Connecticut Estate Taxes

Connecticut has a rather convoluted estate tax system, made more confusing by new laws enacted June 30, 2005. For the estates of those dying before 2005, Connecticut has an estate tax that is intended to absorb the maximum credit against the federal estate tax. It also has a layered inheritance tax system. The amount of tax imposed depends on who gets what after you are gone, according to the following categories:

• Class AA: Any portion of the net taxable estate passing to the surviving spouse is completely exempt from tax.
• Class A: Any transfers involving beneficiaries that count as parents, grandparents, adoptive parents, and natural or adoptive descendants are also exempt from tax.
• Class B: This category includes the husband or wife or widower or widow who has not remarried of any natural or adopted child, stepchild, brother or sister of the full or half-blood or adopted brother or sister or any natural or adopted descendant of such brother or sister. Through the end of 2004, a total of $600,000 is exempt from tax for the class. The rest is taxed as indicated in the table below (Columns (3) and (4)).
• Class C: This category applies to all other beneficiaries. Through the end of 2004, there is a $200,000 exemption for the class and the rest is taxed according to the tax table below (Columns (5) and (6)).

The estates of decedents dying on or after July 1, 2004, and before January 1, 2005, are subject to a special Connecticut estate tax instead of the regular Connecticut estate tax. The special estate tax is computed as if the decedent had died during 2002 using the federal exclusion and credit amounts for that year. For 2002, the applicable exclusion amount was $1 million and the credit amount was $345,800.

Beginning in 2005, significant changes were made to Connecticut's gift tax, succession tax, and estate tax. More complete information will be included in future Connecticut Department of Revenue Services (DRS) special notices. In the meantime, here are highlights of the laws enacted June 30, 2005:

• The Connecticut succession tax does not apply to estates of decedents dying on or after January 1, 2005.
• The Connecticut estate tax is no longer based on the federal credit for state death taxes. Instead, representatives of the estate of a decedent dying on or after January 1, 2005, must file a return with the DRS if the decedent's Connecticut taxable estate is over $2 million. If the decedent's Connecticut taxable estate is $2 million or less, the representatives must file the return with the probate court (not DRS). The taxable estate is based on the total Connecticut taxable gifts made by the decedent during all calendar years beginning on or after January 1, 2005, and the decedent's taxable estate (generally based on federal estate tax computations).
• Starting in 2005, persons making Connecticut taxable gifts (donors) must file a return with the DRS reporting Connecticut taxable gifts, even if no gift tax is due. Connecticut gift tax is due once the sum of Connecticut taxable gifts made during all calendar years beginning with 2005 exceeds $2 million.
  Connecticut taxable gifts are defined as those federal taxable gifts that are gifts of real or tangible personal property situated within Connecticut and, for donors who are Connecticut residents, gifts of intangible personal property.

Deductions for resident decedents. The following items can be deducted from a resident decedent's estate when calculating the Connecticut estate tax liability:

• decedent's lawful debts
• unpaid taxes on real property within the state which were a lien at the date of decedent's death; on personal property which constituted a personal obligation or were a lien at the date of death; and on income which had accrued to the date of death
• tax on untaxed property
• special assessments
• funeral expenses
• reasonable executor's and administrator's commissions
• reasonable attorney fees
• reasonable administration expenses, including those relating to property transferred other than by will or by laws relating to intestate estates (i.e., those estates without a will) except such as are listed below
• unpaid mortgages not deducted in the appraisal of the property
• reasonable family allowance, not to exceed 12 months
• court fees

In the case of a transfer other than by will, the following items are allowed as deductions:

• liens subject to which the transfer is made
• unpaid expenses of administering a taxable lifetime trust prior to death and expenses of terminating such a trust if it terminates on the death of the transferor

The following items are specifically set out as not being deductible:

• federal estate tax and succession, inheritance, estate or transfer taxes paid or payable to other states, territories, the District of Columbia, foreign countries or governmental subdivisions thereof
• expenses of care, maintenance or repair of real estate and buildings accrued subsequent to the death of decedent
• interest on obligations of decedent which accrued subsequent to decedent's death
• property taxes, except the tax on untaxed property assessed by the state subsequent to decedent's death
• income taxes accrued subsequent to decedent's death
• expenses incurred and taxes assessed on real estate and tangible personal property situated outside the state
• all other charges and expenses of administration properly allocable against income

Deductions for nonresident decedents. The following deductions are allowed from the estate of a nonresident decedent:

• fees of Connecticut probate court
• advertising expenses incidental to the administration in Connecticut
• reasonable compensation of appraisers of real estate or tangible personal property situated in Connecticut
• expenses incurred in connection with procuring fiduciary's bond filed in Connecticut probate court
• commissions paid in connection with sale of real estate or tangible personal property situated within the state
• reasonable compensation of executors and administrators qualifying as such in Connecticut and reasonable fees of Connecticut attorneys
• mortgages in existence at the date of decedent's death on real property or tangible personal property within the state not already deducted in the appraisal of the property so mortgaged
• unpaid taxes upon real and tangible personal property situated in the state, which were a lien at the date of decedent's death
• tax on untaxed property assessed by the state against the estate of decedent
• special assessments which were a lien on real property in the state
• the net taxable estate passing to the surviving spouse of the decedent

In determining the taxable estate of a nonresident involving transfers other than by will or intestate laws, only the following deductions are allowed:

• liens subject to which the transfer is made
• debts of decedent, if it is judicially established that such transfer is subject thereto

Returns. Beginning in 2005, the Connecticut gift tax return and the estate tax return will be combined into a single return. The DRS is expected to release the new form in the coming months.