair market value based on its highest and best use at the date of death, or at the alternate valuation date, if elected.

E. DEDUCTIONS

1. What change did the new legislation make in the deduction of interest for Massachusetts estate tax purposes?

Under M.G.L. c. 65C, § 3(b), as amended, effective December 31, 1985, interest is allowed as a deduction for Massachusetts estate tax purposes only if it has been paid in full or has accrued within three years from the due date of the estate tax return, regardless of any extension of time to file the return. This deduction of interest includes interest on federal estate tax paid on an installment basis.

b) Under M.G.L. c. 65C, § 3(b), before amendment, in general, the Massachusetts estate tax deduction for interest follows the federal deduction.

2. What change did the new legislation make in the Massachusetts marital deduction for qualified terminable interest property (QTIP)?

Under M.G.L. c. 65C, § 3A, as amended, and applicable to estates of decedents dying on or after January 1, 1986, the executor may make an election that certain qualified terminable interest property (QTIP) passing from the decedent to the surviving spouse and included in the Massachusetts gross estate, will qualify for the Massachusetts marital deduction. The total Massachusetts marital deduction cannot be greater than 50% of the decedent's Massachusetts adjusted gross estate. All other requirements for the Massachusetts marital deduction must be satisfied for QTIP property to be allowed as a deduction.

1) QTIP election

The executor must make a proper election for QTIP property to qualify for the Massachusetts marital deduction as follows:

(a) the election must be made on the Massachusetts estate tax return, which is filed on or before the due date of the return or any extension granted;

(b) the election once made is irrevocable; and

(c) the election may be for all or any part of the QTIP property. If an election is made for part, it must relate to a fractional or percentile share of the QTIP property.

The Massachusetts election is independent of the federal election, and so the Massachusetts QTIP property may differ from the federal QTIP property.

2) QTIP and qualified charitable remainder trust

Under M.G.L. c 65C, § 3A(g), as amended, an interest in a qualified charitable remainder trust qualifies for the Massachusetts QTIP marital deduction if:

(a) the interest passes from the decedent to the surviving spouse, and

(b) the surviving spouse is the only beneficiary of the trust, other than a charitable organization qualified under Code § 170.

3) QTIP inclusion in the Massachusetts gross estate

Under M.G.L. c. 65C, § 1(f), as amended, and applicable to estates of decedents dying on or after January 1, 1986, the Massachusetts gross estate of the second spouse to die includes the value of QTIP property held by the second spouse at death, if a marital deduction for this QTIP property was previously allowed in the estate of the first spouse to die. The Massachusetts gross estate of the second spouse to die also includes QTIP property transferred during the life of the second spouse to die. M.G.L. c. 65C, § 1(f).

b) Under M.G.L. c. 65C, § 3, before amendment, and applicable to estates of decedents dying before January 1, 1986, a terminable interest in property passing from the decedent to the surviving spouse does not qualify for the Massachusetts marital deduction.

3. What change did the new legislation make in allowance of the reformation of charitable instruments?

Under M.G.L. c. 65C, § 3(c), as amended, effective December 31, 1985, the reformation of a charitable instrument is allowed for charitable remainders or other partial interests passing to a charity which had previously not qualified for the Massachusetts charitable deduction, if the reformation of the charitable instrument qualifies these interests for the federal charitable deduction under Code § 2055(e) in effect on January 1, 1985. In general, to qualify for the Massachusetts charitable deduction, a charitable interest must be in the form of a charitable remainder trust, an annuity trust, or a pooled income fund, and the amount of the property interest must be included in the Massachusetts gross estate.

Under M.G.L. c. 65C, § 31 before amendment, a Massachusetts charitable deduction is allowed for charitable remainders or other partial interests passing to a charity which meet the qualification of Code § 2055(e) in effect on January 1, 1975, without regard to the later federal changes extending the time for reformation of charitable instruments.

F. MASSACHUSETTS ESTATE TAX LIEN

1. What change did the new legislation make in the Massachusetts estate tax lien in connection with a bona fide purchaser of Massachusetts real estate?

a) Under M.G.L c. 65C. § 14(b), as amended, effective December 31, 1985, to protect a bona fide purchaser for value, there is no estate tax lien on Massachusetts real estate where the property is transferred as follows:

1) before the decedent's death;

2) by a deed not disclosing an intent that the transfer will take effect at or after the decedent's death, and the deed was recorded before the decedent's death; and

3) by the initial transferee (or a transferee of the initial transferee) to a bona fide purchaser for full and adequate consideration.

The estate tax lien then attaches to the proceeds of the property which is transferred, or to any other property of the initial transferee, to the extent of the value of the transferred property.

b) Under M.G.L. c. 65C, § 14(a), before amendment, effective before December 31, 1985, for all Massachusetts real estate included in the Massachusetts gross estate, the Massachusetts estate tax lien arises at the date of death of the decedent and continues until the tax is paid in full or until ten years from the due date of the return, whichever is earlier.

2. What change did the new legislation make in the requirements which apply when a non-resident executor sells Massachusetts real estate?

a) Under M.G.L. c. 202, § 32, as amended, effective December 31, 1985, a non-resident executor, in order to obtain from the probate court a license to sell Massachusetts real estate, must file in the probate court a Massachusetts estate tax closing letter or Massachusetts release of estate tax lien issued by the Commissioner, showing that the Massachusetts estate tax has been paid or that no tax is due. This provision incorporates the same obligation imposed upon a resident or non-resident executor, by M.G.L. c. 65Cr § 14(e).

b) Under M.G.L. c. 202, § 32, before amendment, the non-resident executor's obligation to file a Massachusetts estate tax closing letter or release of estate tax lien was not explicit.

3. What change did the new legislation make in the Massachusetts estate tax lien on farm property qualifying or special use valuation?

Under M.G.L. c. 65C, § 14(f) as amended, and applicable to estates of decedents dying on or after January 1, 1986, a Massachusetts estate tax lien attaches to farm property qualifying for special use valuation for ten years from the decedent's death. See D4(a)(2) above.

b) Under M.G.L. c. 65C, § 14, before amendment, and applicable to estates of decedents dying before January 1, 1986, there is no special Massachusetts estate tax lien for farm property, because there is no special use valuation for farm property.

Commissioner of Revenue

September 23, 1986

TIR 86-4