Dear Colleagues,

The Massachusetts Department of Revenue has issued a working draft directive on the issue of deaths occurring in 2010. This directive, if it becomes the rule, may cause a double tax on many 2010 estates.

BRIEF BACKGROUND As many of us know, the federal Tax Act of 2010 became law at the very end of last year. Prior to the passage of the Act, there was no federal estate tax for individuals who died in 2010, but there was carry-over basis. As most people’s estates are well under $1 million, the possible loss of the step-up in basis was a significant issue (especially if they had transferred property to others or put in trusts, but retained enough “tax strings” to have the property included in their estates in any other year). The Act was a wonderful solution for most estates of someone who died in 2010. Under the Act, an estate of someone dying in 2010 is, by default, under the federal “estate tax regime”, thereby avoiding federal estate taxes if the estate is $5 million or less and also avoiding federal capital gains taxes, because of the step-up in basis of all assets.

But larger estates may opt out of the “estate tax regime” with an election and, therefore, be under the carry-over basis rules and have no federal estate taxes. An obvious example of an estate that would most likely benefit from “opting out” of the “estate tax regime” would be the George Steinbrenner estate, who was reported to be a billionaire when he died in 2010. By dying in 2010, his family was afforded the opportunity to save hundreds of millions of dollars in estate taxes.

Many of us that practice in the estate planning area assumed that the Massachusetts Department of Revenue would follow the stepped-up basis rule, because Massachusetts still had an estate tax if an estate exceeded $1 million. Then the DOR published a surprising working draft directive. If this directive becomes the rule, some estates will pay both Massachusetts estate taxes and Massachusetts capital gains taxes. Additionally, some smaller estates will pay Massachusetts capital gains taxes simply because the individual died in 2010.

The DOR, in its working draft directive, states that anyone dying in year 2010 who is a Massachusetts resident or has property owned in Massachusetts will be treated under the EGTRAA rules and under code section 1022. Result, no step-up in basis, but with the ability to allocate up to $1.3m of basis ($3m to a spouse). This is a big deal! Especially in light of the issues of what items we may not be able to allocated basis to (i.e., life estates or irrevocable, income only trusts – most frequently used in the Medicaid planning context).

I encourage everyone to respond to the Massachusetts Department of Revenue and to our state representatives and senators that the working draft directive be revised or that a law be passed to fix this serious issue.

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