Balance Estate and Gift Tax in Connecticut With Life Insurance Trusts
Connecticut might be a beautiful place to live, but it’s an expensive place to die. Whether you’re a resident of the state, or you just own property here, it’s likely that your estate is going to owe the state some money.
Connecticut Estate Tax Laws affect more than just for the top 1%. It affects small businesses, even family owned ones. On top of that, Connecticut also levies a state gift tax that could impact your ability to give your business to your family. Balancing these two different taxes, along with handling an extremely expensive probate process, involves careful estate planning.
Connecticut Estate Tax Laws and Gift Taxes
To start, it’s important to know that the state of Connecticut’s cut-off for estate tax is less than half of the federal limit, at $2 million. This tax applies to all Connecticut residents as well as anyone who owns property — including businesses — in the state. The taxable estate is based on the total amount of the individual’s gross federal estate, plus any taxable gifts.
Connecticut is the only state that has its own individual gift tax. Taxable gifts include all gifted items made after January 1, 2005, that exceed $2 million in aggregate value. Any gift you’ve made above and beyond that $2 million will be added to the value of your overall estate, increasing your tax burden.
If the value of your estate is greater than $2 million, then your estate tax will range from at least 7.2% all the way to 12%. Below is a table of current estate tax brackets.
|Up to $2 million||None|
|$2,000,001 to $3.6 million||7.2% of the excess over $2 million|
|$3,600,001 to $4.1 million||$115,200 plus 7.8% of the excess over $3.6 million|
|$4,100,001 to $5.1 million||$154,200 plus 8.4% of the excess over $4.1 million|
|$5,100,001 to $6.1 million||$238,200 plus 9.0% of the excess over $5.1 million|
|$6,100,001 to $7.1 million||$328,200 plus 9.6% of the excess over $6.1 million|
|$7,100,001 to $8.1 million||$424,200 plus 10.2% of the excess over $7.1 million|
|$8,100,001 to $9.1 million||$526,200 plus 10.8% of the excess over $8.1 million|
|$9,100,001 to $10.1 million||$634,200 plus 11.4% of the excess over $9.1 million|
|$10,100,001 +||$748,200 plus 12% of the excess over $10.1 million|
On the upside, there are some good things about Connecticut Estate Tax Laws. Transfers of estates to surviving spouses are not taxable. Also, while estate taxes are due six months after death, the state of Connecticut will allow for some additional time to file and pay taxes, provided the appropriate extension request is filed. Unfortunately, that’s about all of the benefits Connecticut residents or those who own property in Connecticut will see – and there’s even more bad news.
Probate costs in Connecticut are the highest in the United States. The state recently removed a cap of $12,500 on fees and instead made it so a probate case is charged at up to 0.01% on estate assets, all the way up to a cap of $40,000. These are just the fees to file and don’t account for the cost of attorneys, appraisals, and more. As a result, it’s not unusual for large estates in Connecticut to see six-figure probate bills.
Reduce Your Connecticut Estate with an ILIT
If you live in Connecticut, or you own property here, you need to reduce the size of your estate and, above all, avoid probate. Irrevocable life insurance trusts (ILIT) can be used to accomplish this. ILITs are useful because:
- They allow you to transfer your wealth into an account that won’t be considered part of your estate.
- Both the trusts and the life insurance policies bypass probate, reducing probate fees.
- ILITs can be used in conjunction with a business continuity plan to cover taxes and keep businesses in the family.
- Policies can easily be purchased that will allow you to stay within Connecticut’s $2 million aggregate gift tax limit — and will pay out significantly more.
- They work better than AB spousal shelter trusts, which are taxed in Connecticut.
Of course, how much your heirs will get out of this trust will depend on how good the policies are that back it. At Howard Kaye, we work with more than 50 highly rated insurance agencies and specialize in universal life policies that will allow you to use gift exclusions to fund an estate plan. If you live in Connecticut, you’re definitely going to need a plan like ours. Contact a Howard Kaye representative by calling 800-DIE-RICH for more information on managing your estate taxes and probate costs in Connecticut.