March 1, 2017

State and Federal Tax Law Developments Affect Same-Sex Couples and MA Residents with Out-of-State Real Estate

Recent changes in state and federal tax laws impact same-sex couples and any Massachusetts residents who own real estate in another state. Clients who may be affected by these changes should act soon to protect the possibility of preferable tax treatment.

Potential Massachusetts Estate Tax Savings for Out-of-State Real Estate

Massachusetts residents who own real estate located outside of Massachusetts, either individually or through a trust, LLC or other entity, should consider the possibility of taking action based on a recent court decision discussed below.

The U.S. Supreme Court has previously held that it is unconstitutional for any state to tax out-of-state property. When Massachusetts adopted its current estate tax regime, however, it based the tax on the federal system in place at the time and implemented a tax on all of the decedent’s property, wherever situated. In a meaningful departure, the Middlesex Probate and Family Court recently held that Massachusetts could not levy an estate tax on Paris real property owned by a Massachusetts domiciliary.

Under this case, real estate located outside of Massachusetts but owned individually by a decedent domiciled in Massachusetts can be excluded from a decedent’s gross estate for Massachusetts estate tax purposes. If out-of-state real estate is located in a state that levies its own estate tax, this recent decision may not have a significant impact, as tax would be owed to that state.  However, an individual who owns real estate in a state that does not have its own estate tax, such as Florida or New Hampshire, may now be able to recognize significant estate tax savings at his or her death.

It remains unclear whether the same result would be reached if the out-of-state real estate is owned by a trust or other entity governed by Massachusetts law instead of directly by the individual. In certain instances it may make sense to change the ownership of such out-of-state real estate. Therefore, again, we strongly recommend that you contact us if you are a Massachusetts resident and own, either individually or through a trust or other entity, real estate located outside of Massachusetts.

IRS Issues Notice Giving Married Same-Sex Couples Opportunity to File for Tax Refund

A prior transfer to a same-sex spouse, whether during life or at death, that did not qualify for the marital deduction or that required the allocation of generation-skipping transfer tax (GST) exemption because of the Defense of Marriage Act (DOMA) may be eligible for more favorable tax treatment under a new IRS ruling.

As a result of the Supreme Court case United States v. Windsor, which declared portions of DOMA unconstitutional, and various subsequent court and IRS rulings, transfers between married same-sex couples now qualify for the marital deduction for lifetime gifts and bequests at death and do not require allocation of GST exemption, even in cases involving significantly younger spouses. Until recently, the application of these changes did not apply to gifts and bequests made before the ruling. However, in January of this year, the IRS announced that if a prior transfer between spouses did not qualify for the marital deduction at the time of the transfer because of DOMA, the affected taxpayer or personal representative of the affected estate may be able to file an amended estate or gift tax return to claim the marital deduction for that gift or bequest and receive a refund of taxes paid or restoration of the exemption used on the gift (IRS Notice 2017-15). Similarly, if GST exemption was allocated to a transfer to a significantly younger spouse because of DOMA, the taxpayer or personal representative may be able to file an amended return to reduce the amount of exemption allocated or receive a refund of taxes paid. Different deadlines apply depending on the date and circumstances of the original transfer, so it is imperative to act quickly. Strict deadlines apply, so please contact us as soon as possible if you think this situation may apply to you.

Note: 2017 Exemption and Exclusion Amounts

The 2017 unified federal estate and gift tax exemption amount increased to $5,490,000, as did the federal GST exemption amount. The annual exclusion amount for gifts remains at $14,000 for 2017.

Please stay tuned for further developments from the new administration/Congress about the future of the estate and gift tax.