Connecticut/Massachusetts 2019 Year End Estate and Gift Tax Planning Update

State and Federal laws have significantly increased estate tax exemptions.  We recommend clients review their estate plan at least every five years, or sooner if there are changes in your financial or personal life, changes in your relationship with your fiduciaries or beneficiaries, or changes in the state or federal estate tax law.

NEW Connecticut Uniform Trust Code. In the past twenty years the use of trusts as Will substitutes, for tax planning and asset management has continued to grow around the country. To date, 35 states (including Massachusetts, Vermont, New Hampshire, Maine and Florida) have enacted various forms of the Uniform Trust Code (“UTC”). Connecticut’s version of the UTC goes  into  effect  January  1,  2020.   The  act  encompasses  four  major  changes to Connecticut trust law and significantly enhances the options for and administration of trusts in Connecticut.

• Domestic Asset Protection Trusts are now permitted. Under specific circumstances one may transfer assets into a trust for their own benefit and those assets are not generally available to creditors of the trust creator (not available for Title XIX planning).
• Directed Trusts are now permitted. A non-trustee may direct a trustee to act with regard to distributions, investment decisions and other matters. For example, a trust which owns a closely held corporation may have a management advisor who directs the operation of the business (rather than the institutional trustee).
• The Rule Against Perpetuities has been modified to allow for trust duration of up to 800 years (for new trusts).
• Codification of trust law. Probate courts have expanded jurisdiction over inter vivos trusts (such as revocable trusts). New provisions affect notice to beneficiaries, accountings, non-judicial settlement agreements, modifications and terminations of trusts.

Federal Estate and Gift Taxes. On January 1, 2020, the federal estate tax exemption will rise to $11.58M per person ($23.16M for married couples).  The exemptions are set to expire and revert back to $5M per person, adjusted for inflation, after 2025.  Your beneficiaries will continue to receive the benefit of a “step up in basis” to the date of death value on assets included in your estate. If a new administration is elected after the 2020 federal elections it is possible the exemptions may be reduced back to $3.5M.  Thus, consideration should be given to utilizing the large estate and gift tax exemptions while they are available.  However, clients must also weigh the potential estate tax savings against the loss of a “step up in basis” at death.

Federal Gift Tax Annual Exclusion. The federal gift tax annual exclusion is $15,000 per recipient for 2019 and 2020. There is an unlimited gift tax marital deduction for U.S. citizen spouses. The annual exclusion for gifts to non-citizen spouses is $155,000 for 2019 and $157,000 for 2020.

Connecticut Estate and Gift Tax: Clients in Connecticut must consider the impact of the state gift tax (the only state with a gift tax).  The Connecticut estate and gift tax exemption rose to $3.6M in 2019 and will rise to $5.1M in 2020, $7.1M in 2021, $9.1M in 2022 and match the federal exemption in 2023 (currently $11.4M but indexed for inflation).  The federal exemption will revert back to $5.1M in 2026. The tax rate ranges from 7.8% to 12% with a cap on the maximum estate/gift tax of $15M.

Massachusetts Estate Tax: The Massachusetts estate tax exemption remains at $1M per person with tax rates ranging from 0.08% to 16%.

Update Your Estate Planning Documents: Many estate plans provide for the creation of a Family Trust (or Credit Shelter Trust) upon the first spouse to die. In older estate plans, the formula for funding that trust may continue to reference funding it with the maximum amount that can pass free of federal estate tax which could result in an over-funded Family Trust and/or significant state estate tax. In newer plans, the funding formula may have been based upon the maximum state estate tax exemption. With the larger state estate tax exemptions this may no longer be necessary or a desired result.  Estates below the state and federal exemption may be suitable for a simplified estate plan.