Estate Tax Returns

Federal and/or state estate tax returns are required whenever the total value of the decedent’s assets exceeds the applicable filing thresholds. The present exemptions as of 2023 are $2,000,000 in Massachusetts and $12,920,000 per person, federally. The Federal exemption is due to increase to $13,060,000 per person as of January 1, 2024.

As of January 1, 2010, the federal estate tax law was repealed. In 2011, the federal estate tax was reinstated with the threshold being increased to $5 million. The $5 million threshold was adjusted for inflation to $5.12 million for 2012. As a result of the passage of The American Taxpayer Relief Act of 2012, the exemption is to remain at the $5 million amount, adjusted annually for inflation, which has increased as follows:

2013 → $5.25 million
2014 → $5.34 million
2015 → $5.43 million
2016 → $5.45 million
2017 → $5.49 million
2018 → $11.18 million (as a result of the passage of the Tax Cuts and Jobs Act.)
2019 → $11.40 million
2020 → $11.56 million
2021 → $11.70 million
2022 → $12.06 million
2023 → $12.92 million
2024 → $13.06 million

Massachusetts State Estate Taxes

State estate tax returns may also be required. Generally, a state estate tax return is required to be filed with the state where the decedent was domiciled at the time of his death. State estate tax returns may also need to be filed with each state where the decedent owned any property, if that property was physically located within that state, e.g., a vacation home in another state.

With respect to Massachusetts decedents, an estate tax return was required if the decedent died during 2002 with an estate valued in excess of $1 million. For decedents dying after 2002, the Massachusetts estate tax thresholds varied from year to year as follows:

• 2003 → $700,000
• 2004 → $850,000
• 2005 → $950,000
• 2006 through 12/31/2022 → $1 million

Due to a change which occurred in October of 2023, the new Massachusetts estate tax filing threshold is $2,000,000 per person, which change was retroactive to January 1, 2023. Thus, with properly structured and funded trusts, a married couple in Massachusetts can pass up to $4 million of their assets to their heirs free of Massachusetts estate taxes.

The due date for filing the estate tax returns is nine months from the decedent’s death. (Note that it is also possible to get a six-month extension of time to file these returns, although, if there is a tax due, an estimated tax will generally have to be paid within the original nine-month deadline.)

Evaluating the Estate

In determining whether the decedent’s estate exceeds the filing threshold level, it is necessary to determine the value of his gross estate. Thus, even if there are deductions available to lower the taxable estate such that there is no actual tax due, if the value of the gross estate exceeds the filing threshold, then a return must be filed.

The value of the decedent’s gross estate includes all assets in which the decedent had an interest. The value is generally the fair market value as of the date of death. The term fair market value is generally the price at which property would change hands between a willing buyer and a willing seller when neither party is under any compulsion to buy or sell and both parties have reasonable knowledge of all reasonable facts. While the date of death is generally the valuation date, there is also available an alternate valuation which uses the fair market value of the decedent’s assets six months after death (or the actual date of sale if a sale occurs between the date of death and the six-month alternate valuation date). The alternate valuation date can be used only if it reduces the estate tax liability. The same method of valuation must be applied towards all assets, i.e., it is not possible to use the date of death values for some assets and the alternate value for other assets.

Assets to be Evaluated

The types of assets to be included in the gross estate include the following:

• Real estate. Any real estate that the decedent owned, whether outright, in trust, or as a joint owner, is includible in his estate to the extent of his interest therein. Thus, for example, real estate owned jointly with another individual may be includible only to the extent of 50% of the value of such real estate.  The value of any such real estate (indeed of any asset in the decedent’s estate) is the fair market value determined as of the time of the decedent’s death. The fair market value us generally obtained by reference to an appraisal of the property, or if sold within a short time after death, to the actual sales price. The type of appraisal needed in any estate can vary depending upon the size of the estate, the tax due, the nature of the real estate involved, etc. In some cases, a formal appraisal by a certified appraiser may be necessary, e.g., where there is commercial real estate involved. In other cases, a more ‘informal’ appraisal from a local realtor may suffice. (Many realtors refer to this as a “Comparative Market Analysis.”)
• Stocks and bonds. This category includes publicly traded stocks, bonds and mutual funds, as well as stock in closely held companies. Also included in this category would be any federal bonds, such as Savings Bonds, Treasury Bills, etc. The proper valuation of publicly traded stocks, bonds and mutual funds is the average of the high and the low for the day on which the decedent died. If the decedent died on a Saturday or Sunday, an average of the high and low prices for Friday and of the high and low prices for Monday must be used. Further, if there are any accrued but unpaid dividends or interest owed on any of the investments, such accrued dividends or interest must be included as well. If the stock is in a closely held company, some type of appraisal of the company must be included to substantiate the value to be reported on the return.
• Mortgages, notes and cash. This category includes any bank accounts, including certificates of deposit. Also included would be any mortgages or notes payable to the decedent.
• Life insurance. Any and all life insurance insuring the decedent’s life must be reported on the return. Not all such insurance is necessarily taxable, but it must nevertheless be disclosed on the return. Any life insurance in which the decedent possessed any ‘incidents of ownership’ will be taxable. The term ‘incidents of ownership’ includes, but is not limited to, actual ownership of a policy and the right to change the beneficiary (e.g., as in the case of company-provided group term life insurance wherein the company owns the actual insurance policy but the employee/insured can designate and change the beneficiary of the insurance proceeds at any time). Life insurance which is owned by someone else, e.g., the decedent’s spouse, or by some type of irrevocable trust may be excluded from taxation, but is still reported. Any life insurance which the decedent had transferred away within the three year period prior to his death is also taxable.
• Jointly owned property. This includes any type of asset described herein, but that was owned jointly by the decedent with any other person(s). For federal estate tax purposes, the normal presumption is that any property owned jointly by husband and wife is includible in the decedent’s estate to the extent of 50% of its value. The presumption for property owned jointly by the decedent and anyone other than a surviving spouse is that the entire value of the property is taxable to the decedent unless the surviving joint owner can prove otherwise. Thus, for example, if the decedent had put a bank account into his name with one or more of his children, the entire value of the bank account is includible in the decedent’s estate unless the children can actually prove that they contributed to the account.
• Miscellaneous property. This category includes items such as jewelry, items of personal property, household furnishings, automobiles, rare collections (e.g., coins, books, stamps, etc.) and any other asset which the decedent might own. Other types of miscellaneous assets would include limited partnership interests, refunds of any type (e.g., income tax refunds, insurance premium refunds, etc.), death benefits payable from the decedent’s employer, etc. If any of these items were particularly valuable, a formal appraisal may be needed.
• Lifetime transfers. Any assets which the decedent might have transferred to a revocable trust during his lifetime (which asset may fit one of the categories otherwise described herein) must be included. It is also necessary to account for any taxable gifts made by the decedent and reported on any federal gift tax returns filed. Any such ‘adjusted taxable gifts’ will affect the value of the decedent’s taxable estate as well.
• Annuities. This category includes any commercial form of annuity as well as any type of retirement benefits to which the decedent might be entitled. Retirement assets would include Individual Retirement Accounts, 401(k) accounts, Keogh accounts, pension plans, profit-sharing plans, etc.

Debts and Other Expenses

If the gross value of all of the above assets exceeds the applicable filing threshold, then the various debts and expenses relating to the decedent’s estate must next be accounted for. These include the following:

• Funeral expenses. These include any funeral home expenses, cemetery charges, memorial costs, flower charges, expenses relating to a funeral reception, and other similar charges.
• Administration expenses. These include legal fees, accountant’s fees, and any executor’s fees paid. Other expenses would be fees charged by realtors or other appraisers to render appraisals for the estate. Certain expenses of maintaining estate assets during the estate administration process may also be deductible.
• Debts. These include any bills incurred in connection with the decedent’s last illness, as well as any bills owed at the time of death. The bills would include credit card bills and household bills that had been accrued, but not yet paid. Also, any real estate tax bills may be deductible as well, even if not yet issued by the city or town. federal and state income tax liabilities may also be deductible.
• Mortgages and liens. Any mortgage balance outstanding or lien is also a deductible expense. (Note, however, that if the mortgage is on real estate in which the decedent owned less than the entire interest, the mortgage is generally only deductible to the extent of the decedent’s interest in the underlying real estate. Thus, for example, if he owned a home with his spouse as joint tenants and only 50% of the value of the home is includible in the gross estate, only 50% of the mortgage balance may be deductible.

Finally, after compiling the list of assets and debts and expenses, there may be other deductions and/or credits to be taken as well. These deductions include the following:

• Marital deduction. Assets payable to the surviving spouse (if any) will generally qualify for the estate tax marital deduction. Any asset owned jointly by the decedent and his spouse and which passes automatically to the surviving spouse alone will be fully deductible. Other assets that may be deductible include life insurance or annuities payable directly to the surviving spouse. Additionally, if the spouse is the beneficiary under any type of trust created by the decedent, the surviving spouse’s interest in that trust may qualify for the marital deduction (assuming the “QTIP” or Qualified Terminable Interest Property requirements of the Internal Revenue Code are met).
• Charitable deduction. Assets payable to any qualified charitable organization will also generally be deductible to the extent of the value of the interest passing to charity.
• Foreign Death Taxes. If the decedent owned property in another country and his estate is obligated to pay taxes to that country, a credit may be available.
• Credit for tax on prior transfers. In certain situations where the decedent’s estate includes assets which were received from someone else, if those assets had been taxed in the prior owner’s estate, there may be a credit available. The actual amount of the credit is a complicated computation, but is basically designed to avoid having the same asset taxed twice within a short period of time. Generally, this credit is available only if the tax was paid within 10 years of the decedent’s death, with the amount of the credit varying depending upon how closely to the decedent’s death the tax was paid (e.g., a tax paid within 2 years of death may be fully available as a credit, whereas the credit for a tax paid more than 8 years and less than 10 years from date of death is available only to the extent of 20% of the credit is otherwise determined.
• Qualified conservation easement exclusion. It is also possible to exclude from taxation a portion of the value of land that is subject to a “qualified conservation easement.” Generally, the land must have been owned by the decedent or his family for at least 3 years prior to the decedent’s death; the easement must be given to a qualified charitable organization; and the property must be exclusively used for conservation purposes.

Once all of the above information has been gathered, the necessary computations are made to determine the amount of tax liability, if any. Fedele and Murray, P.C., can assist in gathering all the necessary information and will prepare all necessary returns and schedules for you.

Avoid Estate Tax Frustrations

Taxes are notoriously frustrating, and estate taxes bear the additional gravity of loss. An experienced and attentive tax professional can alleviate some of that gravity by explaining and facilitating the filing process to you. Our attorneys have decades of experience helping Massachusetts families. Send us an email or call us at 781-551-5900 to schedule a consultation.