October 9, 2018
By: Carole M. Bass
On May 15, 2018, Connecticut’s budget bill became effective maintaining an exemption from Connecticut estate and gift tax of $2,600,000 for 2018 and $3,600,000 for 2019, but providing that the match to the federal basic exclusion amount will phase in gradually rather than being effective in 2020 as would have been the case under prior law.1 Under the budget bill, the Connecticut exemption amount will be $5,100,000 in 2020, $7,100,000 in 2021, $9,100,000 in 2022 and will match the federal basic exclusion amount (currently $11,180,000) effective January 1, 2023.
There is a wrinkle, however, in that another piece of Connecticut legislation provides for the Connecticut estate and gift tax exemption to remain at $2,600,000 for 2018 and $3,600,000 for 2019, but to match the prior federal exemption of $5,490,000 in 2020 with no additional increase after 2020.2 It remains to be seen what will become of the Connecticut exemption.
As you may recall from our prior Wealth Advisory newsletters, the new federal tax law increases both the federal estate and the federal gift tax exclusion to $11,180,000 per person (a $10,000,000 basic exclusion amount indexed annually for inflation). However, since the increased federal exclusion is scheduled to sunset on January 1, 2026 and revert to the pre-2018 basic exclusion amount of $5,000,000 (indexed), absent future Congressional action, the increased federal exclusion will only apply to gifts made and estates of individuals dying between 2018 and 2025.
In general, readers with estates in excess of the pre-2018 federal exclusion of $5,000,000 (indexed) may wish to take advantage of the increased federal exclusion by making current lifetime gifts in case the exclusion decreases in 2026 (or potentially sooner if there is a change of administration in 2020). For those readers who are residents of Connecticut, however, there is a complication because Connecticut has the distinction of being the only state that imposes a state level gift tax. As noted above, the Connecticut exemption is not slated to match the federal exclusion until January 1, 2023 (or not at all depending on what happens with the conflicting legislation).
Connecticut residents might, therefore, wish to make their gifts gradually over the next several years to avoid making taxable gifts exceeding the Connecticut exemption. In addition, Connecticut residents may, if applicable, wish to make gifts of out-of-state real or tangible property, which are not subject to Connecticut gift tax.
For Connecticut residents with assets that are expected to appreciate significantly before 2023 there are techniques available to freeze the asset value for estate tax purposes while gradually taking advantage of the increasing Connecticut exemption.
EXAMPLE: Let’s assume that a Connecticut resident individual owns an interest in a business that is currently valued at $5,000,000. It is anticipated that the value of the business will appreciate significantly over the next several years. If the individual gifts his interest in the business to a trust for his descendants he would have sufficient federal exclusion to shield the gift from federal gift tax, but would incur a substantial Connecticut gift tax on the value of the gift in excess of $2,600,000. Under the Connecticut budget bill, the Connecticut gift tax on the $2,400,000 difference amounts to $186,600. If the individual instead makes a partial gift to the trust equal to the current Connecticut exemption of $2,600,000 and sells the remaining portion of his interest in the business to the trust in exchange for a promissory note, he can gradually forgive the note each year as the Connecticut exemption increases, making gradual gifts that will not incur Connecticut gift tax.
Readers who are Connecticut residents should contact us to discuss strategies for lifetime gifting.
1Conn. Pub. Act No. 18-81 (effective May 15, 2018).
2Conn. Pub. Act No. 18-49 (effective May 31, 2018).