2010 Planning

■ Connecticut Estate Tax Made Less
Harsh: ◙ For deaths and
gifts on or after January 1, 2010, the Connecticut
exclusion is increased from $2 million to $3.5 million. This is consistent with
current federal law. ◙Under old law, an estate or gift valued at $2
million or less was not taxed. However,  the full value of any estate or gift valued more
than $2 million is taxable. This paradigm resulted in a “cliff” in which a $1
increase in the value of a gift or estate from $2,000,000 to $2,000,001
increases tax liability from zero to over $100,000. ◙  Not all changes were favorable. The new law increased the flat income tax rate for trusts
and estates from 5% to 6.5% from 2009 on. ◙ Filing
deadlines were also accelerated. An
executor (personal representative) will have to file an estate tax return six
(rather than 9 under old law) months after the date of death, starting with
deaths on or after July 1, 2009.

■ Connecticut Business Tax: Changes will ensnare more businesses in the Connecticut tax system.
Under prior law a business needed a “physical presence” in Connecticut to pay
tax.  The new law is much broader and will
subject a business (and/or the equity owners) to Connecticut
tax if the business had a “substantial economic presence” in Connecticut,
or if it derived income from sources within Connecticut. If your business purposefully
directs business into Connecticut
it will have a  tax nexus.  A business’ purpose would be evaluated by the
frequency, quantity, and systematic nature of its economic contact within Connecticut.

■ Personal Injury Settlement: Generally not included in
gross income, other than punitive damages.
IRC Sec. 104(a)(2).  This result
will be available whether or not the amounts are received by suit or settlement
agreement, and whether or not received in a lump sum or as periodic payments by
individuals on account of personal physical injuries (including death) or
physical sickness. This exclusion had required that excluded damages must
derive from a tort claim. This requirement was relaxed in Prop. Reg. 127270-06
9/14/09).  The proposed regulations
expressly delete the requirement that to qualify for exclusion from gross
income, damages received from a legal suit, action, or settlement agreement
must be based upon “tort or tort type rights.”