2005 Developments in Connecticut Probate, Estate and Gift Tax Law
| Publication year | 2021 |
| Pages | 217 |
80 CBJ 217. 2005 DEVELOPMENTS IN CONNECTICUT PROBATE, ESTATE AND GIFT TAX LAW
I. LEGISLATION
The Connecticut legislature was quite busy with probate and estate and gift tax legislation in 2005. The repeal of the succession tax and the overhaul of the estate and gift tax laws were, obviously major changes. The changes in the transfer tax laws resulted in a change in how probate court fees are calculated. The legislature also attempted to balance the interests in protecting a ward and giving flexibility to a conservator or temporary conservator to deal with emergency situations with, among other things, new hearing and reporting requirements. The protection of children was another theme in 2005, with the pilot Regional Children's Courts becoming permanent and the Probate Court Administrator authorized to expand the program throughout the state. The probate courts have also been given some guidance on dealing with 21st century discovery issues, with new authority given to courts and executors to have access to a decedent's e-mail accounts.
A. Connecticut Estate and Gift Tax
During 2005, the Connecticut legislature amended the Connecticut estate and gift taxes and repealed the Connecticut succession tax. These changes made permanent the decoupling of the Connecticut estate tax, which had been temporarily in place for the estates of decedents dying between July 1, 2004 and December 31, 2004, although the form of decoupling has changed significantly. In addition, the Connecticut gift tax system has been completely overhauled and replaced with a system unified with the Connecticut estate tax. The estate and succession tax changes apply to the estates of dece-
* B. Dane Dudley of the West Hartford Bar; Gregory A. Hayes and George H. Richards, II of the Stamford Bar; Leigh A. Newman of the Hartford Bar and Jennifer M. Pagnillo of the Greenwich Bar
dents (who were either Connecticut residents on their deaths or owned Connecticut real or personal property) dying on or after January 1, 2005.(fn1) The gift tax changes apply to gifts made on or after January 1, 2005.(fn2)
Succession Tax. The Connecticut succession tax, found at Chapter 216 of Title 12 of the Connecticut General Statutes, no longer applies to the estates of decedents dying after January 1, 2005.(fn3)
Gift Tax. Connecticut gift tax continues to apply to (i) gifts made by Connecticut residents of real property and tangible personal property located in Connecticut and intangible personal property regardless of location and (ii) gifts made by non-Connecticut residents of real property and tangible personal property located in Connecticut.(fn4) However, the previous system of levying a tax each year based on the current year's gifts has been replaced with a system that has now been "unified" with the Connecticut estate tax; no gift tax is due until aggregate taxable gifts made on or after January 1, 2005, exceed $2 million but the amount of any such taxable gifts will be included in the donor's Connecticut taxable estate, effectively deferring tax until the donor's death.(fn5) Much like the federal requirements, a gift tax return must be filed for any year in which Connecticut taxable gifts exceed the annual exclusion amount, even if no gift tax is due. Once the aggregate gifts exceed $2 million, gift tax will be due based on the entire amount of taxable gifts at marginal rates ranging from 5.08% to 16%. Any gift tax paid for tax year 2005 and later is credited against the donor's Connecticut estate tax. Gifts made prior to 2005, and gift tax paid as a result of such gifts, are ignored.
3. Connecticut Estate Tax. The Connecticut estate
1 2005 Conn. Acts 251, §§ 66, 69 (Reg. Sess.); 2005 Conn. Acts 3, §§ 50-53 (June Spec. Sess.).
(fn2)2005 Conn. Acts 251, § 67 (Reg. Sess.).
3 Id.§ 66; 2005 Conn. Acts 3, §§ 50-53 (June Spec. Sess.).
4 See CONN. GEN. STAT. § 12-643 (2006 Supp.), as amended by 2005 Conn. Acts 251, § 68 (Reg. Sess.).
5 2005 Conn. Acts 251, §§ 67, 68 (Reg. Sess.). Gifts made prior to January 1, 2005, are not considered in determining whether the $2 million aggregate threshold is exceeded or in determining any credit for gift taxes paid.
threshold is now $2 million. Accordingly, no estate tax is due if the Connecticut taxable estate of a decedent dying after January 1, 2005, is $2 million or less.(fn6) The definition of Connecticut taxable estate has been expanded to include any Connecticut taxable gifts made after January 1, 2005.(fn7) For Connecticut taxable estates greater than $2 million, the estate tax is generally equal to the prior federal state death tax credit, with marginal rates ranging from 5.085% to 16% for estates larger than $10,100,000.(fn8) Unlike the federal estate tax calculation, the Connecticut estate tax calculation is based on the entire estate - there is no "exclusion" or unified credit equivalent. Thus, while there is no tax due for a $2,000,000 Connecticut taxable estate, the tax jumps to $101,700 for a $2,000,001 Connecticut taxable estate.(fn9) The effect of this "cliff" should be mitigated by including in one's estate plan a charitable gift of the amount necessary to reduce the Connecticut estate tax to zero provided that the gift is of a lesser amount than the tax saved.
Inheritance taxes paid by resident estates to any other U.S. state or the District of Columbia based on real or personal property located in those jurisdictions are credited against the Connecticut estate tax, up to the pro rata amount of tax that Connecticut would have imposed on that property. Similarly, the Connecticut estate tax on a non-resident estate is prorated according to the percentage of the gross estate that falls under Connecticut's estate tax jurisdiction. However, if a Connecticut resident owns real property in a state that currently does not have an estate tax, the effect is that out-of-state real property will be subject to tax by Connecticut because there will be no offsetting state estate tax paid to the other jurisdiction.(fn10) Although concerns about the constitutionality of what is effectively a Connecticut estate tax on non-Connecticut real and personal property have been voiced, no
(fn6)Id.§ 69.
7 Id.§ 69(c).
(fn8)Id.§ 69(g).
(fn9)Id.
(fn10)Id.§ 69(d). A state that has not amended its estate tax laws to account for the phase out of the federal death tax credit will generally no longer collect estate tax. California and Florida are currently among these states.
successful challenge to this structure has been mounted.
A Connecticut estate tax return must be filed for every Connecticut resident decedent and every non-resident decedent whose gross estate includes Connecticut real or tangible personal property.(fn11) If the decedent's Connecticut taxable estate is over $2 million, the tax return must be filed with both the Commissioner of Revenue Services and the probate court for the district in which the decedent resided.(fn12) If the decedent's Connecticut taxable estate is less than $2 million then the return must only be filed with the appropriate probate court, and the judge of probate will issue a determination that the decedent's estate is not subject to Connecticut estate tax.(fn13)
Married Connecticut residents (or residents of any state who own real property in Connecticut) with a traditional estate plan designed to avoid estate tax at the death of the first spouse by maximizing use of the federal exemption amount and the federal marital deduction, will be surprised to find that although there will be no federalestate tax due at the death of the first spouse, there could be stateestate tax due. For example, a married Connecticut resident dying in 2009 with a taxable estate of $4,000,000 and a traditional estate plan would owe $229,200 in Connecticut estate tax at first death. The Connecticut estate tax can be deferred to the second death by changing the estate plan to take into account state, as well as federal, estate taxes. To avoid the dilemma that residents of other "decoupled" states face, having to choose between deferring state estate tax and taking full advantage of the first-to-die's available federal estate tax exemption, the new Connecticut estate tax law permits an election under Section 2056(b)(7) of the Internal Revenue Code for Connecticut purposes, regardless of whether that
11 2005 Conn. Acts 251, § 70 (Reg. Sess.) (amending CONN. GEN. STAT. § 12- 392). Previously, Connecticut required an estate tax return to be filed only if a federal estate tax return was required, both for Connecticut residents and non-Connecticut residents with Connecticut property. See CONN. GEN. STAT. § 12- 392(b)(3) (2005). However, the new requirement is analogous to the prior requirement that succession tax returns be filed for all estates.
12 2005 Conn. Acts 3, § 55 (June Spec. Sess.).
13 Id.
election has been made for federal purposes.(fn14) Accordingly, trust property for which a surviving spouse has a qualifying income interest can qualify for the Connecticut estate tax marital deduction even though an election will not be made to qualify it for the federal estate tax marital deduction, permitting the federal and Connecticut taxable estates to match the corresponding estate tax exemptions, which in turn allows all estate taxes to be deferred until the death of the surviving spouse.(fn15)
The Department of Revenue Services ("DRS") issued a Special Notice describing the changes to the Connecticut estate and gift taxes.(fn16) The Notice, in addition to providing a helpful explanation of the main elements of the new law, includes the DRS interpretation of the...
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