The sad fact (it’s sad because I don’t have $10.98M) is that most of us don’t have to worry about the Federal Estate Tax anymore. Now, you can have $5.49 million ($10.98M if married) and not incur federal estate tax.
Estate Tax CT
Estate Tax Planning
Most of “Estate Tax Planning” revolved around avoiding the Federal Estate Tax. So, we can just dispense with the Estate Planning now?
Unfortunately, that is not the case. Connecticut Estate Tax starts at $2M. The rate starts at 7.2% and goes up to 12% (just changed by the 10-31-17 budget to equalize the exemption to the federal amount of $5.49M over 3 years effective for estates after 1-1-18). New York Estate Tax starts at a mere $2.062M (just changed by a 3-14 law rising to $5.49M-the federal amount-in 2019). The rate starts at 5% and goes up to 16%. Your Estate Attorney will have to consider these taxes.
If you are lucky enough to have to worry about the Federal Estate Tax, the rate starts at 18% and quickly ratchets up to 40%.
So, the short answer is that you still need to do Estate Tax Planning to minimize the state taxes (especially in Connecticut and New York), unless you want to gratuitously pay 5% to 16% of your estate to the tax man. And whether you live in Easton CT or Bedford NY makes a difference in how much tax you will pay. Your Estate Planning Lawyer can save you a lot of money.
Gift Tax
Fortunately, you can still give $14K to each beneficiary every year free of gift tax.
Both the federal government and Connecticut impose a gift tax and they both work in the same manner. Estate Planning Lawyers know these complicated rules.
You have made a gift occurs whenever you give something of value to another person. It can be an outright gift or giving them something for less than fair market value. The exceptions are 1. It doesn’t exceed $14K, 2. It is for tuition or medical expenses, or 3. it is to your spouse. So yes, giving your grandchild a car worth $20K is a gift.
There is annual exclusion of $14,000. This means that you can give up to $14K to as many people as you want each year without triggering the requirement of filing a gift tax return or paying any gift tax. It also means you can give $28K each year between you and your spouse and you can gift 100 people (or more) 14K each for a total of 1.4M.
The person who gives the gift pays the tax. It is essentially the estate tax or a reduction of the credit you can use against your estate tax. In 2017, each person has a federal credit of $5,490,000 and a Connecticut credit of $2,000,000. The federal amount is indexed for inflation, so it increases each year, but the Connecticut amount remains constant.
So, a Connecticut resident with a net worth of less than $2.0 million doesn’t have to worry about the gift tax. If they have between $2M and $5.49M (until 2021), they need to address the state gift tax issues. Most couples can arrange their affairs so the limits are $4M and almost $11M.
Practically, you can shield large gifts from gift tax or shield your estate from estate tax when you die.
If you make a taxable gift, the law requires you to file a gift tax return, even if you do not owe any money. Failure to do so can result in a late filing penalty. If you owe a tax and fail to file, you will owe the tax, penalties and interest.
Estate Planning Techniques
If you need to plan to minimize Estate Taxes there are various techniques Estate Planning Lawyers can use including recapitalizations, grantor trusts, GRATs, QPRTs, charitable remainder trusts, sales to intentionally defective trusts, and family limited partnerships/LLCs.
Federal Estate Exemption and Tax Rate
For 2017, the federal estate and gift tax exemption is $5.49 million per person, up from $5.45 million in 2016. That means an individual can leave $5.49 million to his heirs and pay no federal estate or gift tax. A married couple will be able to shield about $11 million ($10.98 million) from federal estate and gift taxes. Estate Planning Attornies can help arrange your affairs to minimize the taxes.
The federal estate and gift tax exemptions rise with inflation, and are changed every year.
If you are lucky enough to have to worry about the Federal Estate Tax, the rate starts at 18% and quickly ratchets up to 40%.
Connecticut Estate Exemption and Tax Rate
In 2017, the Connecticut estate tax starts at $2M. The rate starts at 7.2% and goes up to 12%. It is a statewide tax so Fairfield county pays the same rate as other Connecticut Counties.
Because the exemption in Connecticut is only $2M and the federal exemption is almost $5.5M, you can have no federal liability and still incur a Connecticut tax liability. This is a tricky one and your Estate Planning Attorney will have to consider how to minimize the Estate Tax.
Connecticut estate tax does not have portability like the federal estate tax which means the marital exemption does not move over to the other spouse. Therefore, in Connecticut the only way a couple can shelter $4M from tax is to use a credit shelter trust which is a mechanism which preserves the marital exemption of the first spouse to die.
In addition to the Estate tax, the State of Connecticut has probate fees that are material. They range up to 1% of the gross estate and are capped at $40,000.
What is a Connecticut Estate or Trust?
Determining if an Estate or Trust is taxable in Connecticut or whether it can be moved is a tricky subject.
Connecticut law lays out the rules in CGS 12-701(4). ““Resident trust or estate” means (A) the estate of a decedent who at the time of his death was a resident of this state, (B) the estate of a person who, at the time of commencement of a case under Title 11 of the United States Code, was a resident of this state, (C) a trust, or a portion of a trust, consisting of property transferred by will of a decedent who at the time of his death was a resident of this state, and (D) a trust, or a portion of a trust, consisting of the property of (i) a person who was a resident of this state at the time the property was transferred to the trust if the trust was then irrevocable, (ii) a person who, if the trust was revocable at the time the property was transferred to the trust, and has not subsequently become irrevocable, was a resident of this state at the time the property was transferred to the trust or (iii) a person who, if the trust was revocable when the property was transferred to the trust but the trust has subsequently become irrevocable, was a resident of this state at the time the trust became irrevocable.”
New York Estate Exemption and Tax Rate
New York estate tax starts at a $5.25M (changed by a 3-14 law rising to the full federal amount-in on 1-1-19). The rate starts at 5% and goes up to 16%. It is a statewide tax so Westchester county pays the same rate as other Connecticut Counties.
Therefore, New York is generally the same as the federal exemption. However, beware the New York estate tax cliff where the entire estate is taxed if it goes over the exemption amount. Talk to your Estate Planning Lawyer on how to avoid the cliff.
The New York Estate Tax Cliff
The New York estate tax is calculated unlike the taxes of other states. Under the systems of other states (and the federal government), if an estate is large enough to be subject to the tax, only the amount that’s over the exempt amount is taxed. For example, if the exempt amount is $2 million, and the taxable estate is $2.5 million, then only $500,000 would be subject to the estate tax.
On the other hand, if the estate is under the exempt amount in New York, there is no tax. If it is over the exempt amount, the entire estate is taxed without reduction by the exemption. For example, if someone dies in 9-17, leaving a taxable estate of $6,000,000 the estate would exceed the New York exempt amount of $5.25M by only $750,000. However, the entire estate would then of $6M would be taxed.
Estate and Inheritance Tax in Other States
In the rest of the country in 2017, fifteen states and the District of Columbia have an estate tax and six states have an inheritance tax. Maryland and New Jersey have both. Estate Planning Lawyers can check the rules in the various states.
Estate Plan
While planning to minimize or avoid estate taxes is an important reason to meet with an Estate Planning Attorney, creating an estate plan is more about about providing protections during lifetime, such as avoiding a guardianship or conservator ship proceeding if you’re incapacitated and protecting your nest egg from the possibility of an extended stay in a nursing home.
John has an advanced law degree (LLM) in Taxation and is also an accountant with over 20 years of tax experience, so he has the credentials to represent you in a competent manner.
Call John now to make sure your money goes to your loved ones and not the government.
