Since 2005, one of the more annoying idiosyncracies of CT estate planning law has been the 2 million dollar cliff threshold for CT estate taxes. At the time it matched the federal estate tax exclusion, but that rate was set to rise to $3.5 million at the start of 2009, and was widely expected to stay in that vicinity.* The end result was that individuals could easily get wallopped over manners of poor planning** (as a “cliff tax”, you’re assessed on the full first $2MM if you’re over by even a dollar), and couples with a net worth over $4 million required multiple, layered trusts to maximize the tax credits offered, such as they were.
However, last month Gov. Rell announced she would allow the proposed 2010-2011 budget to pass into law, which modifies the estate tax to a flat tax of 25% on the value of estates over $3.5MM, similar to the federal taxes. Under this new system, modest individuals estates may no longer be blindsided, and couples with a net worth underneath $7 million can avoid estate taxes altogether with a common arrangement often referred to as an “AB Trust.” An AB trust simply takes the property from the decedent spouse(let’s say husband’s) estate and splits it into two piles: a “bypass pile” which could be taxed, but is valued to max-out his $3.5 million credit, and a “marital deduction pile,” which gives the property to his widow tax-free, and will fall within her $3.5 million credit when she passes. The trust allows the piles to be split up in whatever way will save the most taxes, and is now a very effective tool in CT.
*This is still in a state of legislative flux, however. Presently there is no estate tax at all for 2010 and a low $1MM exemption starting in 2011, but these are likely to change and should not be planned around.
**Because of the low threshold, holding a large life insurance policy on yourself, vacation properties, or even part of a small business could make an estate subject to tax. The change in the estate tax does not affect the assessment of probate fees on these assets, so it remains prudent to place substantial investments in trust, outside of your estate.