Conflict, confusion and now clarity (for the moment)
The Connecticut exemption from estate and gift taxes has been on the rise since legislation in October 2017 to phase it up to the federal exemption. The state exemption, which was $2 million for most of the last 15 years, rose to $2.6 million in 2018 and now to $3.6 million in 2019. As a result of competing, contradictory bills passed in May of 2018 in response to the federal Tax Cuts and Jobs Act, which nearly doubled the federal exemption to $11.18 million for 2018, there has been uncertainty in the amount of the Connecticut exemption available from 2020 onwards. We now know that the Connecticut exemption from estate and gift taxes will rise to $5.1 million in 2020, $7.1 million in 2021 and $9.1 million in 2022 (with the usual caveat that the legislature may take action to change these numbers). Effective January 1, 2023 and going forward, the Connecticut exemption amount will equal the federal estate tax exemption, and will drop in concert with the federal exemption amount on January 1, 2026, subject to any changes in federal law. The inflation adjusted federal exemption amount for 2019 is $11.4 million.
While there is clarity at the moment—change appears to be constant as various legislative proposals related to estate and gift taxes are on the table as the new governor and legislature put forward their ideas. Most notably, Governor Lamont's first proposed budget included the repeal of the gift tax (Connecticut remains the only state with a gift tax). His proposed budget would retain the estate tax with the exemption increasing to the federal amount in 2023. Under the Governor's proposal, gifts made within three years of death would be included back in a decedent's death to prevent deathbed gifting. Connecticut residents and those with property in Connecticut will want to stay tuned with respect to these proposals and the prospect of changes out of Washington, D.C. before 2026 in order to achieve their goals in a tax efficient manner.
How the current law could affect your ability to give tax free gifts
The Connecticut exemption from estate and gift taxes takes into account lifetime gifts as well as transfers at death, so a Connecticut resident may apply his or her rising exemption towards making tax-free gifts. If your prior gifts never exceeded the Connecticut exemption amount, in 2019 you can gift an additional $1 million of Connecticut property over last year without having to pay a Connecticut tax on the gift. However, if you previously paid a Connecticut gift tax (in 2005 or later) you can still take advantage of the higher Connecticut gift tax exemption, but you cannot use the full amount of the increase without incurring a gift tax.
Because Connecticut gift taxes are assessed on aggregate lifetime gifts (made in or after 2005) at progressive rates, the increased exemption has pushed the taxable threshold up the rate table, and the credit you receive for gift taxes previously paid will no longer match the recalculated tax. For example, a Connecticut resident who gifted the federal exemption amount of $5.12 million in 2012 would have paid $240,000 in Connecticut gift tax at that time. That resident can now give only $1,143,461 in 2019 without paying any additional Connecticut gift tax, despite the fact that the Connecticut exemption is now $1.6 million higher than it was in 2012. If that same person gifted the full $1.6 million in 2019 (for an aggregate total of Connecticut gifts equalling $6.72 million), that gift would generate nearly $47,500 in Connecticut gift tax. This less than dollar-for-dollar increase is due to the increased rate applied to the taxable portion of aggregate gifts, and should be calculated prior to making additional gifts if you do not wish to incur a further gift tax.
There also remains the flexibility to use your federal exemption without triggering Connecticut gift tax by making gifts of real or tangible property located outside the state. However, there is additional complexity with these transfers that would need to be weighed against the savings on gift tax.
Because your situation is unique, this Tax Alert also does not provide tax or planning advice tailored to your exact circumstances. We therefore invite you to contact us to review your estate and gift planning and discuss tax considerations with you in light of the recent legislative changes and current legislative proposals, which attorneys at Withers Bergman will continue to closely monitor.