The accumulation of wealth is a very good thing. However, from an estate planning perspective, it can present some added challenges depending on the extent of your resources.
2023 Connecticut State Estate Tax Exclusion
There are 12 states in the union and have state-level estate taxes. As luck would have it, Connecticut is among the unfortunate dozen. That’s the bad news, but there is good news for most residents. This tax is only applicable on the portion of an estate that exceeds the exclusion.
For the rest of 2022, the Connecticut state estate tax exclusion is $9.1 million. This is the highest exclusion among the states that have estate taxes. The rates are variable depending on the actual value of your estate, but the maximum is 12 percent at the present time.
In addition to the state-level tax, there is also a federal estate tax that is applicable in all 50 states. Once again, there is a large exclusion that will allow most families to avoid the tax. During the current calendar year, it is $12.06 million. The top rate of the federal estate tax is 40 percent.
Each year, this figure is indexed for inflation. Since there has been a lot of it this year, the increase should reflect that reality. The figure for next year has not been formally released at the time of this writing. However, Bloomberg has used IRS codes to make a projection based on current economic realities. They suggest that the exclusion will be $12.92 million in 2023.
When the new year rolls around, the Connecticut estate tax exclusion is going to mirror the federal exclusion. Plus, the rate will be a flat 12 percent for the portion of an estate that exceeds the exclusion.
Gift Taxes
The logical reaction to an estate tax would be lifetime gift giving. That window of opportunity was closed when a gift tax was implemented about 90 years ago. Under the tax code, the federal gift tax and the estate tax are unified. As a result, the exclusion is a unified exclusion. It extends to large lifetime gifts and the estate that will be transferred after your death.
In other words, you would be using some of your estate tax exclusion to give large gifts tax-free while you are living, but there is a caveat. There is an annual gift tax exclusion that sits apart from the unified gift and estate tax exclusion.
It can be used to transfer a certain amount to any number of people in a calendar year in a tax-free manner. This year, it is $16,000 per person. Bloomberg projects a $17,000 annual exclusion in 2023.
Clearly, this may not sound like a lot of money for someone that has over $10 million of wealth. However, sustained giving can have an impact. A married couple could combine their respective exclusions to give $32,000 a year to an unlimited number of people using the current $16,000 figure. In addition to direct giving, the exclusion can be used to fund certain types of tax efficiency trusts.
Among the 12 states with estate taxes, Connecticut is the only one with the gift tax. You are cutting into your estate tax exclusion if you give a gift that exceeds $16,000 to any one person in a calendar year. If Bloomberg is right, that will go up $17,000 next year.
There is also an educational exclusion. If you want to pay school tuition for students, you do not have to worry about paying a gift tax on the transfers. The same arrangement applies to the payment of medical bills for other people, including health insurance premiums.
We Are Here to Help!
If you are exposed to estate taxes, there are steps that you can take to limit the burden. And of course, if taxation is not a source of concern, your plan should be constructed to suit your specific needs.
When you choose our firm, we will provide personalized attention. At the end of the process, you will emerge with a custom crafted plan that is perfect for you and your family.
You can set up a consultation at our Glastonbury or Westport, CT estate planning offices if you call us at 860-548-1000. If you would rather reach out electronically, fill out our contact form and we will get back in touch with you promptly.
Mr. Florin is admitted to practice before the courts of the State of Connecticut and the State of New York. He is also a member of the American Academy of Estate Planning Attorneys, the National Academy of Elder Law Attorneys, the Connecticut Bar Association, and the Fairfield County Bar Association.