Even as Connecticut sharply raised the wealth “cliff” above which inheritance taxes are collected, collections dropped sharply in the recently completed first fiscal quarter, a possible sign that lifetime gifts have lessened.
To win passage this summer of tax hikes on individuals making $500,000 annually and couples making $1 million, the Connecticut General Assembly raised the bar over which wealthy people are subjected to the state”™s inheritance taxes.
Beginning in October, the state began applying death taxes on estates valued at at least $3.5 million, instead of the $2 million cliff the state has had in place until now.
The new Connecticut cliff put the state back in synch with the federal $3.5 million exemption ”“ for now. Under current law, the federal inheritance tax is wiped off the books for anyone dying in 2010; the following year, the federal cliff drops to $1 million and the maximum chargeable estate tax rises from 45 percent this year to 55 percent in 2011.
At deadline Congress had yet to pass a law to instate a death tax for next year; President Obama has previously stated he would like to see a permanent $3.5 million exemption and a 55 percent maximum tax rate.
“Certainly in the last year much has changed and the economic landscape continues to evolve,” said Richard Kohan, a Connecticut resident who is a principal with PricewaterhouseCoopers, and who recently co-authored a PWC guide to tax and estate planning. “But opportunity is inherent in times of change. Within this context, many individuals and businesses may want to reconsider their short- and long-term plans.”
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Strategies for minimizing estate taxes are varied ”“ one popular strategy is to take full advantage of tax exemption on gifts, under which a benefactor can give a dependent up to $12,500.
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Through the first fiscal quarter ending September 30, Connecticut gift and estate tax collections were under $30 million, nearly half their levels during the same period a year ago.
Because the figures can be drastically altered by a few powerhouse estates, it is too soon to tell whether they reflect reduced gift giving by wealthy individuals who now have an extra $1.5 million in cap room they did not enjoy last year.
Inheritance and gift tax revenue in fiscal 2009 totaled $238 million.
If gift giving is down whether due to the overall economy or specifically as it applies to estate planning, benefactors could be missing a golden opportunity. Tax attorneys say the best time to make such gifts is when their current value is vastly lower than what it will be years from now. Assuming the asset appreciates as planned, stock for instance, then a beneficiary has far more to gain by receiving the property now than at a later point when it may be subject to an inheritance tax.
Of course, another way to minimize one”™s estate taxes in Connecticut is to move one”™s domicile to a state lacking estate taxes such as Florida ”“ which requires spending more than half the year at the new residence.
In a 2008 study, the Connecticut Department of Revenue Services confirmed that wealthy Connecticut residents were likely moving to such tax havens at least in part to avoid paying inheritance taxes.
