We practice law in the state of Connecticut, and people who live here would say that it is one of the best places to live in the entire country. Thousands of individuals who can afford to live anywhere choose to call Connecticut home, so there are a lot of wealthy people here.
A study was conducted recently by Phoenix Marketing International. They wanted to determine the density of millionaire residents state-by-state. The study found that the state of Connecticut has the second-highest density of millionaires. Researchers determined that 7.3 percent of Connecticut households have a net worth of at least $1 million.
When you achieve your financial goals, you have reached a satisfying plateau, but there is a responsibility that goes along with success. You have to preserve your wealth for the benefit of the loved ones that you will be leaving behind, and this can be challenging.
Even if you are very careful about your own actions, you have to be concerned about taxation. There is a federal estate tax that looms large for high net worth families, and this tax can have a huge impact. In the state of Connecticut, there is also a state-level estate tax to deal with if you are a high net worth individual.
Let’s look at the parameters.
Unlimited Marital Deduction
The first thing that we should point out about the estate tax is the fact that it is not applicable on transfers between spouses. If you are legally married in the eyes of the law, you can transfer unlimited assets to your spouse without incurring any estate tax liability.
This is the case if you are married to an American citizen. The tax collectors want to be able to get some money someday, and they don’t want a non-citizen spouse to return to his or her country of citizenship with a tax-free inheritance.
Federal Estate Tax Exclusion
There is a federal estate tax exclusion that allows you to transfer a certain amount of money to people other than your spouse before the estate tax would become applicable. To understand the exact amount of the estate tax exclusion this year, you need to take a brief walk down memory lane.
A $5 million exclusion was put into place via legislative mandate for 2011 and 2012, but there was an adjustment to account for inflation in 2012 that brought the exclusion up up to $5.12 million. At the end of 2012, the American Taxpayer Relief Act of 2012 was passed, and it made the base exclusion permanent.
There have been inflation adjustments each year since 2012, and after a series of adjustments, the exact amount of the federal estate tax exclusion in 2016 is $5.45 million. This is the amount that you can transfer tax-free.
We should point out the fact that the estate tax exclusion is portable between spouses. This means that your surviving spouse could use your exclusion and his or her own after your passing.
Federal Gift Tax
It would be natural to consider lifetime gift giving when you hear about the existence of the federal estate tax. People did give gifts to avoid the estate tax right after the estate tax was enacted in 1916.
To close this loophole, a gift tax was enacted in 1924, but it was repealed in 1926. The good times ended in 1932 when the gift tax was put back in place, and it has been a fact of life since then.
The gift tax and the estate tax are unified, so the $5.45 million exclusion is a unified exclusion. It applies to gifts that you give while you are living along with the value of your estate.
State-Level Estate Taxes
There are a number of states in the union that impose state-level estate taxes. In these states, the exclusions are lower than the federal exclusion in most cases, so people who are exempt from the federal tax can be exposed to state-level estate taxes.
As we stated previously, there is a state-level estate tax in the state of Connecticut. The state-level exclusion here is just $2 million.
Estate Tax Efficiency Strategies
As you can see, as a Connecticut resident you can face estate tax exposure on the state level even if you do not consider yourself to be among the true financial elite. Plus, people who have been very successful can face exposure on both levels.
The good news is that there are estate tax efficiency strategies that can preserve your wealth for the benefit of your loved ones. To learn more about the estate tax and the steps that you can take to ease the burden, download our special report. The report is free, and you can click this link to get your copy: Complimentary Estate Tax Report.
Mr. Nirenstein is licensed to practice before the courts of the State of Connecticut and the United States District Court. He is a member of the Connecticut and Hartford County Bar Associations, and the Estate and Probate, Elder Law, Business Law and Real Estate Sections of the Connecticut Bar Association.
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