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Massachusetts Court Rules Out-of-State Estate Tax a Constitutional Issue

A Family and Probate court in Massachusetts has ruled that out-of-state estate tax is a constitutional matter, a report from Wealth Management reveals. The ruling affects residents of Massachusetts who own real estate outside of the state at the time of their death.

As per state law, the value of out-of-state real estate is subject to Massachusetts estate tax. If the property is located in another state that also imposes an estate tax, Massachusetts offers a tax credit for taxes paid to that state. If the property is located in a state that does not impose estate tax or in a foreign country, no tax credit is offered.

The additional estate tax can place a financial strain on families. Problems may also arise if the property is located in a state that has a higher estate tax threshold than Massachusetts. Massachusetts has a $1 million threshold, whereas the federal exemption limit is $5.4 million. Many states are now adjusting their thresholds to be more in line with the federal limit.

The law creates complications for estate planning attorneys, as all options are unfavorable. Estate planners have three options: pay the tax and avoid a fight; report the real estate and claim that it is not subject to the Massachusetts estate tax; or pay the tax and file an amended return asking for a refund.

The state’s Department of Revenue at times has given into requests immediately, but has also gone to the point of threatening litigation. At other times, the state has held its ground. The mixed bag of results makes it difficult to predict the outcome of whichever route is taken.

At the heart of the issue is the case Dassori v. Commissioner of Revenue. In this case, the decedent was a resident of Massachusetts at the time of death and owned an apartment in Paris, France. The apartment was owned through a French entity known as SCI.

A Massachusetts estate tax return was filed by the estate that showed the apartment was subject to the state’s estate tax. An amended return was then filed that excluded the apartment’s value from the decedent’s Massachusetts estate and requested a refund of $176,880. The state denied the estate’s refund request.

The due process clause of the 14th Amendment prohibits states from taxing real property located in other jurisdictions. This principle was confirmed by the U.S. Supreme Court in 1923.

Ultimately, the court ruled in the estate’s favor, which is a victory for all Massachusetts taxpayers. While Dassori is not a controlling precedent, this is the first time a constitutional law was raised against out-of-state taxation on real property since the state changed its laws after the “Credit for State Death Taxes” was eliminated.

The case was complex, as it dealt with foreign property using an entity that most U.S. lawyers are unfamiliar with. However, the principal remains the same – taxation of real property located outside of Massachusetts is in violation of the due process clause under the 14th Amendment.

The Massachusetts Department of Revenue has not revealed whether it will be appealing the decision, or if lawmakers will amend the law in light of the decision.