February 11, 2019
FOCUS: Wealth Management

Quietly, CT makes derided 'death' tax friendlier to state's wealthiest residents

Image | TheaDesign, shutterstock.com
Image | TheaDesign, shutterstock.com
Alan Clavette, CPA and Managing Member, Clavette & Co.
Robert Laraia, Founding Partner, Northstar Wealth Partners

Wealth transfer creates opportunities, threats for CT advisory firms

As America and Connecticut undergoes a major asset transfer boom in the coming years, wealth management firms say the trend represents both a threat and opportunity to their business.

The state's more friendly estate and gift tax exemption, they say, could help encourage more so-called members of "Generation One" to retire in Connecticut, which would allow wealth management firms to retain older clients and, ideally, their children, who will inherit estates tied to liquid assets, privately held businesses, real estate and other lifelong investments.

However, younger people, including those in their 20s and 30s, are managing their portfolios at an earlier age and demanding a new slate of services that include remote planning, web-based products and a management team with both young and tenured advisors.

Wealth management firms must adapt to those changing needs or risk losing the next-generation of investors, advisors say.

"If you build relationships with the second or third generation, it's going to create a whole new legacy of clients that kind of starts over," says Robert Laraia, founding partner of West Hartford's Northstar Wealth Partners.

As Baby Boomers retire in droves and reach the end of their lives over the next half-century, a record amount of wealth is expected to change hands in the United States.

In fact, more than $58.1 trillion in the U.S. is estimated to transfer from those born between the mid-1940s and 1960s to their children, according to a recent report by global accounting and consulting firm Deloitte.

Local wealth management executives say their firms have been seeing this trend firsthand for much of the last decade, as more older clients gift or transfer assets to their children and become less hesitant to begin estate or succession planning.

The largest transfer of wealth in U.S. history presents challenges to Connecticut, which must work to keep in-state as much money as possible. That means not driving out the state's wealthiest residents, who generate significant tax revenues for the cash-strapped government.

That has put one tax in particular under the spotlight in recent years: Connecticut's estate and gift levy, which has been thought of as one of several factors that pushes older residents to flee the state.

But the good news for those who think the so-called "death tax" is hurting the state's competitiveness is that it will soon be impacting far fewer people.

That's largely due to an underpublicized policy change adopted in 2017 that tied the state's estate and gift tax exemption level to the federal threshold, which was originally projected to more than double Connecticut's exemption from $2.6 million in 2018 to $5.1 million by 2020.

Unexpectedly, however, two months after Connecticut's policy change, President Donald Trump's 2017 federal tax reform law more than doubled the federal estate tax exemption to $11.2 million.

Connecticut is now in the first year of a six-year phase in to meet that new federal exemption level — essentially making the state's death tax relevant to only a handful of wealthy residents.

The change, which officials say was made to keep Connecticut competitive with other states, will also mean the General Assembly loses out on tens of millions of dollars in tax revenues in each of the coming years, as the budget continues to face multibillion-dollar deficits.

Meantime, there is also a proposal in the General Assembly to eliminate the estate and gift tax entirely.

"The general public is probably not tuned into it," said Alan Clavette, a CPA and managing member of Newtown-based accounting firm Clavette & Co., regarding the lack of public awareness surrounding the state's soaring estate tax exemption. "I don't think people are focused on that piece at all."

Clavette, a member and former chair of the Connecticut Society of Certified Public Accountants, says Trump's tax reform law will continue raising the federal estate tax exemption through fiscal 2025, until it's set to fall back down to $5.4 million (adjusted for inflation) in 2026. Connecticut taxpayers, he says, should expect the state's threshold to follow suit.

"There's a lot of concern about what happens at that point … " he says.

Who's impacted?

The state's new exemption level, adjusted for inflation, will rise to $5.1 million in 2020. That means estates worth less than that will no longer be impacted by the estate and gift tax. The exemption level then rises to $7.1 million in 2021; $9.1 million in 2022; and $11.2 million in 2023, according to state law.

Also, the new law lowers the lifetime cap on the maximum estate and gift tax payable from $20 million to $15 million in 2019.

The impact will be significant for the state and people who will no longer need to pay the levy, whose progressive tax rate in 2019 starts at 7.8 percent for people with estates worth between $3.6 million and $4.1 million, and peaks at $663,000 plus 12 percent of the excess over estates worth $10.1 million.

To put it in perspective, take the 2018 fiscal year, when Connecticut's estate and gift tax raised $223.7 million in revenue.

The exemption level that year was $2.6 million, but if the future $11.2 million exemption level had applied, the state would have missed out on at least $65.1 million in tax revenue.

That's because at least 599 estates worth between $2.6 million and $10 million would have been able to avoid the tax, according to the Connecticut Department of Revenue Services' latest annual report.

The state Office of Policy and Management projects the higher exemption will cost the state $193 million in death tax revenue over the next four years.

Estate, gift tax debate

It's difficult to determine the exact impact the estate and gift tax has on people's decision to retire in Connecticut or move elsewhere, but local wealth management executives say it does weigh on the minds of their wealthiest clients.

And the tax has become a hot-button political issue.

During the 2018 gubernatorial campaign, Republican candidate and former financial executive Bob Stefanowski said the state needed to eliminate the estate and gift tax in Connecticut, which is one of 14 states and the District of Columbia that assesses it.

The state's largest business lobby, the Connecticut Business & Industry Association, and the Commission on Fiscal Stability and Economic Growth, have also advocated for eliminating the tax.

"It is certainly better, but our larger concern is the non-competitive nature of it," said Joe Brennan, CEO and president of CBIA, adding that real estate brokers in Fairfield County have reported the tax drives people out of the state. "The problem is, even though it's impacting a smaller group of people, it could have an effect on our economy."

Meanwhile, in Washington, D.C., three Republican Senators — including Senate Majority Leader Mitch McConnell and Sen. Chuck Grassley — recently introduced legislation that would repeal the federal estate tax.

Gov. Ned Lamont is currently reviewing Connecticut's estate and gift tax, according to his spokeswoman. Lamont's current stance, however, will soon be fleshed out in his first proposed state budget, which is due later this month.

Lamont did say on the campaign trail last year, that Connecticut could not afford losing estate and gift tax revenue, according to media reports.

Although some House and Senate Democrats support maintaining the estate and gift tax, it's not entirely a partisan issue. Democratic Sens. Alex Bergstein, of Greenwich, and Will Haskell, of Westport, both from Connecticut's wealthy Gold Coast, last month proposed a bill that would eliminate the estate and gift tax in Connecticut.

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