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HOW LARGE OF AN ESTATE CAN PASS FEDERAL ESTATE TAX FREE IN CONNECTICUT? A More In Depth Look at Connecticut Estate Tax and the Amount That Can Pass Tax Free

BARRY D. HOROWITZ

Connecticut Estate Planning Attorney


It may be logical to assume that you can just give assets to others without paying any type of tax on these transfers. Whatever you have to give is something that you have been able to hang onto or acquire after you paid taxes on your income or your capital gains. Why should you be asked to pay another tax when you give the assets away or pass them on via the terms of your estate plan? This may be a very valid question, but there is indeed a gift tax and an estate tax in place in the United States. You can only give a certain amount of money before the estate tax or gift tax is imposed.

ESTATE TAX ON THE FEDERAL LEVEL We would first like to mention that there are some states that have an estate tax on the state level. Connecticut is one of the states, and Connecticut is the only state which has its own gift tax. That having been stated, this paper is going to focus exclusively on federal transfer taxes and the limit that you can give before the taxes are imposed. This limit is defined by the amount of the federal estate tax exclusion that is in place at the time of your death. During 2013 we have a $5.25 million estate tax exclusion.


To provide some background, the estate tax was repealed throughout 2010. At the end of that year the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was passed. Under the terms of this piece of legislation the estate tax exclusion was set at $5 million for 2011. An adjustment upward for inflation was to be applied in 2012. This adjustment put the estate tax exclusion at $5.12 million in 2012. This aforementioned act was in place for only two years. It expired at the end of 2012. Throughout 2012, if it would have expired under existing laws the estate tax exclusion would have gone down to $1 million in 2013. You probably remember all the talk about the "fiscal cliff." This involved some automatic spending cuts and tax increases taking place if something wasn't done to change existing laws. This reduction in the estate tax exclusion was one of the perils that we faced as the cliff drew nearer. As it turns out tragedy was narrowly averted and the American Taxpayer Relief Act of 2012 was passed. This measure continued the same situation with the estate tax exclusion. Once again there was an adjustment for inflation added onto that $5.12 million that was in place in 2012. This is how we arrive at the $5.25 million exclusion that we have this year.

YOUR SPOUSE AND THE ESTATE TAX EXCLUSION

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860-548-1000

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The $5.25 million exclusion is applied to asset transfers to anyone other than your spouse. Bequests that you leave behind to your children are indeed taxable, so you have to use your exclusion to give tax-free inheritances. The same is true of your parents, any other relatives, and those who are not related to you. However, you are allowed to leave any amount of money to your spouse free of the federal estate tax. This is because of the unlimited federal estate tax marital deduction. This is true assuming your spouse is a citizen of the United States. If your spouse is a citizen of some other country he or she would not be able to utilize the unlimited marital deduction. This is because the Internal Revenue Service wants to get paid eventually. Your spouse would be subject to the estate tax after you pass away. But if your spouse was a citizen of another country he or she could just take the money to that country, and the Internal Revenue Service of the United States may never receive anything after your spouse passes away. Another thing to know about the federal estate tax if you are married is that the present $5.25 million exclusion is allotted to every American taxpayer. Let's say that you and your spouse file your tax returns jointly. This can give you the impression that you are a joint entity. You may wonder if you get just one exclusion as a couple. In

Nirenstein, Horowitz & Associates

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860-548-1000

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fact, each person in the union would have $5.25 million to utilize. Therefore, under the current exclusion a married couple would have a total exclusion of $10.5 million. There is more good news on that score. Earlier in this paper we mentioned the tax relief act that was passed in 2010. A provision contained within this measure made the estate tax exclusion portable. In an estate planning context portability defines the legal right of a surviving spouse to use the exclusion that his or her deceased spouse was entitled to use. As a result, in 2013 if your spouse passes away you would be left with a total exclusion of $10.5 million to apply to your own estate if your spouse didn't use any of his or her exclusion. The federal gift tax is unified with the estate tax. So, this $5.25 million exclusion is a unified exclusion. It is the amount that you can give to others tax-free whether the transfers took place while you were alive or after your death.

CONCLUSION

Nirenstein, Horowitz & Associates

www.preserveyourestate.net

860-548-1000

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The federal estate tax carries a 40% maximum rate, so it can significantly reduce the wealth that you are passing on to your family members. There are however steps that can be taken to reduce or sometimes even eradicate your exposure. If you work with a licensed estate planning attorney to explore your options you can devise a wealth preservation plan that keeps a maximum store wealth in the family.

REFERENCES Internal Revenue Service http://www.irs.gov/Businesses/Small-Businesses-&-SelfEmployed/Estate-and-Gift-Taxes

Forbes http://www.forbes.com/sites/deborahljacobs/2013/01/02/afterthe-fiscal-cliff-deal-estate-and-gift-tax-explained/

Nirenstein, Horowitz & Associates

www.preserveyourestate.net

860-548-1000

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About the Author Barry D. Horowitz

Barry D. Horowitz is a founding partner in the law firm of Nirenstein, Horowitz & Associates, P.C. He received his diploma from the Loomis Chaffee School and his Bachelor of Arts from Bennington College, where he dual majored in philosophy and music. Mr. Horowitz was awarded his Juris Doctor degree with honors from the University of Connecticut School of Law. While attending law school, Mr. Horowitz received the American Jurisprudence Award in Legal Ethics and the Nathan Burkan Award. After graduation from law school, Mr. Horowitz continued his legal education at New York University School of Law where he received a Post Doctorate Law Degree in Taxation. He has also recently received a national achievement award. Mr. Horowitz is admitted to practice before all the state courts in the State of Connecticut and the United States District Court. He is a member of the Hartford County Bar Association, a charter member of the American Academy of Estate Planning Attorneys, and has recently received the American Academy Award. Mr. Horowitz is also an active member of the Connecticut Bar Association where he is a member of the Elder Law Section, the Estate Planning and Probate Section, and the Professional Ethics Committee. Mr. Horowitz practices exclusively in the area of Estate Planning where he has earned a reputation as a dynamic and entertaining speaker. He also has recently published a book entitled “Guiding Those Left Behind in Connecticut.� Nirenstein, Horowitz & Associates, PC Living Trust and Estate Planning Attorneys Serving the State of Connecticut with Offices in Greater Hartford, Fairfield County, CT www.PreserveYourEstate.net HARTFORD WESTPORT Gothic Park 191 Post Road West 43 Woodland St., Suite 520 Westport, CT 06880 Hartford, CT 06105 Phone: 203-221-2617 Nirenstein, Horowitz & Associates www.preserveyourestate.net 860-548-1000 Phone: (860) 548-1000

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How Large of an Estate Can Pass Tax Free in Connecticut?  

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