Connecticut, not unlike many other states, has recently had to confront lower than expected revenues and a budget imbalance. Despite reductions in budget allocations made earlier this year by the Governor, the State reportedly faces a $300 million shortfall. On November 13, the State's General Assembly convened in Special Session to address the problem. The three day session was focused on taking immediate action to reduce budget allocations. But, one of the topics that came up for consideration was the possibility of delaying further implementation of the phase-out of the State's Inheritance Tax.
The "Succession Tax" is a tax on the right to inherit or to succeed to property being transferred at death. In keeping with the trend in other states, Connecticut had enacted legislation several years ago to eliminate this tax and to rely instead upon an already existing "Estate Tax." The Estate Tax falls upon estates of wealthier decedents and is less costly to administer, because the tax is determined simply by collecting the amount of a credit which the federal government allows on the decedent's federal estate tax return. Connecticut therefore began to phase out the more complex Succession Tax, first by exempting property passing to surviving spouses and to descendants. In 2002, the tax on property passing to "Class B beneficiaries," - sons-in-law, daughters-in-law, brothers and sisters, nieces and nephews, was also to be exempted.
However, the size of the projected budget deficit obliged the Legislature to call a halt to the continued phase-out of the Succession Tax for a period of one year. House Bill No. 7601 was passed and is expected to be signed by the Governor. The current $600,000 exemption for property passing to Class B will continue until 2003, and tax at rates of 9 and 10 percent will continue to be imposed on amounts above that. In 2003, the exemption will increase to $1,500,000. Absent further legislative action, all property passing to Class B from persons dying after 2003 will be exempt.
It is also conceivable when Connecticut's Legislature convenes again in February, it might do more than postpone the phase-out of the Succession Tax. The repeal of that tax was undertaken in part in reliance upon the State's ability to derive revenue generated by the State Estate Tax, as previously mentioned. But, now that the federal government has determined to repeal the Federal Estate Tax, the ability of the State to collect the amount of credit allowed by the federal government will disappear. Unless Congress determines to address the repeal of the Federal Estate Tax, it seems reasonable to suppose that Connecticut (and other states) will eventually consider action to preserve its own Estate Tax or to reinstitute some form of Succession or Inheritance Tax.
The need to review your estate plan as the tax laws continue to change remains important.