Topic:
ESTATE TAX; INHERITANCE TAX; LEGISLATION; LEGISLATIVE INTENT;
Location:
TAXES - ESTATE;

OLR Research Report


October 1, 2008

 

2008-R-0546

SUCCESSION TAX ON PROPERTY TRANSFERS TAKING EFFECT AFTER TRANSFEROR'S DEATH

By: Judith Lohman, Chief Analyst

You asked for an explanation and legislative history of a statutory provision imposing a state succession tax on certain property transfers by gift or grant that are intended to take effect after the transferor's death (CGS 12-341b(d)).

SUCCESSION AND TRANSFER TAX

Until January 1, 2005, Connecticut imposed succession taxes on certain estates and property transfers of people who died before that date. The succession tax was repealed for deaths on or after that date by PA 05-251. The tax applied to estates valued at more than specified amounts based on the relationships between the decedent and his or her heirs. Before the repeal, was adopted, the tax was already being phased out. At the time of its repeal it applied only to transfers to collateral relatives, such as siblings, nieces and nephews, and to more remote relatives and unrelated heirs. (A fuller description of the repealed succession and estate taxes and the estate and gift taxes currently in effect can be found in OLR Report 2005-R-0535).

The succession tax applied to taxable transfers, whether by trust or otherwise, of specified types of property. For Connecticut residents, the tax applied to real property located in Connecticut; tangible personal property not actually located outside the state; and all intangible personal property (such as stocks or bonds). For nonresidents, it applied to transfers of real property in Connecticut and tangible personal property actually located in the state. The tax also applied to transfers of interest in or income from taxable property (CGS 12-340).

TAXABLE TRANSFERS UNDER SUBDIVISON (D)

Section 12-341b (d) imposed the tax on transfers of taxable property, or interests in or income from it, through gifts or grants that are “intended to take effect in possession or enjoyment at or after” the transferor's death. The statute specifies that this type of taxable transfer includes any arrangement, such as a trust, by which the transferor, during his life or for any equivalent period, retains the right to (1) possess or enjoy the property (such as by living in or using it); (2) receive income from the property; or (3) designate, on his own or with others, who can hold or receive income from the property. Such a transfer was not taxable if (1) the transferor held a “reversionary interest” under which the property could return to his ownership or control and (2) the value of the reversionary interest immediately before the transferor's death did not exceed 5% of the property's total value. The law required the value of the reversionary interest to be determined by the usual valuation methods, according to regulations adopted by the Department of Revenue Services.

Thus, this statute barred a person from avoiding the succession tax by giving up ownership of his taxable property before he died while retaining the benefits of ownership or control until his death.

LEGISLATIVE HISTORY AND INTENT OF SUBDIVISION (D)

Although 12-341b (d) applied to taxable transfers of people dying on or after July 1, 1963, the same wording also appeared in the succession tax law applicable to people who died between July 1, 1959 and July 1, 1963 ( 12-341) and in earlier versions of the succession and transfer tax law. The provision was included in the original succession tax law enacted in 1889 (Chapter 180, Public Acts 1889, 1) and, except for a hiatus from 1897 to 1915, was part of the law thereafter.

No full transcripts of legislative debates dating from before 1945 are available, so we cannot determine the 1889 legislature's exact intent in enacting the language in subdivision (d). However, a 1932 Connecticut Supreme Court case states that the provision's purpose is to make it impossible for transferors to avoid the tax at their death by transferring taxable property, in trust or otherwise, to heirs while keeping the right to use the property or the income from it while alive.

Because a property owner's “common and perhaps not unnatural aversion” to taxation “applies with special force to the diminution of the estates left by them at death,” the Court said, “these artifices were met by provisions in the state taxing statutes calculated to close such avenues of tax avoidance.” Subdivision (d) was such a bar against tax avoidance. The Court found that “the policy of the law is that the owner of property shall not defeat or evade the tax by any form of conveyance or transfer, where after death the income, profit or enjoyment [of the property] inures to the benefit of those who are not exempted [from the tax]” (Blodgett v. Guaranty Trust Company of New York, 114 Conn. 207, January 26, 1932, 1932 Conn. LEXIS 13, copy attached; U.S. Supreme Court affirmed, 207 U.S. 509 (1933)).

JL:ts