Connecticut Governor Dannel P. Malloy recently shared a $40.6 billion two-year budget with the Connecticut Legislature highlighted by, among other things, $1.5 billion in proposed labor concessions and $400 million in annual pension costs to be borne by municipalities and partially offset by tax revenues generated by a real estate tax liability assessed against hospitals. In an effort to stem the rising tide of wealthier residents fleeing Connecticut in order to settle in more tax-friendly (and, in most cases, warmer) states, Governor Malloy also included a provision in the proposed budget that would alter the estate tax landscape.
Currently, Connecticut residents are able to transfer $2 million in assets (either through lifetime gifting or upon death) to their intended beneficiaries with no estate or gift tax liability. In order to avoid federal estate and gift tax liability, individuals are able to transfer upwards of $5.4 million of assets to their intended beneficiaries with no estate or gift tax liability (or $10.8 million of assets for married couples due to recently enacted federal portability rules that allows one spouse to utilize the unused estate tax exemption of a previously deceased spouse). As a result of the inconsistent estate and gift tax exemption amounts found in Connecticut tax law ($2 million) and federal tax law ($5.4 million), estate planning for Connecticut residents has become quite a challenge. One of the more common estate planning techniques has always been to fund trusts in the amount of the estate tax exemption that would bypass the estate of a surviving spouse and pass to the next generation (together with the appreciation of the trust assets) estate tax-free. However, the question has always been, “Which exemption amount should we use to fund the bypass trust, Connecticut ($2 million) or federal ($5.4 million)?” The answer to that question would always be in the form of yet another question, namely, “Is it worth it to avoid the Connecticut estate tax (7%-12%) by limiting the funding of the bypass trust to $2 million, or should I maximize the funding of the bypass trust ($5.4 million) and pay some Connecticut tax now on the trust assets exceeding $2 million?”
Obviously, the best answer to this conflict would be to increase Connecticut’s exemption from $2 million to the federal exemption of $5.4 million. However, the State of Connecticut does not currently have the financial footing that would allow it to sacrifice estate tax revenues. Instead, Governor Malloy’s proposed budget calls for a gradual increase in Connecticut’s estate and gift tax exemption, from $2 million in 2017, to $2.6 million in 2018, to $3.6 million in 2019, and finally, to an amount equal to the federal exemption (whatever that may be at the time) in 2020. The effect of this budget proposal is that fewer Connecticut residents with estates valued between $2 million and $5.4 million will have a Connecticut estate tax liability going forward. Theoretically, at least, estate and gift tax planning for Connecticut residents would become a little easier if this budget proposal is approved. On the other side of the coin, however, it is important to note that the cost of running Connecticut’s probate courts is primarily funded by Connecticut tax revenues, and not simply with statutory probate court free revenue. One has to wonder how the probate courts’ many important services would be effected if the revenues paying for those services are reduced dramatically. This negative impact should generate a very lively discussion in the halls of the State House.
Please feel free to contact your Essex Trust advisors to discuss how this proposed legislation might affect your own estate plan.