Recently, Connecticut has been making strides to revise legislation that pertains to estate tax law. In July 2019, Connecticut made a notable advancement with respect to gift and trust law, ultimately passing HB 7104– an extensive bill concerning the Connecticut Uniform Trust Code. The bill makes various revisions to four major categories (Domestic Asset Protection Trusts, Dynasty Trusts, Directed Trusts, and Statutory Trust Rules) as well as changes to the Connecticut Gift and Estate Tax Exemptions. The law affects trusts that go in to effect as of January 1, 2020.
Domestic Asset Protection Trusts
Domestic Asset Protection Trusts are irrevocable self-settled trusts that are safe from creditors if they are structured properly. In other words, taxpayers can protect their assets from their creditors. Typically, domestic asset protection trusts designate a permissible beneficiary, known as a grantor, who is allowed access to the funds within the account. Prior to the bill, many taxpayers were skeptical of taking advantage of this opportunity. Residents interested in domestic asset protection trusts had to hire professional trustees in other states as well as living with the concern that Connecticut officials would not adhere or respect to the laws of other states. Now, Connecticut allows residents to adopt these asset protection plans as long as they meet the criteria to qualify. Upon meeting the qualifications, the protection that individuals receive in regard to their assets is similar to how assets of a business are protected within a limited liability company. The one downside, however, is that the bill only allows future protection from unknown liabilities not from existing creditors.
With regard to a Dynasty Trust, Connecticut now allows a trust to continue through multiple generations. Previously, they were usually limited to a duration of 110 years but, through the passing of this bill, trusts are now allowed to be held for a maximum of 800 years. Ultimately, this serves as a significant benefit to many Connecticut taxpayers as the assets that fund these trust are exempt from transfer taxes and can pass down from generation to generation. Connecticut now adds to the other twenty states that have a dynasty trust act in place and those Connecticut taxpayers who wish to partake in this type of opportunity no longer have to hire corporate trust companies from a different state to act as the trustee. Through the new law, costs of creating and maintaining the law should decrease.
Connecticut now allows the use of trust directors. Prior to the new law changes, all responsibilities fell in the hands of the trustee. However, now, a taxpayer can appoint a director to have limited responsibilities within the trust to assist in decisions the taxpayer may not fully understand. The key decisions and responsibilities a trust director would hold could be those involving investment activity. Trustees can have guidance in the investments made while continuing to have full authority over the decisions regarding distributions. Further, a taxpayer wishing to place a business interest into a trust can have a new fiduciary with the skills and expertise to specifically manage the business. As a result, the trustee can now retain a position that he might have not been willing to hold in the past.
Statutory Trust Rules
HB 7104 also adopts 80 new statutes pertaining to the management of trust accounts. Among the changes include:
- Greater notice requirements to beneficiaries
- If beneficiary is incapable (young, disabled, etc.) of managing or dealing with a notice, beneficiary can appoint a designated spokesperson to speak on his behalf
- Trustees and beneficiaries can obtain court approval to alter or dismiss a trust
- Increased access to probate courts
With these rules, comes more responsibilities as well as more opportunities.
Updates to Connecticut Gift Tax Exemptions Tax exemptions for gift tax and estate tax are to increase in the coming years. They are to conform to the current federal amount of $11.4 million by January 1, 2023. In Connecticut, tax exemption amounts are $3.6 million in 2019, $5.1 million in 2020, $7.1 million in 2021, and $9.1 million in 2022. Connecticut, the only state imposing a gift tax, has an annual exclusion of $15,000.©