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Connecticut Gift and Estate Tax Exemptions and Significant Changes to the State’s Trust Administration Provisions

The Connecticut legislature has been busy of late updating the Connecticut Uniform Trust Code as well as making changes to the gift and estate tax exemptions. It is important for taxpayers to keep in mind not only the federal laws when it comes to gift, trust, and estate planning but the state law as well since the two do not always coincide with one another.  The following Connecticut changes will greatly enhance the administration of trusts and planning opportunities available to practitioners and their clients in Connecticut.

Updates to Connecticut Gift and Estate Tax Exemptions

Connecticut enacted new legislation that extended the timeline for increasing the Connecticut gift and estate tax exemption amounts.  Previously the Connecticut exemptions were scheduled to conform with the federal amounts as of January 1, 2020.  The new time frame has the Connecticut exemptions equaling the federal exemptions beginning January 1, 2023.  As of January 1, 2019, the federal gift and estate tax exemption is $11,400,000.  For tax years 2019 – 2022, the Connecticut gift and estate tax exemption amounts are $5.1 million, $7.1 million and $9.1 million respectively.

Connecticut remains the only state in the nation that imposes a gift tax.  The Connecticut gift tax annual exclusion does mirror the federal amount of $15,000.  Unlike federal gift tax law, Connecticut does not impose a Generation Skipping Transfer tax. Taxpayers who may not have taken full advantage of the increased federal exemptions due to the possible Connecticut gift tax implications will want to coordinate with their estate attorneys and accountants to make sure they maximize their gifting abilities with these new state increases.

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Updates to Connecticut Trust Law

In June of 2019, Connecticut enacted legislation resulting in four major categories of revisions to Connecticut trust law, including allowing Domestic Asset Protection Trusts, Directed Trustees and an expansion of the Rule Against Perpetuities.

With these changes, Connecticut became the 19th state to adopt domestic asset protection trust legislation and one of the first ten states to adopt the Uniform Trust Act.

A domestic asset-protection trust (DAPT) is an irrevocable self-settled trust in which the grantor is designated a permissible beneficiary and allowed access to the funds in the trust account.  If the DAPT is properly structured, the goal is that creditors won’t be able to reach the trust’s assets.

With the adoption of the Uniform Trust Act, the responsibilities of the trustee can now be bifurcated between the trustee and a trust director.  The trust director will assume limited responsibility for a specific role originally required of the trustee.  The role tends to be most valuable in trusts with difficult assets, such as real property, a closely-held business or a concentration of assets.  Whereas previously the trustee may have been more inclined to sell a difficult asset to minimize their risk of liability, a trust director with the appropriate expertise to manage and/or invest such assets effectively can now be delegated the responsibility.

The legislation also adopts a near repeal of the rule against perpetuities by allowing (prospectively) for trust durations of 800 years.  The trusts must be established on or after January 1, 2020 for the new law to apply. The planning opportunities can vary between taxpayers, do not assume any of this information is directly relevant to your circumstances.

If these exemptions and trust law changes might impact you in anyway, please reach out to a member of Withum’s Private Client Service Team with questions concerning your particular situation by filling out the below form.

Author: Rebecca Alicea, Esq., LLM  |  ralicea@withum.com

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