Amid continued uncertainty over how the federal government will levy “death taxes,” Connecticut kicked off its first fiscal quarter by collecting double the gift and estate taxes it took in a year earlier.
For the quarter ending Sept. 30, the state collected $61 million in gift and estate taxes, according to the Connecticut Department of Revenue Services, up from just under $30 million from a year earlier and easily the biggest increase among the state”™s major sources of tax revenue.
After Congress did not act to plug a gap in U.S. estate tax law, bequeathals have been spared federal taxes in 2010, even as Connecticut lowered its own estate tax burden last year in conjunction with the passage of a “millionaires” income tax.
Under current federal law, a 55 percent tax takes root on estate assets after an exemption of $1 million. In 2009, the federal estate tax was 45 percent of assets beyond $3.5 million, with President Obama having expressed an interest in targeting that formula in future years.
Federal law allows $13,000 untaxed annually
Currently, federal law allows for untaxed, annual gifts of up to $13,000 per recipient, capped at $1 million over the lifetime of the benefactor. The savings can be considerable, say attorneys with Cumming & Lockwood, which has offices in Stamford and Greenwich. A benefactor making annual gifts to three children and six grandchildren could transfer $4.7 million while saving $2.3 million in estate taxes. That of course, does not factor in the additional earning power of those nest eggs via investments.
What”™s more, gifts beyond $13,000 are being taxed at only 35 percent this year ”“ substantially below the 45 percent tax of 2009 and the planned 55 percent tax in 2011.
Connecticut”™s windfall during the quarter surprised some trusts and estates attorneys, who noted that with Connecticut imposing lower estate taxes last year coupled with higher exemptions before taxes kick in, if anything they expected tax collections to decline.
More audits mean more revenue
Patricia Beauregard, an attorney in the Bridgeport office of Pullman & Comley, said the state appears to have stepped up its enforcement and collection efforts.
“I think they”™ve been doing more audits, and it may be that those efforts have resulted in more revenue,” Beauregard said.
John Ferguson, member of Ferguson Cohen L.L.P., said the most rational explanation was simply a higher number of wealthy estates becoming exposed to the tax during the period, due to the deaths of benefactors.
Nevertheless, Congressional dalliance in tackling estate tax reform has extended the window for taxpayers to take advantage of possibly the most beneficially unique estate planning opportunity they will see in their lifetimes, noted Ferguson, whose firm has offices in Greenwich and White Plains, N.Y.
Low federal rates present opportunity
Those opportunities are myriad, from the window on low gift taxes soon slated to close; to low Applicable Federal Rates used by the IRS for income tax purposes. Individuals who have outstanding intra-family loans can refinance those loans using lower AFR rates, according to Ferguson. And coupled with the continued bear market, those low AFR rates open an opportunity for benefactors to fund Grantor Retained Annuity Trusts with depressed assets that should perform better in future years ”“ particularly since legislation is pending in Congress that would curtail some GRAT contributions.
Perhaps the biggest question is whether Congress will apply a higher rate retroactively covering 2010, when it reconvenes after the elections to consider a new estate tax. That could come back to haunt members in two years ”“ in a survey by the Tax Foundation last year, two-thirds of respondents said they want the tax repealed outright, on grounds the federal government is taxing estates that were previously exposed to income taxes.
“We”™ve been guessing wrong since 2001,” Beauregard said. “Nobody thought it would come to this.”
