January 19, 2021

Volume XI, Number 19


January 18, 2021

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Non-Residents Owning Real Estate in Connecticut – Possible Strategy for Minimizing Tax

Many Connecticut non-residents own real property in Connecticut, and Connecticut has its own estate and gift tax. Connecticut has an estate tax exemption of $5,100,000, but many non-resident landowners believe that their Connecticut real estate will not be subject to estate tax at their death, especially where the Connecticut property is worth less than the estate tax exemption. That is not necessarily the case, however.  If a non-resident has a total estate (including property outside of Connecticut) worth more than $5,100,000, then the non-resident is not entitled to the entire Connecticut estate tax exemption and may be subject to Connecticut estate tax. Nonetheless, with proper planning, it may be possible for non-resident landowners to avoid, or at least minimize, Connecticut estate and gift tax on their Connecticut property.

Under previous law, a common estate planning technique for non-residents was to create a business entity, such as a single member LLC, to own the Connecticut real estate. By doing so, the non-resident would have an ownership interest in the entity and not the underlying real estate. The ownership interest in the entity would qualify as intangible personal property that is taxed in the resident state, not in Connecticut.  However, that strategy was rendered ineffective by the Connecticut legislature in 2019.

As of 2019, Connecticut General Statues 12-391(e)(2)(B) provides that for Connecticut real property and tangible personal property owned by a pass-through entity (such as partnerships, Subchapter S-Corporations, and limited liability companies disregarded for federal income tax purposes), the entity shall be disregarded for estate tax purposes and such property shall be treated as personally owned by the decedent proportionate to the non-resident decedent’s interest in the entity, and therefore subject to Connecticut estate tax.

This means, generally, that using an LLC simply to hold Connecticut real estate – in order to convert an individual’s ownership in real property to an ownership in intangible personal property – will no longer be successful in avoiding Connecticut estate tax. This would include any property deemed held in an LLC for a non-business reason, such as residential real estate held for an estate planning purpose. It also seemingly would include commercial real estate in Connecticut that was acquired by gift or inheritance, where that property remains subject to federal estate tax.

Accordingly, non-resident landowners who wish to avoid Connecticut estate tax should act during their lifetimes to remove the property from their taxable estate. Since the new law does not address the Connecticut gift tax, a non-resident individual may want to consider either gifting his or her interest in the entity during lifetime in a fashion consistent with the client’s overall estate plan. We note that it is possible the Connecticut legislature will act in the future to eliminate this gifting strategy as well.

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About this Author

Michael Clear Estate and Trust attorney Greenwich Wiggin and Dana

As a Partner in the firm's Private Client Services Department, Michael regularly counsels clients on the far-reaching financial implications of estate planning, estate and trust administration, probate litigation, and business succession planning. Yet he is also a trained counselor with insight into the family dynamics these matters can effect. Known for his empathy and good humor, he helps clients take prudent action in the face of indecision, hopefully resolving contested issues before litigation.

Michael's estate planning practice includes assisting individuals and families in...

Veronica Bauer Estate Planning Attorney

Veronica R.S. Bauer is a Partner in the firm's Private Client Services Department in Palm Beach, Florida. Veronica focuses her practice on estate planning, estate and trust administration and charitable planning and administration.

Her practice includes assisting individuals and families with tax-efficient and practical estate, gift and income tax planning. She also assists fiduciaries and beneficiaries through estate settlement and trust administration matters

Robert Benjamin Estate Planning Attorney Wiggin and Dana

Bob has over three decades of experience as an estate planning and probate lawyer and previously served as Chair of Wiggin and Dana's Executive Committee (2009–2015). He is a Partner in the Private Client Services Department and counsels foreign and domestic clients in matters relating to estate planning, probate, and the taxation and administration of trusts and estates. He often works with clients who have complex estate planning needs, such as family business owners and artists. He is also a resource to lawyers at other firms in situations where difficult family dynamics or complex...

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Karen Clute Tax attorney New Haven Wiggin and Dana

Karen is committed to helping clients navigate ever-changing tax and fiduciary rules. As a member of the firm's Private Client Services Department, Labor and Employment Department, and Philanthropy Practice Group, Karen has a wide-ranging practice grounded in a deep understanding of the intersections of personal-, community-, and employment-related tax, fiduciary, and financial concerns.

She advises individual clients about a broad range of estate planning issues, with an emphasis on estate and income tax planning. She works with executors and trustees on fiduciary matters and...

Daniel Daniels Estate planning lawyer Wiggin Dana

For three decades, Dan has dedicated himself to counseling families in preserving wealth from generation to generation. His clients include affluent individuals, family offices, business owners, C-suite executives and private equity and hedge fund founders. He assists them in estate and business planning, trust and estate administration, probate litigation, and more.

Dan has been named by Worth magazine as one of the top 100 trust lawyers in the United States. He is one of six trust and estate lawyers in Connecticut ranked in Band 1 by the international ranking service ...