Estate planning lawyers rarely get to deal with issues of constitutional law, but a recent Massachusetts Probate and Family Court case, Dassori v. Commissioner of Revenue, demonstrates the benefits of holding onto that hard-won knowledge from the first year of law school.
Out-of-State Real Estate
The case is relevant to anyone who dies a resident of Massachusetts owning real estate outside of the state. Massachusetts law will effectively subject the value of the non-Massachusetts real estate to Massachusetts estate tax. If that real estate is located in another state that imposes its own estate tax on the property, Massachusetts offers a credit for the tax paid to that state, and there should be little or no increase in the total tax paid. However, if that real estate is located in a state, such as Florida, that has no estate tax, or in a foreign country, no credit is available. The additional Massachusetts estate tax triggered by that non-Massachusetts real estate may be significant. A similar problem may arise if the real estate is located in a state that has its own estate tax but a larger estate tax exemption than Massachusetts. (Massachusetts has a $1 million exemption; the federal estate tax exemption is currently $5.4 million; and many states that still impose an estate tax have increased their exemption to come closer to, or match, the federal exemption.)
Constitutional Issue
This is where constitutional law comes in. The due process clause of the 14th Amendment to the U.S. Constitution bars states from taxing real property in other jurisdictions. The U.S. Supreme Court confirmed this principle in cases dating back to 1923, which was acknowledged, in the context of an earlier estate tax statute, by the Massachusetts Supreme Court in the 1980s. There appear to be no prior cases applying the due process clause to the current Massachusetts estate tax statute, although one could reasonably conclude that the current statute is unconstitutional to the extent that it taxes non-Massachusetts real estate or tangible personal property.
The Options
The apparent conflict between current law and the due process clause leaves estate planning attorneys, as well as the personal representatives and beneficiaries of estates, in a difficult position. Realistically, the options are to pay the tax and avoid a conflict; report the real estate but take the position that it isn’t subject to Massachusetts estate tax, risking a fight along with interest and penalties if the estate doesn’t prevail; or report the property, pay the tax and subsequently file an amended return claiming a refund, risking a fight but avoiding interest and penalties. (An estate could simply omit the real estate from the Massachusetts estate tax return, but it wouldn’t be complying with statutory requirements or the return instructions.)
It seems likely that various estates have tried all of these approaches. Anecdotally, results were mixed, with the Massachusetts Department of Revenue sometimes giving in right away, sometimes going to the brink of litigation and settling and sometimes standing its ground.
Dassori
In Dassori, the decedent died a resident of Massachusetts, owning an apartment in France, through a French entity called a société civile immobilière (SCI). The estate filed a Massachusetts estate tax return showing the apartment as real estate subject to Massachusetts estate tax. It then filed an amended return that excluded the value of the apartment from the Massachusetts gross estate and requested a refund in the amount of $176,880. The request for a refund was denied.
Unfortunately, it doesn’t appear that the court decided the constitutional issue described in this article. The case itself deals with the obscure question of whether the SCI was equivalent to a corporation, which Massachusetts could legitimately tax as intangible personal property, or was an entity like a nominee trust that should be disregarded, with the decedent being treated as if the real estate were owned directly. That issue was decided, on summary judgment, in the estate’s favor.
In other words, the estate won, which is certainly a positive for Massachusetts taxpayers, and it appears that both parties assumed that Massachusetts couldn’t constitutionally tax out-of-state real estate, but the constitutional issue wasn’t directly adjudicated.
Lessons Learned
What conclusions should practitioners draw from this case?
- Estates should seriously consider taking the position that Massachusetts can’t constitutionally tax non-Massachusetts real estate.
- Any estates in this position that have recently filed Massachusetts estate tax returns and paid tax on the non-Massachusetts real estate might consider filing for a refund.
- For planning purposes, Massachusetts residents who hold non-Massachusetts real estate through an entity should consider dissolving the entity and holding the real estate directly. Of course there may be income tax and other consequences to dissolving the entity, which should be considered before making a decision.
- The Department of Revenue should take a clear position on this issue so that the law can be consistently applied.