After a long career working for international banks that specialized in developing countries, John Caracciolo decided to retire with his family in Barkhamstead for the good schools and the quiet countryside.
That was six years ago. Now John is rethinking that decision.
Caracciolo says he doesn't mind paying Connecticut's high cost of living and hefty property and income taxes. Instead, his primary concern is Connecticut’s estate tax. As he and his wife prepare for the future, Caracciolo wants to be sure that he can pass on to his children what he has earned during a lifetime overseas.
“I worked my whole life to save for my family’s welfare and their future and the state’s going to take seven and half percent of it? No, I’m not going to deal with that, no way.”
Caraciollo still owns his childhood home in New York, and although he doesn’t want to move back to his home-state he says “the estate tax alone is enough for us to leave here and move back.”
Connecticut is one of 14 states that has an estate tax. The tax only applies to estates worth more than $2 million but Connecticut’s threshold is far lower than the federal government’s threshold of $5.4 million.
In 2015, New York Gov. Andrew Cuomo reformed New York’s estate tax in line with the federal exemption, which means someone in Caracciolo's position could relocate to New York and avoid the Connecticut tax.
Connecticut’s estate tax imposes a 12 percent tax on estates valued over $2 million. An individual’s estate comprises their entire net worth including their personal property or business.
There is also a probate court fee of .05 percent of the estate. In 2015 Connecticut eliminated a $12,500 cap on those fees, which pushed some bills in the six and seven figure range. But it also capped the estate tax at $20 million.
The estate tax isn’t the only tax that may be driving out wealthier residents. David, a former Goldman Sachs manager living in Darien, says Connecticut’s gift tax has him looking to move.
David asked that his last name not be used as he is in the process of making his decision whether or not to leave.
“Why should I stay in Connecticut when I can just pick up and go to Rye, New York, and not have to pay it?” David said.
Connecticut is the only state in the nation to have a gift tax in addition to the federal gift tax. The Connecticut gift tax applies to all gifts made over the course of a lifetime that add up to more than $2 million, inclduing the amount of an individual’s estate following their death. Essentially, the gift tax ensures that an individual cannot avoid the estate tax by gifting their estate to their children before they die.
Connecticut’s estate and gift tax are on top of the federal estate and gift tax, although Connecticut’s threshold is far lower than the federal government’s. But for those who would be affected by the federal taxes it makes little sense to stay in the only state which increases that penalty.
“Why does the state think that people with wealth are going to stay?” David asked. “They’re going to leave.”
Overall the estate and gift tax do not account for much in the way of taxes for the state. In 2014, the estate tax brought in $168 million, less than 1 percent of the state’s General Fund. That figure was significantly lower than in 2001 when the income from the estate tax accounted for 2.5 percent of the General Fund budget.
However, the outmigration of wealth may cause bigger headaches now and in the future.
Those moving out of the state tend to be higher-earning individuals and families, while those moving into the state earn less, according to a 2016 study by the Connecticut Commission on Economic Competitiveness.
A 2008 study by Connecticut’s Department of Revenue Services surveyed Connecticut estate planning attorneys and found that 52.6 percent of their clientele who moved out of Connecticut did so primarily due to the estate tax.
It also found that 76.9 percent said the estate tax was “partially responsible,” for their clients moving out of state.
Lawmakers appear to be responding to the dissatisfaction with the estate and gift tax. Lawmakers from both sides of the political aisle have raised 25 bills either eliminating the estate tax or raising the threshold. Another 4 bills would eliminate the gift tax.
Some of those bill will receive a public hearing before the Finance, Revenue and Bonding Committee on Friday.
Reforms to the estate and gift tax would be welcome news for many retirees living in Connecticut who feel they have to relocate in order to pass on their legacy to their children. Changes to the estate and gift tax may encourage some of Connecticut's wealthier individuals and business owners to remain in the state long after they've retired.
Caraciollo, who has spent a lifetime in the banking industry, said “it’s not just the income that the state loses, it’s the human capital and that’s the big issue. Connecticut is killing the goose that laid the golden egg.”