How Does Massachusetts Track Gifts for Estate Tax Return?

 In Estate and Gift Taxes
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Photo by Georgie Cobbs on Unsplash

Question:

As a practical matter, how would Massachusetts determine the amount of taxable gifts for estate tax purposes since gifts in small but taxable amounts could have been given over the lifetime of the giver? There may be no existing documents for gifts given decades ago. Also would the tax on a $20,000 gift be on the entire amount or just on the difference between $20,000 and the tax exempt amount of $15,000?

Response:

Massachusetts has a unique gift and estate tax structure. Gifts are not taxed and for Massachusetts purposes, no gift tax return is necessary when they are made. When a Massachusetts resident dies, their estate is taxed if it exceeds $1 million. That’s where gifts figure in. Gifts in excess of the annual exclusion must be added back into the estate for purposes of determining whether the estate is taxable in Massachusetts. For instance, if someone dies in Massachusetts with a total estate of $900,000 and she had made taxable gifts during her life of $200,000, her estate will be subject to the Massachusetts estate tax even though it’s under the $1 million threshold. This is because adding back in the $200,000 of gifts, it totals $1.1 million. Nevertheless, it will be taxed only on the $900,000 actually in the estate. So, in some cases, making lifetime gifts does not eliminate the estate tax, but it does reduce it.

A lot of this depends on the good faith and honesty of the person completing the Massachusetts estate tax return. Massachusetts has no way of tracking taxable gifts, but the executor must sign the return under the pains and penalties of perjury. As a result, failure to include such gifts is a crime, assuming the executor is aware of them and the failure to include them was intentional.

In terms of the reporting requirement, in your example of a gift of $20,000 only the $5,000 excess would have to be reported on the federal gift tax return and included in the Massachusetts estate.

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