Gift Taxes
| Pages | 385 |
| Publication year | 2021 |
65 CBJ 385. GIFT TAXES
A Connecticut gift tax(fn1) has been imposed on all post-August 31, 1991 gifts "by any individual resident or nonresident," other than gifts of tangibles or realty situated outside Connecticut.(fn2)
The language is somewhat ambiguous as applied to nonresidents. It could be interpreted as taxing them on gifts of intangible personalty. Apart from the illogic of such a position, there could be serious questions as to jurisdiction, nexus to tax or even constitutionality, as well as issues involving practicality and enforceability. The Department of Revenue Services (hereafter "D.R.S.") apparently plans to tax nonresidents only on gifts of Connecticut real estate and tangibles.(fn3)
Taxable gifts are transfers includible as such for federal gift tax purposes under Internal Revenue Code (hereafter "I.R.C.") Sections 2503, 2511-2514 and 2516-2519.(fn4) Thus, they are defined by reference to the federal gift tax, which permits gift splitting, by spouses and requires separate returns of each spouse. The rates seem to apply separately to each spouse so, by gift splitting married couples potentially reduce the rate applicable to their gifts, even though they are only made by one spouse.
For example, in the absence of gift splitting, a $200,000 gift by one spouse will attract a $7,500 Connecticut tax (with a gift in excess of $200,000 taxed at $7,500 plus 6% of the excess), while if that individual and his or her spouse agree to split the gift, the tax will only be $2,500 each, totalling $5,000 (with the next $100,000 taxed in the 5% bracket and any excess in the 6% bracket). Thus, there is a $2,500 Connecticut gift tax saving each year if both spouses elect to split a $200,000 gift made by one of them.
There is no federal type exemption equivalent to a credit against the Connecticut gift tax.(fn5) Unlike the federal gift tax, Connecticut's gift tax is non-cumulative. Each year's gifts in excess of the $10,000 annual exclusions(fn6) are taxed in the lowest (1%) bracket again, because the tax is imposed on a "gift during such taxable year"(fn7) and the rate table specifies the rate on gifts "during the calendar year."(fn8) Thus, taxpayers may reduce the rate of tax by breaking a large gift into smaller ones, made over a period of several years.
The $10,000 exclusion is available for outright gifts and for transfers into I.R.C. section 2503(c) trusts for minors.(fn9) Crummey powers that are used to obtain the federal present interest exclusion for transfers to other irrevocable trusts should make them eligible for Connecticut's $10,000 exclusion also.(fn10)
(assuming only one of On Taxable On Entire
$10,000 annual exclusion Tax Gifts Gift
------------------------ ------ ---------- ----------
Not over $25,000 1% 1% Range fr. almost 0% to .71%
over $50,000 of the excess over $25,000
Over $50,000 but not $750, plus 3% 2% 1 3/4%
over $75,000 of the excess over $50,000
Over $75,000 but not $1,500, plus 4% 2 1/2% 2 1/4%
over $100,000 of the excess over $75,000
Over $100,000 but not $2,500, plus 5% 3 3/4% 3 1/2%
over $200,000 of the excess over $100,000
As is apparent from the above table, the gift tax rates range from 1% on the first $25,000 of taxable gifts in excess of annual exclusions to 6% on taxable gifts greater than $200,000. However, the effective rates on taxable gifts only range between 1% and 3 and 3/4% (reached at the $200,000 level). They then gradually approach but never reach 6%. Thus, the rate curve for effective rates on taxable gifts in excess of $200,000 is a hyperbolic one.
If a gift to only one person, using only one annual exclusion is made, the range of rates on the entire gift, including the exclusion, is from a small fraction of a percent to 3.57% on gifts in excess of $200,000 and then, in another hyperbolic curve, up to just under 6% on gifts in excess of $200,000. As previously mentioned, the statutory as well as the effective rates begin all over again each year and would seem to apply separately to each spouse, even though only one has made the gift, so long as both of them consent to file a joint gift tax return.
Taxable gifts include outright transfers as well as those in trust, direct or indirect gifts whether of real or personal, tangible or intangible property;(fn12) but in the case of real or tangible property only if these items are situated in Connecticut.(fn13) Gifts are to be valued as of the date they are made.(fn14)
Gifts by a spouse to a nonspouse will be considered as made half by each spouse, if both are citizens or residents of the United States at the time of the gift. (fn15) The exercise or release of general powers of appointment are taxable gifts.(fn16) The disposition of all or part of a QTIP income interest will be treated as a gift of the remainder.(fn17)
Although the inheritance tax is not imposed on life insurance proceeds, a gift of an insurance policy appears to be taxable to the extent that its interpolated terminal reserve plus unearned premium, dividend accumulations and interest thereon, less policy loans, exceed any annual exclusions.(fn18)
The deductions allowed in I.R.C. sections 2522 to 2524 may be subtracted in computing taxable gifts.(fn19) These are charitable gifts, and interspousal gifts qualifying for the marital deduction,(fn20) but "only to the extent that the gifts ... are included in the amount" (fn21) of gifts against which deductions are applied Since Connecti cut's gift tax incorporates specific I.R.C. sections, presumably all those sections apply to limit the deductions in the same way as under the I.R.C. Thus, there will be no marital deduction for a gift to a non-citizen spouse, but the annual exclusion for such gift will be $100,000 instead of only $10,000.(fn22) The pre-1982 rules concerning gifts into joint tenancy apply if the donee tenant is a non-citizen spouse.(fn23)
Direct payments of tuition and for medical care are not taxable gifts,(fn24) nor are waivers of survivor benefits to pensions or rights to those benefits,(fn25) or loans of archeological, historical or creative tangible personal property (qualified works of art) to charities, other than private foundations, if the use of the artwork is related to the purpose or function on which the organization's exemption is based.(fn26)
Property settlements under written agreements where divorce occurs within three years (beginning a year before the agreement is entered into) that settle marital rights or provide a reasonable allowance for support of issue are not taxable gifts(fn27) nor are qualified disclaimers.(fn28)
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