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Massachusetts Court Rules on Interstate Effects of QTIP Election

Deems a transfer occurred on taxpayer’s death.

In Shaffer v. Commissioner (SJC 12812 (July 10, 2020)), the Supreme Judicial Court (SJC) of Massachusetts reviewed a claim by a surviving spouse’s estate that a qualified terminable interest property (QTIP) trust established by her predeceased husband shouldn’t be includible in the Massachusetts taxable estate.

Adelaide Chuckrow died as a Massachusetts resident in 2011. She was the beneficiary of a QTIP trust established by her late husband Robert under his estate plan.  Robert died as a New York resident. Robert’s estate tax returns made a QTIP election both federally and under New York Law. The QTIP trust held intangible assets only (shares in various companies and a limited partnership interest).

Taxes Owed on QTIP Trust

The QTIP trust assets were included as part of Adelaide’s federal estate on the Form 706 but the QTIP trust assets weren’t included on her Massachusetts estate tax return. Her estate didn’t t file any estate tax return in New York. The Massachusetts taxing authority audited the return and assessed an additional tax of nearly $2 million relating to the value of the QTIP trust, and the estate appealed.

Massachusetts estate tax is calculated with reference to the federal estate tax in effect on Dec 31, 2000, originally known as a “sponge tax.”  The statute provides that a tax is imposed on “the transfer of the estate of each person dying…. a resident of the commonwealth.” The estate argued that there was no “transfer” on Adelaide’s death and that the only transfer was on Robert’s death. As a result, the estate alleged, it was a violation of constitutional principles to tax the QTIP at her death.

Transfer Occurred

However, the Appellate Tax Board and the SJC disagreed, holding that there’s a transfer on the death of the surviving spouse. The SJC relied on case law (both from other states as well as federal courts) to determine that a transfer occurs whether there’s a change in the legal and economic relationships to the property at issue. It concluded that a transfer had occurred on Adelaide’s death with respect to the QTIP trust property because there was a change in the legal and economic relationships to the QTIP property.

The definitions section of the Massachusetts statute defines the “Massachusetts gross estate” as the federal gross estate plus property for which a QTIP election had previously been made on a Massachusetts estate tax return. However, the term “Massachusetts gross estate” isn’t used in the section of Massachusetts law imposing the estate tax, and the SJC agreed with the Appellate Tax Board that it wasn’t relevant to the operative tax provision.

The case illustrates the disjointed nature of the statute governing the calculation of the Massachusetts estate tax and highlights the complexity of intrastate estate planning. The estate has petitioned for writ of certiorari to the U.S. Supreme Court, alleging that Massachusetts is violating the due process clause of the Constitution by taxing the QTIP trust.

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