Transfer Taxes - Johnson, Dowe, Brown & Barbarotta, LLC (2024)

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Transfer taxes are different from and in addition to income taxes. There are three types of transfer taxes. They are: gift taxes, estate taxes and generation-skipping-transfer taxes. The federal Tax Cuts and Jobs Act (TCJA) that became effective January 1, 2018 increased the federal exemption equivalent amount substantially. Taxable transfers in 2017 that did not exceed $5,490,000 were exempt. For 2018 the federal exemption equivalent was increased to $11,180,000. Unless the federal government takes action to change the TCJA, in 2026 the 2018 federal exemption equivalent will drop back to $5,490,000 (plus inflation adjustment for the years from 2018 through 2025).

Gift Taxes. Both the federal government and the state of Connecticut tax gifts. States other than Connecticut do not impose a gift tax on their residents or on tangible property located in those states. Gifts that qualify for annual exclusions and gifts to spouses or to charities are not subject to either the federal or Connecticut gift taxes. Annual exclusion gifts include those made to any one beneficiary each year that do not exceed an annual exclusion amount that is indexed for inflation. For gifts in 2018 the annual exclusion amount is $15,000. In addition gifts to persons by the direct payment of their medical and educational expenses are not subject to federal or Connecticut gift taxes. A married person can double his or her annual, per donee exclusion if his or her spouse elects to treat gifts as joint gifts of both spouses on returns filed by April 15 of the year following the year in which the gifts are made.

Gifts (other than to spouses and charities) that exceed the annual exclusion amount and are not qualified medical payments or qualified educational payments, can qualify for a federal transfer tax exemption equivalent that is indexed for inflation. The federal transfer tax exemption equivalent for 2018 is $11,180,000 unless reduced by previous taxable gifts. Aggregate taxable gifts in excess of the available exemption equivalent generate federal gift taxes of 40% of the value of amounts over the available exemption equivalent amount. See the chart at the end of this tab for Connecticut exclusion equivalent amounts and rates.

Estate Taxes. Unless used up by lifetime gifts, the federal government and the state of Connecticut tax distributions, other than to spouses and charities, from the estates of Connecticut residents that exceed the available transfer tax exemption equivalent amounts set by the State of Connecticut. Many states other than Connecticut also impose estate taxes on their residents and on tangible property in their states that pass to beneficiaries at death.

For persons dying in 2018, distributions (other than to spouses and charities) from their estates that exceed an aggregate a transfer tax exemption equivalent of $11,180,000 generate a federal estate tax of 40% of the excess. The federal transfer tax exemption equivalent applies to estate distributions similar to its application to lifetime gifts but there are no annual exclusions for federal estate tax purposes. The federal transfer exemption equivalent reduction in 2026 creates some planning opportunities for individuals with assets exceeding $5,000,000 and for married couples with combined assets exceeding $10,000,000. Individuals and married couples with assets valued below these thresholds probably will find the costs and complexity of transfer tax planning are not justified by federal transfer tax savings.

Connecticut imposes an estate tax on the estates of its residents and on the tangible property located in Connecticut of non-residents. A Connecticut estate tax return is due six months from the date of death in the Connecticut probate court where the Connecticut resident lived at the time of death or where the property of a non-resident was located at the time of death. For persons dying in 2018 (distributions, other than to spouses and charities) from their estates that aggregate a transfer tax exemption equivalent of $2,600,000 generate a Connecticut estate tax of between 7.2% and 12% based on the chart at the end of this tab. Years following 2018 are also shown in the chart but years following 2023 will need to await inflation adjustments before the Connecticut transfer taxes can be calculated or predicted.

Generation-Skipping-Transfer Taxes. Both Connecticut and the federal government have designed generation-skipping-transfer (GST) taxes to impose a transfer tax that would otherwise be avoided by gifts or estate distributions to grandchildren or more remote beneficiaries rather than to children or beneficiaries closer in age. The transfer tax exemption equivalent amounts and transfer tax rates applicable to gifts and estate distributions generally apply to the GST tax. The application of this tax is complex and minimizing the tax for large estates requires competent professional planning if a sophisticated nature.