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

Elder Law, Estate Planning & Probate,  Nonprofit Organizations


Davis O'Sullivan &
Priest LLC
129 Church Street
Suite 805
New Haven, CT
06510
203-776-4400
Fax: 203-774-1060


ESTATE AND TAX PLANNING

(last updated August 6, 2014

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(revised 2014):  The Most Regressive Death Tax by Another Name - Connecticut's Probate Fee.  They won't call it a "tax" because they'd have to admit it is a tax that is a real death tax -- it applies to EVERYONE who dies in Connecticut, even someone who dies homeless and penniless.  It's the "probate fee" that is delivered to the probate court where the person resided at death, and which is imposed when the CT estate tax return is due -- six months after death.  The check is even made out to "Treasurer, State of Connecticut."  "But my estate is too small for a CT estate tax -- this won't apply to me, will it?"  Sure it will.  The CT estate tax return for "non-taxable" estates must be filed within six months of death. If it is not filed, INTEREST ACCRUES ON THE TAX THAT WOULD HAVE BEEN ASSESSED WHEN IT WAS TIMELY FILED -- at 0.5% per month.  "But if I avoid probate, I avoid the probate fee, right?"  WRONG.  Imagine joint bank accounts of $50,000, a life insurance policy of $25,000, and a retirement account of $25,000.  Even with no probate, the CT Estate tax return for non-taxable estates must be filed within six months, reporting assets of $100,000 -- and a "fee" of $465 is due, payable within thirty days.  (OK, short extensions are now permitted if you ask and use the right form.)  Suppose nobody files the return, and a year passes.  If my computations are right, the recipients will owe over $30 in interest.  The only exception to the late filing interest:  estates of $40,000 or less (or $500,000 and some passes to a surviving spouse).  That's an exemption for the interest -- not for the death tax, oops, I meant to say, probate fee.  For more details, here's what the Probate Courts have to say about it.  So -- since the only way to "avoid" the probate fee is to avoid dying a Connecticut resident (unless your heirs you break the law), in Connecticut you pay a fee for dying.  As the Beatles joke, "Now my advice for those who die / Declare the pennies on your eyes." Signed, someone who supports the Buffett Rule.  Honestly.  Poor widows, indigent orphans should not have to pay a tax just to DIE.  Explain this to your legislator, I'm tired of explaining it to my clients!  See my article: "When Somebody Dies in Connecticut:  PAPERWORK" if you want to do this o your own.

1/1/11 (WITH 2014 COMMENTS):  What was this "Tax Compromise" anyway?  I'm sure you can read countless explanations of the eleventh-hour tax legislation at the end of 2010.   Here are a few estate tax highlights that may matter to YOU:

  • Federal estate tax is BACK:  retroactive to 1/1/2010, federal estate tax will be due if a person with more than $5 million leaves that money to anyone other than a spouse or a charity (certain special trust exceptions apply).  This is "estate tax," not a "death tax" -- everybody dies -- not everybody has an "estate" that can be taxed!   (There are exceptions to prevent a Constitutional argument by the executors of billionaires who died in 2010.)
  • If a person leaves $5 million to his/her spouse (2014 number:  $5.34), his/her spouse can actually pass on $10 million (now $10.68 without estate tax.  This is known as "portability."  Translation:  if you live in a state with no STATE estate tax, you might not need those pesky "bypass" or "credit shelter trusts" to avoid "wasting" each spouse's exemption!  CATCH:  when spouse #1 dies, a federal estate tax return must be file -- something everyone may forget.
  • If we ever have inflation again, these amounts will go up -- they will be indexed for inflation. (That's how $5 M became $5.34 M)
  • If estate tax is due, the rate will be 35%.  This is a lot less than it used to be.  There will also be a deduction for state taxes --  but  not a credit, as there was before 2001.
  • Starting in 2011, the exemption is the same for assets that pass at death or during your lifetime. 
  • You may not even know that in 2010 the "step up" in basis was lost and now is back -- that is what prevents your heirs paying capital gains tax when they sell the house, stock, etc. they inherited.  The "step up" means that inherited property is treated as if your heirs bought it at the value it held on your death, and when the property is sold, your heirs only pay tax on the appreciation since your death.
But if you live in Connecticut, who cares?  We still have (2014 update) a $2 million exemption for gifts and for assets inherited at death, with no portability.  Tax rates range from 7.2% to 12%.  Estate tax planning -- with those pesky credit shelter or bypass trusts -- is still essential for those with combined estates over $2 million.  See my (somewhat dated) article on this topic!  And Connecticut residents are luckier than some. The exemption is only $1 million in New York, Massachusetts, or Washington, D.C, and only $675,000 in New Jersey.  Carefully planning may be required for those owning real estate in multiple jurisdictions.

(2011) Update on Retirement Plans.  Minimum distributions are back -- since 2010.  However, the tax reform bill does allow tax exemption on distributions from retirement plans that pass entirely to a charity.  No deduction, but tax exemption, which amounts to a 100% deduction.  This doesn't apply to gifts used to purchase charitable gift annuities.  Reminders:  any beneficiary, not only a spouse, may have the right to "roll out" an inherited IRA or interest in a retirement plan, to his or her own IRA, choosing the account custodian and the successor beneficiaries.   Recurring problems, however:  CHECK YOUR BENEFICIARY DESIGNATIONS frequently.  Custodians have been known to change them without notice, to ignore additional beneficiaries, and to reinstate expired beneficiary designations.   And one more thing -- if you have to draw down retirement accounts to pay medical bills, remember that Connecticut does NOT have a medical expense deduction against the Connecticut income tax. (It does, however, have a waiver of tax (PDF) for persons who received Medicaid assistance to pay for long-term care in a nursing home or at home, and who are unable to pay taxes.) (If this doesn't open or has a prior year on it, paste the link in your browser and change the year reference to the applicable year. Or search the DSS site for Form 19IT.)

Med-Ed:  Even with an economic downturn, there are still plenty of folks worried about the gift tax (which kicks in at $5.34 million for federal gift tax, only $2 million for Connecticut).  Read my article "summarizing" the long-standing tax rule exempting from the whole gift and estate tax regime any direct payment of someone else's tuition or medical care expenses -- the "med-ed" deduction.

In case you have been sleeping for 9 years.....Connecticut Gift Tax Repealed (on gifts up to $2 million)!  Effective 1/1/2005, Connecticut's legislature repealed the gift tax for lifetime gifts totally up to $2 million. Since there is no penalty for failure to file a gift tax return when no tax is due, this will relieve many people from the need to file.  Connecticut was formerly the only state that had a gift tax that operated separately from its estate tax.  For gifts over $2 million, the excess is taxed. 

 How to Administer a Life Insurance Trust.  In these uncertain times, we don't know whether or not there will be more or less estate tax in the future.  Life insurance trusts are still relevant:  (1) for those who fear future increases in state or federal estate tax; (2) for those who want to protect assets from creditors that may turn up at your death; and even (3) for those who want to "leverage" a gift to heirs that will be protected against long-term care expenses.  These trusts often include as a feature the requirement that notices be sent to beneficiaries annually in order to escape inclusion in the total gifts made during life.  Here is help for those of you named as Trustees of "life insurance trusts" but unwilling to fork over the fee your attorney or accountant charges to handle the procedures required to get the right tax result.  Little do you know that the fee may still represent a loss to your attorney!  Click HERE for instructions and a sample notice form. 

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The following is my statement of principles regarding the practice of estate planning.  I first started writing them in 1997, concerned that the desire to minimize taxes was the only concern given attention by estate planning attorneys. You may also want to look at the pages dealing with planning for the elderly and planning for the disabled, which focus more on entitlement benefits, another part of estate planning for those types of clients.  Another page, living trusts, sets out the pros and cons of this popular, but sometimes abused device. 

What Is Estate Planning?

This is a particularly good question in light of the scaling back of a good portion of our estate tax laws.  However, the core human issues remain the same.  "What if something happens to me?"  The need to plan for the care of family members and the distribution of one's property when we have left this mortal coil is a basic human instinct.  The desire to minimize taxes payable as a result of death has been and should be only a secondary concern, an aspect of our desire to control our own property (because we can never control our own death).  Even with the as-yet unexplored tax bill, there will still be taxes to plan for, but with this much uncertainty estate planning must emphasize human, not accounting concerns.  Who will care for the vulnerable people we love and will leave behind? How can -- and should -- our assets protect and help them?  Whom do we trust to carry out the chores that are created by our passing, or to administer the plans we set in motion?  We want our worldly goods to benefit the people we love and the causes we care about -- how can that be accomplished most effectively?

For further information on the estate planning process, email your question to davis@sharinglaw.net, or write to me at the address shown.  I cannot, however, give specific advice about specific situations without taking you on as a client; writing to me does not create an attorney-client relationship.  DO NOT disclose confidential information to me.

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DISCLAIMER:
THIS INFORMATION IS NOT PROVIDED AS  LEGAL ADVICE AND CREATES NO ATTORNEY-CLIENT RELATIONSHIP.  NO ENDORSEMENT IS INTENDED BY ANY REFERENCES HEREIN.  PLEASE CONSULT YOUR OWN LEGAL AND FINANCIAL ADVISORS BEFORE TAKING ANY ACTION.  In compliance with regulations issued by the Internal Revenue Service, please be advised that nothing on this webpage was written to be used or may be used by any person to avoid any penalties under the Internal Revenue Code.
 

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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
Fax: 203-774-1060
Email: davis@sharinglaw.net