Trusts & Estates Section

2010 PRING S Trusts & Estates Section Spring 2010 Newsletter A PUBLICATION OF THE BOSTON BAR ASSOCIATION TRUSTS & ESTATES SECTION SPRING 2010 1 Trusts & Estates Section Co-chairs Proposed Change to Massachusetts Basis Rules to Address 2010 Changes in Federal Anne Marie Towle Athena Capital Advisors [email protected] Estate Tax Laws Kenneth P. Brier, Esq., Brier & Geurden LLP Andrew D. Rothstein, Esq., Goulston & Storrs As things stand now, there is some concern income tax on pre-death capital gains on the among that as a result of the change in federal inherited appreciated property when they sell it. basis rules for 2010, and no corresponding Massachusetts change, a substantial, hidden In effect, under the current Massachusetts tax Massachusetts tax problem has arisen for rules assets that historically were subject to only successors to decedents’ property. one level of tax will now be subject to two levels of tax. When the federal government decided to reduce and repeal the federal estate tax beginning in Consider, for example, the impact of inheriting 2002, it planned to offset some expected revenue a Beacon Hill row house valued at $10 million loss by (i) eliminating the portion of the estate at the decedent’s date of death but purchased tax revenue it effectively shared with the states for a tenth of that amount in the 1960s. Under via the state death tax credit and (ii) eliminating the rules that existed last year, the heirs would Peter Shapland in 2010 the so-called “step-up” in basis, which have paid roughly $1,067,600 of Massachusetts Day Pitney LLP established date-of-death (or 6-month alternate) estate tax and inherited the house with a basis [email protected] valuations for all inherited property. equal to the date-of-death (or alternate) value, so if they sold it for its date of death value the Under this plan the estate of a 2010 decedent day after the decedent died, there would be no Inside this Issue would pay no federal estate tax, but the Massachusetts capital gains tax. Under the decedent’s heirs would be responsible for rules that exist in 2010, the heirs would still pay Page 3 Proposed Change to Massachusetts Basis Rules to Address 2010 paying income tax on pre-death capital gains on roughly $1,067,600 of Massachusetts estate tax Changes in Federal Estate Tax Laws inherited appreciated property when they sell it. and inherit the house with a basis equal to what By Kenneth P. Brier and Andrew D. Rothstein To some, this seemed like an acceptable tradeoff the decedent paid for it in the 1960s, so that if – capital gains taxes on pre-death gains in lieu of the heirs sell the property for its date of death Page 5 Abandoning Domicile in Massachusetts: Attention to Details Plus a much higher estate taxes. value the day after the decedent dies, there “Gut Check” would be a 5.3% Massachusetts capital gains tax By Melvin A. Warshaw In response to the changes to the federal estate on $9,000,000 of gain resulting in $477,000 of tax system, effective for decedents dying after extra tax. Page 8 Transfers of Limited Partnership Interests Fail to Qualify for Annual December 31, 2002 Massachusetts enacted The concerns laid out above are based on a Gift Tax Exclusion – Analysis and Practical Insights its own estate tax. The Department of Revenue technical, but we think inescapable, reading of By Christopher D. Perry and Bradley Van Buren indicated that the tax was enacted in order the applicable tax statutes. Page 9 Death and (Estate) Taxes: Don’t Wait for Congress to Act – Start Your to preserve the revenue the Commonwealth Massachusetts has its own tax basis rules set Planning Now received before the 2002 federal estate tax changes. However, at that time Massachusetts forth in chapter 62, §6F. These rules interrelate By Amiel Z. Weinstock did not make any changes to its rules relative to heavily with the federal basis rules, but are Page 13 Upcoming Section Events the basis of property inherited from a decedent. independent of them. Section 6F(b)(2)(C) As a result, it appears that decedents dying generally applies IRC §1014(b) (step-up in basis Page 14 Introducing the 2010-2011 Trusts & Estates Steering Committee in Massachusetts in 2010 will be subject to at death) to property acquired from a decedent. Massachusetts estate tax on their assets and the The reference to section 1014(b) of the Code, decedent’s heirs will be responsible for paying however, must be read in conjunction with the Page 16 Section Leadership 2 SPRING 2010 SPRING 2010 3 Proposed Change to Massachusetts Basis Rules to Address 2010 Changes... defi nition for “Code” for purposes of chapter 62, disconnect creates a serious trap for so-called Abandoning Domicile in Massachusetts: as set forth in §1(c). With exceptions for certain pourover trusts containing a “pecuniary” subtrust Code sections not relevant here, that defi nition funding formula. Such a funding formula, though Attention to Details Plus a “Gut Check” provides that “Code” means the Internal Revenue offering several advantages, has always imposed Code of the United States, as amended on the potential of triggering of the recognition of Melvin A. Warshaw, Esq., Financial Architects Partners January 1, 2005 and in effect for the taxable year. gain upon funding. That problem has typically “Code” therefore would include IRC §1014(f), been manageable to the extent persons enacted in 2001 under EGTRRA, which provides administering the trust are dealing only with post- Two recent Massachusetts Appellate Tax Board The taxpayer in Cotter failed to timely change that §1014 shall not apply to decedents dying mortem gains. It is a lot more serious to deal with (ATB) decisions, Cotter (Docket No. C293719, his address to Florida on key fi nancial accounts, after December 31, 2009. So there is no longer gains accrued over the decedent’s lifetime and January 15, 2010) and Swartz (Docket No. including his bank accounts, life insurance any general Massachusetts basis step-up (or not reduced by the federal allocation of increased C287671, March 31, 2010) confi rm that policies and even the mortgage account for his step-down) for property acquired from decedents. basis. lawyers and other advisors must pro-actively Florida condominium. Most unfortunate was supervise a taxpayer’s attempt to abandon the taxpayer’s written statement on November In the absence of any general basis step-up, it Our proposal is simply to maintain the section domicile in Massachusetts. Checklists are a 1, 2003, made to a Florida casino, that his seems that a successor’s initial Massachusetts 1014 basis step-up rules this year and thereafter. good fi rst step to guide a taxpayer because address for income tax purposes was his basis would be determined under §6F(b)(2)(B), Those rules have commonly been thought of as the devil is in the details, but the taxpayer’s Massachusetts home. Not surprisingly, the ATB related to property whose federal basis is “fair play” in mitigating the potential for double lawyer or other advisor should also do a “gut concluded that, “the fact that [taxpayer] did determined in whole or in part by application taxation in the face of an estate tax. Given the check” to determine whether the taxpayer’s not change his address on these accounts… of the basis of prior property. That provision Commonwealth’s continuation of its estate tax projected lifestyle in the new state is compatible established that the [taxpayer] was more provides that the Massachusetts initial basis in the face of the apparently temporary federal with abandoning domicile in Massachusetts. interested in making a superfi cial show to shall be the initial federal basis of the acquired repeal, a continuation of the basis step-up rules property (or its Massachusetts basis, if different), can be viewed as both consistent and fair. Our Ultimately, the taxpayer’s intent will be establish the appearance of domicile…rather if there was no federal gain or loss with respect proposal is to state explicitly that IRC §1014(f) discerned from his or her everyday activities than genuinely changing his domicile to to the transaction (presumably the transaction is not to be given any effect for Massachusetts before and after “abandoning” domicile in Florida.” In Swartz, the former CEO of by which the property was acquired). Under purposes, thereby reading IRC §1014 back Massachusetts, not merely how many “to dos” Timberland and his wife were found not to have §6F(c), Massachusetts initial basis is thereafter into the law. Consistent with that approach, on a domicile checklist are checked off. abandoned their Massachusetts domicile as of adjusted by applying the same adjustments as the proposal also confi rms that the federal the dates of two large sales of Timberland stock are made to the federal basis after the initial $1.3/3 million additional basis allocations The fact patterns in both cases are somewhat in late 2004. This resulted in a large capital basis as determined, with certain exceptions. under IRC §1022(b) and (c) are not to apply for similar. A longtime Massachusetts resident gain tax liability for the taxpayers.1 Among the exceptions, pointedly, “[t]here shall Massachusetts purposes. taxpayer creates a successful local business, be disregarded any federal adjustment resulting and then buys and maintains a home in In Swartz, the ATB found substantial evidence of from provisions of the Code that were not One could conceive of an alternative whereby Florida in addition to maintaining a home in the taxpayers’ family ties to Massachusetts (two applicable in determining Massachusetts gross Massachusetts simply conforms its determination Massachusetts.

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