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.