Massachusetts Supreme Court Denies Estate Tax Exemption in Trust Dispute

Protecting familial assets from unnecessary taxation upon the death of a spouse, parent, or other beneficiary is one of the primary benefits of effective New England estate planning. Establishing trusts, wills, and other estate planning instruments is essential to protecting assets within a family. A recent decision by the Massachusetts Supreme Court demonstrates the importance of following the proper estate planning procedures to prevent substantial tax burdens to the heirs of a property owner upon their death.

In the recently decided case, the appellants consist of the heirs of a Massachusetts woman who died in 2011. Before her death, the woman’s husband created a qualified terminable interest trust in New York to support his wife after his death. The trust was created to guarantee the wife income from the husband’s assets while reducing the tax burden to the parties’ heirs when the husband and wife eventually passed away. After the husband died in 1993, his estate was not taxed for the value of the trust assets, and the assets remained in trust to benefit the wife until her passing. The wife later moved to Massachusetts, where she lived until she died in 2011. The wife’s estate filed both federal and state estate tax returns after her death, noting the trust assets on the federal documents, but omitting them from the state return, and paying no state estate taxes on the trust assets.

The Massachusetts Commissioner of Revenue selected the estate tax return for an audit, and determined that the value of the trust assets should be assessed for Massachusetts estate tax. As a result of the audit, the estate was required to pay over $1.8 million in taxes and interest. The estate disputed the decision, and the Massachusetts Supreme Court took up the resulting appeal. The high court agreed with the tax commission that the transfer of the assets from the wife to her heirs occurred in Massachusetts and was not eligible for and protection by their inclusion in a qualified interest terminable trust. This was because Massachusetts law only protected such assets if the trust created in Massachusetts, and this property was placed in trust in New York. Because of the high court’s decision, the estate will be required to pay the full amount of Massachusetts estate tax on the trust assets.

Although the wife’s estate was under the impression that taxes would not be levied on the estate, this recent decision suggests they were mistaken. Effective estate planning must allow heirs and beneficiaries to an estate to know their potential tax burdens early, and not only after an audit occurs. Furthermore, there are multiple ways for families to prevent their assets from being taxed. A knowledgeable estate preparation attorney can help ensure that beneficiaries will pay as little as possible in federal and state estate taxes.

Retain a Qualified New England Estate Planning Attorney

If you or a loved one is preparing an estate plan to protect your family’s assets in the event of a death, hiring a qualified Rhode Island trusts and estates attorney may be the most important decision you make in your estate planning process. The knowledgeable estate planning lawyers with Bilodeau Capalbo can assist you with will preparation, trust creation, and other estate planning issues. Our skilled attorneys have knowledge of the state and federal laws that must be followed to best protect your assets. Our attorneys practice in Rhode Island, Connecticut, and Massachusetts, and can be of service for all of your estate planning needs. Call our offices at 401-300-4055 to schedule a consultation.