While the Tax Cuts and Jobs Act made huge changes to the tax code, the doubling of the estate tax deduction has been one of the more attractive features for families who have made significant estate plans.
However, if you live in Connecticut and are concerned about how state and federal estate, inheritance and gift (EIG) taxes will affect you in the future, it may be wise to discuss the changes to current law with a trusted and knowledgeable estate planning attorney.
Connecticut’s estate and gift tax
Although Connecticut is one of 12 states that has estate taxes, it is the only state in the Union with a state gift tax also. This tax applies to any gifts in excess of the annual threshold of $15,000 (the same amount for federal gift tax). Since lifetime gifts are considered part of the total estate, these annual gifts will accrue as lifetime gifts that can be taxed.
Although the threshold for federal estate tax is $11.58 million, Connecticut’s is gradually rising to $7.1 million in 2021, $9.1 million for 2022 and at the same exclusion amount as federal estate tax from 2023 up until the federal exemption amount reverts to $5 million on January 1, 2026.
How to give more to loved ones and less to the government
It is important to remember to keep annual giving below the threshold of $15,000 per person to avoid the gift tax, and to keep track of how these amounts accrue toward the estate tax limits. Breaching these lifetime gift exemptions at the state level can mean taxation at 12%, but at the federal rate, 40%.
While Connecticut is one of the more restrictive states for estate planning, there are some key tips for avoiding excessive taxation:
- Set up a trust: the key is to reduce the size of the estate, even if the transfers count as gifts. Transferred property can include savings accounts, certificate of deposit accounts and investment portfolio.
- 529 College Savings Plans: making this gift on behalf of your children’s education will allow you a one-time $75,000 contribution without triggering the gift tax, as long as it is once every five years.
- Direct gifts: annual of $15,000 per person ($30,000 if both parents each give to their limit); direct gifts that are tax-free including cash to spouses, charities, and tuition or medical expenses, if sent directly to the institution.
Wise financial planning is key to getting around some of the restrictions outlined above. While each situation is unique, it makes better sense to plan early than too late.