Last week, Connecticut enacted HB 7104, adopting the Uniform Trust Act. If signed into law, the new legislation will bring significant change to Connecticut trust laws beginning in 2020.
Under the new legislation, Connecticut trusts could potentially avoid being subject to the Generation-Skipping Transfer (GST) tax because they may run as long as 800 years. Caveat: This would not safeguard against changes to federal tax legislation, which may apply GST tax to trusts at certain time intervals. Care should be taken whenever one is creating a generation-skipping trust.
Asset Protection Trusts
Currently, many Connecticut trusts are formed using an out-of-state corporate trustee to protect trust assets from a beneficiary’s creditors. The new legislation would allow individuals to establish an irrevocable “self-settled” trust and serve as the beneficiary of the trust while enjoying the benefits of having the trust property shielded from creditors. Caveat: The new law does not allow a person to protect against existing creditors.
Directed trusts provide a structure wherein the typical role of trustee is bifurcated into two (or more) fiduciary parties, thus separating certain functions (such as investment or distribution functions) from the role of the trustee. The new law will provide clear guidance regarding the liability of each fiduciary based on the fiduciary’s specified role in a directed trust, ultimately offering greater protection to the beneficiaries of the trust and heightened understanding to the acting fiduciaries as to the extent of their responsibilities. Before the passage of this act, Connecticut residents seeking such planning flexibility had to set up the trust in another state and engage an out-of-state (often corporate) trustee. Caveat: If you appoint someone who resides in another state, such as California, to be a specialized trustee or director, the other state might be able to tax the income of the trust depending on that state’s tax laws.
Uniform Trust Code
The bill also adopts much of the Uniform Trust Code which has been enacted in over 30 other states and the District of Columbia. The statute provides trustees and beneficiaries with greater guidance on the management of trusts. For example:
A. Connecticut will permit the appointment of an individual to receive notice on behalf of the beneficiary not suited to deal with trust matters (such as a young or disabled beneficiary).
B. State law will permit trustees and beneficiaries to obtain court approval to modify or terminate trusts when the provisions are either erroneous or no longer make sense based on changing circumstances.
C. The bill provides greater access to the probate courts for trust matters, including the opportunity to obtain pre-approval of a court for actions by the trustee and the use of non-judicial settlement agreements to resolve certain trust matters.
Connecticut Gift Tax
Connecticut remains the only state to have a gift tax. However, through prior legislation, the state will increase the exemption amount over time to equal the federal amount in 2023. Given the scheduled increases in the gift tax exemption, Connecticut residents who wish to make use of the increased federal gift tax exemption should pay special attention to the timing of taxable gifts.
The state also recently passed what is known as a “mansion tax” on the sale of homes valued at over $2.5 million. The new tax imposes a 2.25% tax for sales priced above $2.5 million and 3.9% for a sale of $25 million or more. Caveat: Sellers who continue to own their primary residence in Connecticut may recoup part or all of the real estate conveyance taxes paid at that rate through property tax credits against their Connecticut income tax. Such residents can take the credit beginning in the third calendar year after the transfer. Some people have called this an “exit tax” as the tax credit is not available to those who move out of state.