Despite the common misconception, the Massachusetts Estate Tax could apply to any decedent who owns tangible property or real estate in the state, regardless of whether they were a resident or not. The tax applies based on the gross value of the estate. Fortunately, if you do not live in Massachusetts, you might be able to avoid this tax in relation to investment or business real estate holdings.
If you have questions about planning your estate and minimizing your tax liability, contact Loshak Leach LLP today. Our law firm works with Florida residents to create intelligent estate plans that will offer our clients peace of mind.
Why Avoid the Massachusetts Estate Tax
There are federal and state estate tax laws. For the year 2021, the Federal Estate Tax only applies to estates exceeding $11.7 million USD in value. Only twelve states apply their own estate or inheritance taxes, and unfortunately, Massachusetts is one of them with a current estate tax exemption of $1 million USD. This means that if a Massachusetts resident or non-resident dies and leaves behind an estate valued at more than $1 million USD, it could be subject to an estate tax of up to 16%.
Not only is Massachusetts in the minority of states to levy an additional tax, but it also ties with Oregon for the two states with the lowest exemption level. Residents of Florida who own property in Massachusetts could leave their heirs dealing with burdensome tax rates. If you are in this position, it is worth looking into how you could avoid this tax.
Using a Limited Liability Company to Avoid Estate Taxes in Massachusetts
Suppose you own real estate in Massachusetts as an investment. In that case, you should consider forming a Limited Liability Company ("LLC") and shifting the ownership into that LLC rather than in your individual name. An LLC offers many protections and tax benefits, including avoiding the estate tax for real estate, but it must be an investment property with a legitimate business purpose and not a second home.
The best strategy for avoiding estate taxes for investment real estate owned by non-residents in Massachusetts is to hold title to the real estate in an LLC and not their individual name. In addition to liability protection and potential income tax benefits, conveying your investment real estate to an LLC avoids the Massachusetts Estate Tax with respect to said property because it no longer constitutes real estate.
According to Massachusetts tax law, LLC interests are considered intangible property and are not subject to Massachusetts estate taxes. If Massachusetts property is transferred into an LLC and is owned by a Florida resident, there would be no estate tax liability since the LLC is an intangible asset and no longer considered real estate for estate tax purposes. See Estate of Nielsen v. Commissioner, Docket No. F232365 (Mass. App. Tax Bd. 2001) (explaining that a partnership interest is not taxable, but an interest in a realty trust is taxable for Massachusetts estate tax purposes).
Hiring an Estate Planning Attorney
Estate planning tools can help you protect your wealth and reduce the stress that your family will face in the future. Tax laws are complex, and failing to create a strategic plan might leave your beneficiaries paying unnecessary taxes.