Guest Blog Post: Taxing a QTIP Trust Between States
On Monday, February 10, the Supreme Judicial Court (SJC) will hear Shaffer v. Commissioner of Revenue, SJC-12812, a $2 Million tax dispute. The case revolves around this issue: Can Massachusetts tax a Qualified Terminable Interest Property Trust (QTIP trust) created in another state?
A QTIP trust is a creature of Federal and State Tax law that permits a married couple to defer the collection of estate taxes until both spouses die As the Appellate Tax Board noted in this case, “a QTIP trust allows the first-to-die spouse to control the disposition of the assets upon the death of his or her spouse.” A valid QTIP trust requires: (1) That the surviving spouse must receive all the income for life on at least an annual basis; (2) That no person may have authority to appoint property to a person other than the surviving spouse and (3) That the executor of the first-to-die spouse’s estate must irrevocably elect to use the QTIP trust.
Shaffer is Adelaide Chuckrow’s daughter and Adelaide was married to and lived with Robert Chukrow in New York, where they created a QTIP trust. When Robert died in 1993, his estate made the QTIP election on his federal and New York estate tax returns. At the time, the trust had a value of nearly $850,000. Shaffer was a trustee of the QTIP trust.
Adelaide later became a Massachusetts resident and died in Williamstown (in the Berkshires) in 2011. Shaffer became the administrator of Adelaide’s estate and filed a federal estate tax return value $15.5M, including the QTIP trust. However, Shaffer filed a $2M Massachusetts estate tax return and paid $100,997 in taxes-not counting the QTIP trust.
In 2013, the Commonwealth, by the Department of Revenue, audited Adelaide’s estate and concluded that the estate tax value should have included the QTIP valuation of $15.5M. Shaffer thus owed the Commonwealth nearly $2M in additional estate taxes, including interest.
Shaffer unsuccessfully sought an abatement and appealed to the Appellate Tax Board. A majority of the Board concluded that the QTIP trust was valid and Robert’s estate had validly deferred collection until after his death. However, the Board held that the QTIP assets constituted property that Adelaide transferred into Massachusetts at the time of her death, relying on a plain and harmonious construction of the federal and Massachusetts estate tax laws (indeed, Massachusetts law which incorporated federal law by reference, see G.L. c.65C, §2A.)
The Board in turn rejected Shaffer’s contentions: (1) that the QTIP trust did not constitute part of the Massachusetts gross estate and amounted to a disfavored “double-taxing” of one transaction or (2) assessing the tax violated the Due Process Clauses of the Federal and Massachusetts constitutions.
First, Shaffer’s interpretation effectively disharmonized the gross estate statute (G.L. c.65C, §1(f)) with the Massachusetts statutes governing estate transfers and QTIP elections (G.L. c.65C, §2A and §3A). More specifically, Section 1(f) counted the value of “of any property for which the decedent had at death a qualifying income interest for life described in section three A”-but did not kick in unless there was a QTIP election in Massachusetts. Thus, disfavored double-taxing was not realistic.
Second, the Board rejected that the Commonwealth was seeking to tax an asset transfer outside of Massachusetts. The Board recalled that estate taxes were not direct taxes on the value of property-and the issue distilled to whether the Commonwealth could tax the transfer of assets-which was less settled. Relying on federal and sister state law, the Board concluded that the QTIP trust constitute a taxable “transfer” of assets. The Board emphasized that the QTIP trust transferred property from the first to die spouse to the survivor and then to the survivors beneficiaries. Thus, when Adelaide moved to Massachusetts, the assets transferred with her-and Massachusetts could tax them.
Commissioner Scharaffa dissented and argued that any taxable transfer occurred when Robert died. Commissioner Scharaffa emphasized that Adelaide “had no power or control over the QTIP assets” and only received distributions “at the sole discretion of the…trustees [i.e., Shaffer.]” Since the transfer occurred when Robert died in New York, taxing occurred the QTIP occurred at that point. Massachusetts thus could not, consistent with due process, tax the transaction outside its sovereign borders.
Shaffer appealed from the Appellate Tax Board to the Appeals Court (G.L. c.58A, s.13) and then successfully petitioned the SJC to hear her case directly. (G.L. c.211A, s.10, Mass. R.A.P. 11).
The case turns on the interpretation of state and federal tax statutes. On the one hand, interpretation of statutes are questions of law that the SJC reviews de novo-without deference to a lower court or agency.
However, the SJC places great weight on the Commonwealth and Board’s interpretation of the tax statutes as they have the responsibility and expertise to administer and implement the tax statutes (i.e., the administrative law rule of “agency expertise.”) At the same time, the SJC resolves ambiguities in a tax statute in the taxpayers’ favor. See e.g. Citrix v. Commissioner of Revenue, SJC-12741, 484 Mass.—-(Slip Op. Feb. 5, 2020).
In their briefs, Shaffer and the Commonwealth exhaustively detail the history of the estate tax statutes. Both sides also cite a battery of cases from sister states involving similar scenarios, including from Connecticut and Washington State (which spurred an amendment to state statutory law.)
On the statutory point, Shaffer argues that reading the QTIP election into the definition of gross estate would render other portions of the statute superfluous. The Commonwealth counters that the estate tax law unambiguously encompasses the QTIP trust as an estate asset.
On the constitutional point, Shaffer echoes Commissioner Scharaffa’s dissent and argues that the Massachusetts estate tax unconstitutionally “includes the decedent’s property wherever situated.” (Shaffer’s Brief at 28.) Shaffer goes on to cite a Probate Court decision concluding that the Commonwealth could not tax French real estate.
The Commonwealth replies that a QTIP trust is an asset that follows and transfers with a person. Thus, when Adelaide moved to (and later died in) Massachusetts, the QTIP became part of her estate which Massachusetts could tax without violating due process. Indeed, the Commonwealth emphasizes that Shaffer conceded not filing estate tax returns elsewhere.
Some practical and public questions seem unanswered. How much does the Commonwealth stand to lose if they cannot tax these trusts? If the Commonwealth can tax these trusts, how will imposing the tax affect mobile and aging population? If the point of these trusts is to defer taxes, does that mean that someone assumes the risk of taxation wherever they happen to die? If that premise is correct, how can accountants and lawyers advise clients about that, especially with an aging population?
Curiously, the SJC did not solicit amicus briefs to answer these questions-and as of today (February 6) no amicus briefs have been filed. Regardless, the SJC will likely strike some balance between the Commonwealth’s interests and the fundamental purposes of QTIP trusts.
Joseph N. Schneiderman is an appellate attorney practicing in Massachusetts and Connecticut and recently filed an amicus brief in the SJC’s January sitting. See Youghal v. Entwistle, SJC-12754. Joe gratefully thanks Tim for another opportunity to blog and collaborate!