CT Imposes Estate Tax On Non-Residents With Interests In Certain Pass-Through Entities

Until recently, a non-resident of Connecticut who died owning real property or tangible personal property located in Connecticut could avoid Connecticut estate tax by holding that interest in an entity such as an LLC.  The property interest was considered intangible personal property.  Under recently passed Connecticut legislation (effective June 25, 2019), that is no longer the case with regard to personal use property, such as a home.  The entity will be disregarded in most cases and the Connecticut property will be considered owned by the decedent proportionate to his or her interest in the entity and subject to Connecticut estate tax.  This applies to interests in LLCs, partnerships and Subchapter S corporations.

The new law applies if the entity does not carry on a business for the purpose of profit and gain or if the ownership of the property by the entity was not for a valid business purpose. The law does not define what activity or income would meet the test.

The actual Connecticut estate tax due will depend on the value of the decedent’s entire taxable estate and the Connecticut property’s proportionate share of the taxable estate.  The tax would be avoided only if the entire taxable estate was less than the Connecticut estate tax exemption (currently $3.6M but increasing each year until it matches the federal exemption in 2023). Note that the interest in the entity may also be subject to estate tax in the decedent’s state of domicile if that state treats the interest as intangible personal property.

The new law does not change the law with respect to lifetime gifts of interests in entities.  Therefore, a non-resident of Connecticut could gift his interest in the entity holding Connecticut real property or tangible personal property in order to avoid the Connecticut estate tax, and the gift would not be subject to Connecticut gift tax either.  However, continued use of the property without the payment of fair market rent may result in an incomplete gift subject to estate tax.  For more information, please contact Lisa F. Metz (lmetz@brodywilk.com) or another BW attorney.  

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