the informational website of Lisa Nachmias Davis,
Davis O'Sullivan & Priest LLC, Attorneys at Law

Davis O'Sullivan
& Priest LLC
129 Church Street

Suite 805
New Haven, CT
Fax: 203-774-1060


     Preface:  this is essentially the same alert posted when 2009 arrived!  One big change:  "Portability" of estate tax exemption

January 1, 2011
.  Happy New Year! Amazingly, the White House and the Republicans reached a tax "compromise" that Congressional Democrats had virtually no choice but to ratify.  The result is that the federal estate tax exemption has reset not to $1 million, but to $5 million per person -- with the ability to give any unused exemption to a surviving spouse (known as "portability") -- and a return of the step-up in basis.  The re-set is retroactive to January 1, 2010, but estates of those dying in 2010 have the opportunity to elect not to have the estate tax apply and instead opt for the adjusted "carryover basis" with a limited ability to "allocate" a capital gains tax exemption to sales proceeds of assets "acquired from a decedent" during 2010.

      Paradoxically, this good news at the federal level may have unintended negative tax consequences for your estate -- assuming that the recession has left you with more than $3.5 million between you. The problem is the disconnect between the federal and state exemptions.  Although the federal exemption is now $5 million -- $10 million for a couple -- the Connecticut exemption is now $3.5 million with no increased exemption for couples unless appropriate tax planning shelters assets at the first death from being taxed at the second.  This disconnect could result in about $121,800 in Connecticut estate tax, payable 6 months after the first of you dies.

Here's why:

      An estate plan (particularly one prepared before 2005) often includes trusts designed to minimize taxes, by "sheltering" assets from the federal estate tax payable when the second of you dies.  These trusts may be in your wills, or revocable trust agreements.  Although no tax is due when you leave your assets to your U.S. citizen spouse, doing so used to expose them to federal estate tax at the time of your spouse's later death -- with amounts in excess of the federal exemption taxed at 35% and amounts in excess of the state exemption taxed at 5-16%.  This approach is still the way state estate taxes are applied:  assets that pass to your surviving spouse will be taxed at his/her death.   For this reason, your will or revocable trust agreement may include a trust or "Fund" established when the first of you dies, whether it is called a "credit shelter trust," a "bypass trust," "fund A," or some other name.  Assets owned by the first person to die pass into trust at that person's death and thus escape tax at the time of the second person's death.

      So far, so good.  But your documents -- especially if written before 2005 -- may describe what goes into the trust as "the largest amount that may pass free of federal estate tax," or something similar.  As of 1/1/11, that amount is $5 million  -- more than the amount that can pass free of Connecticut estate tax.  If, therefore, you own more than $3.5 million in your sole name that does not pass to your spouse by beneficiary designation and you die first, more than $3.5 million may pass to the trust.  Result = tax.  If you have $5 million, everything will pass into the trust, with a resulting tax of approximately $121,800.

     What to do?  There are three ways to solve the problem -- and I leave aside the fourth possibility, that you will spend everything on long-term care costs or bad investments decisions, leaving nothing to worry about.  The three choices:

  1. A quick trust amendment:  A simple change of sentence will address the situation, by limiting the amount passing to the trust to "the maximum amount that will pass free of federal and state estate tax."  More will be exposed to federal tax when the second person dies, but that may not matter, depending on the size of your estate.

  2. Rearrange assets:  Ensure that you do NOT (either of you) have assets in excess of $3.5 million in either person's sole name, except for assets that pass by beneficiary designation to a spouse.  Remember when your lawyers advised you to divide your assets so that each of you had "at least" a certain amount in your sole name?  This is the opposite advice -- make sure that you have no more than $3.5 million in your sole name except for assets that pass by beneficiary designation to your spouse.  Instead, take the excess and put it into a joint account, or alternatively, ensure that the account "transfers on death" to your spouse.  If your house is owned in only one person's name, or is owned jointly as "tenants in common," sign a deed re-titling the house in joint names "with rights of survivorship."

    • Example:  Bob has a $1 million IRA naming Susan as beneficiary, a $500,000 house, a $3.5  million brokerage account, and a $100,000 checking account held jointly with Susan.  Susan has $1.9 million of her own.  Since his documents use the "maximum federal" formula, if he dies first, the "bypass trust" will get $4 million -- creating a $38,400 CT estate tax.  To prevent this, Bob could put $500,000 worth of assets into joint names or (better yet) into Susan's name, so that if he dies first, his trust will only get $3.5 million  -- no CT tax. (If Susan dies first, there will be some tax when Bob dies after her, unless more assets are shifted into her name, but that's a different issue.) 
Each of you should try to keep no more than $3.5 million separate, in order to shelter that amount in your trust if you are the first to die. To rearrange assets may be the best choice when you have combined assets of $7 million but your holdings are lopsided, with one person currently owning more than $3.5 million.
  1. Multi-Trust Plans.  If you were planning to leave everything in trust anyway, there may be more complex options, which you might consider if your wealth is over $5.5 million.  It's better to discuss those in person.
To authorize a trust amendment, to ask for a meeting to discuss this further, or to discuss any other changes to your plan, give our office a call at 203-776-4400 (Lisa Davis) or 203-865-5990 (Shawn O'Sullivan / Kathy Priest)

For further information on estate planning, send us an email, or write to us at the address shown. We can only provide general information, and will not provide advice about a particular case without a formal engagement. Writing to any of us does not create an attorney-client relationship.  Any respond provided by email must be treated as general comments and not legal advice.



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Lisa Nachmias Davis
Davis O'Sullivan & Priest LLC
Attorneys at Law

129 Church Street, Suite 805
New Haven, CT 06510
Phone: 203-776-4400  |   203-865-5990
Fax: 203-774-1060  |  203-865-5932