Prior to the start of the State of Connecticut’s current fiscal year that began on July 1, the State’s General Assembly made some important changes to how the state’s Probate Courts are funded. The new budget reduces state funding for the Probate Courts down to zero for the next two fiscal years. To offset the resulting $32 million shortfall to the Probate Courts, the General Assembly has sharply increased the way in which probate fees on estates are calculated.
To provide some background, Connecticut is alone amongst the states in requiring that an estate tax return be filed for every resident decedent, no matter how modest the size of their estate. Estates over $2,000,000 will be subject to the estate tax whereas estates under that amount will not be subject to estate tax, but still must file a simplified estate tax return. By statute the Probate Courts are entitled to collect a fee from every estate. That fee is calculated from a formula using the total amount of assets reported on each filed estate tax return.
For estates in excess of $2,000,000, the previous fee of 0.25% has been doubled to 0.5%, and a maximum cap of $12,500 has been eliminated. For a $5,000,000 Connecticut estate, the fee without that cap will be double what it would have been previously. But for higher net worth individuals who die as a Connecticut resident, the new formula represents an even more dramatic increase. For example, the fee charged on a $50,000,000 estate would previously have been capped at $12,500. Yet under the new fee structure, that estate will be subject to a fee of $250,000, which is twenty times would it would have been before. And that probate fee is on top of the Connecticut estate tax, which for an estate of $50,000,000 would be $5,536,200.
The result of the increased fee hike may be an even greater exodus of high net worth individuals out of the state, at least as far as official residency is concerned. There are many people who spend a portion of the year in Connecticut and a portion of the year outside of Connecticut. Prudent estate planning in those situations includes recommending that the client take steps to become the resident of a state with a lower rate of taxes. For example, Florida happens to be a popular choice since Florida has neither an estate tax nor an income tax. Connecticut’s heightened probate fee structure is another factor making a shift in residency a sound estate planning strategy.
Countering those arguments of individuals who seek to declare non-Connecticut residency, the Connecticut Department of Revenue has an interest in arguing that those decedents were still state residents, whether or not those individuals thought of themselves as such before they died. There are many criteria that the Department of Revenue applies to determine whether a Connecticut resident has truly changed their legal residency, including analysis of whether the person purchases round-trip or one-way tickets when flying in or out of Connecticut and what address is listed on his or her regular utility bills – even for Connecticut real estate. Since the financial “loss” to the State of individuals becoming non-Connecticut residents is greater with the increased probate fee costs, we anticipate the State will strive even harder to argue that some decedents remained Connecticut residents and therefore subject to the State’s estate tax and probate fees.
There is another problem resulting from the probate fee changes and that stems from the issue of enforcement. The General Assembly is undoubtedly concerned that the Probate Courts might have trouble collecting the increased probate fees. Therefore, in order to ensure that the probate fees are in fact paid, revised statutes now provide that there is a de facto lien on real property of decedents that will only be released upon the documented payment of the probate court fee. Even though the budget change was not enacted until June 1, 2015, its reach was made applicable back to January 1, 2015 decedents. There are estates that were fully administered and formally concluded under the jurisdiction of one of the Probate Courts that now have some unfinished business. That unreleased probate fee lien could pose a significant impediment to the sale of that property in the future. A title insurance company will treat that missing release as a problem until it is obtained from the Probate Court and recorded on the land records. In our practice we are taking steps to address that problem now for the estate settlement matters with which we have been involved.
Please call us at 860-769-6938 if you have any questions about the issues presented above or if you care to discuss any other planning issues with us.
Probate Attorneys in CT