Connecticut estate taxes explained
If you live in Connecticut, all the property that you own at your death will be valued to determine if your estate owes money to the IRS or Connecticut -- or both -- or neither. Your estate includes your house, car, furniture, bank account, brokerage account, IRA, 401(k), business interests and everything else you call your own. But assets passing to a spouse are not counted as part of your taxable estate.
Last week, we discussed federal estate taxes and how they were affected by the American Taxpayer Relief Act that the president signed into law on Jan. 3. This week, let's review estate taxes in Connecticut, which were last changed in 2011.
Connecticut estates over $2 million are taxed at different rates. The rates range from 7.2 percent for estates over $2 million to the top of 12 percent for estates over $10.1 million. The first $2 million is tax free.
For example, the Connecticut estate tax for a $2 million estate is zero. A $3 million estate is taxed $72,000 (7.2 percent of $1 million). An estate of $5 million would pay a Connecticut estate tax of $252,000 (8.4 percent of $3 million). A $10 million estate would pay $912,000 (11.4 percent of $8 million). The Connecticut tax is due six months after death.
You may recall that pre-2010, we had a "cliff" tax structure. An estate of $2 million paid no Connecticut estate taxes. But an estate of $2,000,001 -- just a dollar more -- paid Connecticut $101,700.
A Connecticut law enacted in 2011 did away with the cliff. Now, a $2,000,001 estate would be taxed only pennies. Again, there is no Connecticut estate tax on estates below $2 million.
Until a few weeks ago, it was not clear whether a $1 million estate would be subject to a federal estate tax. Now that's resolved. Only estates over $5 million (inflation adjusted estimated to be $5.25 million for deaths in 2013) are subject to federal estate taxes, thanks to the American Taxpayer Relief Act signed into law on Jan. 3. That means that estates of individuals dying in 2013 are not taxable on the federal level if they are valued at $5.25 million or less.
Because of "portability," spouses can pass $10.5 million to heirs free of federal estate tax. Portability preserves the $5.25 million exemption on the federal level, but not in Connecticut for the first spouse to die.
Connecticut and federal
To see the effect of the two tax schemes, we need to consider the size of the estate,
Individuals with estates below $2 million will pay nothing to Connecticut and nothing to the IRS.
Individuals with estates above $5.25 million will pay taxes to both the IRS and Connecticut.
For example, an estate of $6 million will be taxed $360,000 in Connecticut
(9 percent of $4 million, with the first $2 million tax-free).
Because the Connecticut tax can be deducted on the federal tax return, the $360,000 paid to Connecticut reduces the federally taxable estate from $6 million to $5.64 million, according to Robert F. Cohn. author of the Connecticut Estate Planning Wills and Trusts Library. published by Data Trace Publishing Co. Cohn is with the New Haven law firm of Zangari Cohn Cuthbertson PC
The federal estate tax is $156,000, figured as follows: $5.64 million less $5.25 million is $390,000; 40 percent of $390,000 is $156,000.
A $6 million estate would pay a grand total $516,000, counting both Connecticut and federal estate taxes.
$2M to $5.25M
Estates valued between $2 million and $5.25 million will owe Connecticut taxes but no federal estate taxes.
Since the Connecticut tax rate for estates between $2 million and $5.25 million ranges from 7.2 percent and 8.4 percent, each $100,000 of assets over $2 million will cost between $7,200 to $8,400 in Connecticut taxes.
That amount can potentially be saved through planning -- or be avoided altogether by making a move to a tax-free state, such as Florida.
With proper planning, a married couple can pass $4 million free of federal and Connecticut estate tax, explained Cohn.
The usual method is a by-pass trust or credit shelter trust that passes the first spouse's exemption amount into a trust for the life benefit of the survivor. Unlike the federal law, Connecticut does not have "portability" where unused exemptions on the first death pass automatically to the surviving spouse.
Remember, said Cohn: In Connecticut, the rule is "Use it or lose it." Couples need to do some planning to protect the Connecticut $2-million-per-person exemption, or it's lost when the first spouse dies.
Here is an example based on a question from a reader: A married couple with $8 million has all of their assets in joint name with rights of survivorships. There will be no federal or Connecticut estate tax when the first spouse dies and no federal tax when the second spouse dies due to portability. In Connecticut, the $8 million will be reduced by $2 million (not $4 million), when it comes to paying Connecticut taxes.
Planning before the first death can preserve another $2 million. As always be sure to consult your tax adviser before taking any action.
Next week, we'll discuss gifting.
Julie Jason. JD, LLM, award-winning author of "The AARP Retirement Survival Guide: How to Make Smart Financial Decisions in Good Times and Bad," and "Managing Retirement Wealth: An Expert Guide to Personal Portfolio Management in Good Times and Bad," is principal of Jackson, Grant Investment Advisers, Inc. of Stamford. Please e-mail her with questions at email@example.com or write to her c/o The Advocate, 9A Riverbend Drive South, Box 4910, Stamford, CT 06907. Copyright 2013 Julie Jason.Source: m.stamfordadvocate.com