During the recently concluded 2019 legislative session, the Connecticut General Assembly passed an amendment of Connecticut General Statutes § 12-391(e)(2)(B) that is of critical importance to nonresidents who own real or tangible personal property located in Connecticut.
Prior to this amendment, some nonresidents formed business entities and transferred ownership of their Connecticut real or tangible personal property to such entities in an attempt to avoid future Connecticut estate tax liability. With this amendment, however, the legislature has clarified that this estate planning technique will not prevent the imposition of Connecticut estate tax on such property if the business entity is a pass-through entity (partnership, S corporation, or single member limited liability company that is disregarded for federal income tax purposes). Rather, upon the death of a member of the pass-through entity, Connecticut will disregard the entity for Connecticut estate tax purposes and impose Connecticut estate tax on the deceased member’s ownership interest in the entity if: (i) the entity does not carry on a business for the purpose of profit and gain, (ii) the ownership of the property by the entity was not for a valid business purpose, or (iii) the property was acquired by other than a bona fide sale for full and adequate consideration and the decedent retained any power or interest in the property that would cause the Connecticut real or personal property to be included in the member’s federal gross estate. It is noteworthy, however, that the amendment does not address the imposition of Connecticut gift tax on a lifetime gift of an interest in the business entity. This amendment, which is part of substitute House Bill 7373, was signed by Governor Lamont and was effective upon passage.