Don’t Get Cute with Non-Massachusetts QTIP Property: Review of the M. Christine Shaffer, Executrix v. Commissioner of Revenue Case

Issue January/February 2021 February 2021 By Karen L. Witherell
Probate Law Section Review
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Karen L. Witherell

In July of last year, the Supreme Judicial Court of Massachusetts (SJC) issued a decision in the M. Christine Shaffer, executrix v. Commissioner of Revenue (485 Mass. 198, 148 N.E. 3d, 1196, July 10, 2020) matter, which held that a New York QTIP trust was includable in the Massachusetts decedent’s Massachusetts taxable estate. The Shaffer case has given trust and estates practitioners in Massachusetts additional insight into how the Massachusetts Department of Revenue views the taxability of non-Massachusetts qualified terminable interest property (QTIP) consisting of intangible assets for estate tax purposes.

As background, Adelaide and Robert Chuckrow were a married couple residing in New York. When Robert died in 1993, a QTIP trust (federal and New York QTIP elections were made) was established for Adelaide’s benefit under his estate plan. Adelaide later moved to Massachusetts and was a domiciliary of the commonwealth at her death in 2011. The personal representative of Adelaide’s estate filed both a federal and Massachusetts estate tax return. Although the federal return included the QTIP trust assets, the Massachusetts estate tax return did not. No estate tax return was filed in New York, nor was estate tax paid in New York.

The Massachusetts estate tax return was audited, and the Massachusetts commissioner of revenue assessed an additional $1,809,141.88 in Massachusetts estate tax due to the value of the QTIP trust. The estate paid the assessed amount and filed an abatement application, which was denied by the commissioner of revenue. The denial of the abatement application was then appealed to the Appellate Tax Board (the Board), which upheld the denial. The estate then applied for direct appellate review of the matter by the SJC.

The estate raised two primary arguments against the inclusion of the QTIP assets in the Massachusetts taxable estate: “(1) that there was only one transfer of the QTIP assets, which took place when Robert died in New York, and therefore the Massachusetts assessment violates the Fourteenth Amendment to the United States Constitution and art. 10 of the Massachusetts Declaration of Rights; and (2) that the QTIP assets were not includable in the decedent’s estate because ‘the definition of ‘Massachusetts gross estate’ in [G.L. c. 65C § 1(f)] excludes QTIP property for which a Federal, but not a Massachusetts, QTIP election was made.” Shaffer at 202, 1200-1201 (internal citations omitted).

The Board countered the estate’s constitutional argument by relying upon the Fernandez v. Weiner case (326 U.S. 340, 66 S. Ct. 178, 90 L. Ed. 116 (1945)) and the Estate of Brooks v. Commissioner of Revenue Servs. case (325 Conn. 705, 159 A.3d 1149 (2017)), in which the courts gave the term “transfer” a broad construction. Additionally, the Board set forth that, under the tax code, QTIP property is treated as property passing from the surviving spouse, and that several sections of the tax code treat the surviving spouse as the transferor of the QTIP property. See Shaffer at 202, 1201. The Board used this analysis to contend that there was a second transfer of the QTIP property at Adelaide’s death from Adelaide to the designated successor beneficiaries. Based on this reasoning, the Board held that there had been no violation of constitutional principles because a second transfer of the QTIP assets had occurred within the commonwealth. See Shaffer at 202, 1201. (As a side note, the one dissenting commissioner concluded that the only transfer occurred at Robert’s death and that the assessment did violate constitutional principles. See Shaffer at 203, 1201)

With regard to the estate’s argument that the QTIP assets were not includable under the definition of the Massachusetts gross estate, the Board countered that, under the Legislature’s enactment of G.L. c. 65C, §§ 1(f) and 3A, the definition of a Massachusetts gross estate only applies when a Massachusetts QTIP election has been made. In the current case, as no Massachusetts QTIP election was made at Robert’s death, G.L. c. 65C, § 1(f) was inapplicable. In the underlying decision, the Board found that Adelaide’s estate was taxable “under the unambiguous terms of [G.L. c. 65C, § 2A(a)].” Shaffer at 203, 1201.

The SJC’s decision stated that “[i]n reviewing decisions of the [B]oard, ‘[w]e review conclusions of law, including questions of statutory construction, de novo.’ ‘However, because the [B]oard is an agency charged with administering the tax law and has expertise in tax matters, we give weight to its interpretation of tax statutes…” Shaffer at 203, 1201-1202 (internal citations omitted).

Upon review of the constitutional issue, the SJC sided with the Board in agreeing that a transfer of the property had also occurred at Adelaide’s death and that the imposition of Massachusetts estate tax was not constitutionally improper. The SJC additionally found that, since the QTIP property consisted of intangible assets and Adelaide died a domiciliary of Massachusetts, there was a nexus for Massachusetts to impose an estate tax on the QTIP property. See Shaffer at 204, 1202. With regard to the issue of whether or not a transfer occurred at Adelaide’s death, the SJC confirmed the Board’s reliance on the Fernandez case, which established that “an estate tax is not limited to literal transfers at death but ‘extends to the creation, exercise, acquisition, or relinquishment of any power of legal privilege which is incident to the ownership of property.’” Shaffer at 204, 1202-1203 (internal citations omitted). “We therefore agree with the [B]oard that two transfers of QTIP property occur for estate tax purposes, with the first occurring when the predeceasing spouse makes the QTIP election and the second occurring upon the death of the surviving spouse. Therefore, the decedent’s domicile in Massachusetts at the time of her death, and therefore at the time of the second transfer, provided the connection to the Commonwealth to allow Massachusetts to impose an estate tax on the QTIP assets.” Shaffer at 206, 1203-1204.

Upon review of the issue of whether or not the QTIP property was includable in Adelaide’s Massachusetts gross estate, the SJC agreed with the Board in that G.L. c. 65C, § 1(f) does not apply to the estate’s estate tax obligation under G.L. c. 65C, § 2A. “[T]he definition of ‘Massachusetts gross estate’ in §1(f) applies only where the predeceasing spouse makes a Massachusetts QTIP election for property that is included in the Massachusetts gross estate of the predeceasing spouse under § 3A. Because Robert’s estate did not make a Massachusetts QTIP election, nor was there otherwise any Massachusetts QTIP property as defined in G.L. c. 65C, § 3A, the [B]oard did not err in determining that G.L. c. 65C, §§ 1(f) and 3A, do not bear upon the estate’s Massachusetts estate tax obligation under G.L. c. 65C, § 2A.” Shaffer at 207, 1204-1205. The SJC affirmed the Board’s determination that, under the “plain meaning of [G.L. c. 65C,] § 2A,” the QTIP assets are includable in the estate for Massachusetts estate tax purposes. Shaffer at 207, 1205.

Particularly interesting is that, in footnote 10, the SJC decision set forth that “[i]n addition, the estate’s contention that the current Massachusetts estate tax does not eliminate the potential of double taxation is without merit under the present circumstances. The estate is not subject to double taxation, as the QTIP assets in Robert’s estate were not subject to Massachusetts or New York tax before the decedent’s death.” Shaffer at footnote 10.

A petition for certiorari in this matter was filed with the U.S. Supreme Court but was denied on Nov. 25, 2020. Regardless of whether one agrees with the SJC determination in the Shaffer case, this decision stands as the most current determination in Massachusetts as to the taxability of intangible, non-Massachusetts QTIP assets in an estate of a Massachusetts domiciliary. When dealing with non-Massachusetts QTIP assets within the estate of a Massachusetts domiciliary, practitioners would be well advised to review the Shaffer case before considering omitting such QTIP assets from a Massachusetts estate tax return.

Karen L. Witherell is a partner in the Boston law firm of Bove & Langa PC. Her significant background in trusts and estates law and strong commitment to her clients enhance Witherell’s practice, which includes wealth preservation; incapacity and estate planning, both domestic and international; gift transaction planning; preparation of gift and estate tax returns; business succession planning; prenuptial agreements; trust administration; and probate administration.