Your home is likely one of your most valuable assets, and you might wonder whether it is included as part of your taxable estate. To answer this, we first need to understand how inheritances and estate taxes work in Connecticut. At the Law Offices of Charles L. Kurmay, we frequently help clients navigate these important questions to protect their wealth and ensure that their assets are passed on according to their wishes.
Income Taxes on Inheritances
In most cases, the good news is that inheritances are not considered taxable income by either the IRS or Connecticut tax authorities. The assets you leave behind, including your home, are generally free from income taxes because you have already paid taxes on them during your lifetime. However, there are exceptions to this rule. For instance, if assets in a trust generate earnings that have not been distributed before your death, those earnings may be taxable. Additionally, if you leave a traditional IRA to a beneficiary, any distributions they take from the account will be subject to income tax.
Estate and Gift Taxes in Connecticut
For high-net-worth individuals, estate taxes can become a concern. On the federal level, the estate tax exclusion currently stands at $13.61 million—anything beyond that amount will be subject to estate taxes, with a top rate of 40%. Connecticut is one of the few states with a state-level estate tax, and it aligns with the federal exclusion. However, if the value of your estate exceeds this threshold, both federal and state estate taxes may apply.
You can’t simply gift all of your assets during your lifetime to avoid these taxes, as the federal gift tax applies to large gifts and is unified with the estate tax, meaning the same $13.61 million exclusion covers both. Connecticut also imposes a gift tax—the only state in the U.S. to do so—with a flat rate of 12%, established in 2023.
How Home Ownership Affects Your Taxable Estate
If you own a home, it is considered part of your taxable estate. While the transfer of your home to your heirs won’t incur income tax, the home’s value can significantly reduce your estate tax exclusion. This is especially important in high-value areas like Westport, Connecticut, where real estate can quickly eat into your federal and state exclusion amounts.
Additionally, while the Tax Cuts and Jobs Act of 2017 temporarily increased the federal estate tax exclusion, that is set to expire in 2026, lowering the exclusion to $5.49 million, indexed for inflation. This reduction makes estate tax planning even more critical, as your home could represent a large portion of your taxable estate under the new limits.
Fortunately, when you pass your home on to your beneficiaries, they will receive it with a stepped-up basis, meaning they won’t be responsible for capital gains taxes on any appreciation that occurred while you owned the home.
Estate Tax Efficiency Strategies
If estate taxes are a concern, there are ways to reduce your taxable estate, especially when it comes to your home. One effective method is to transfer your home into a Qualified Personal Residence Trust (QPRT). By doing so, you essentially remove the value of your home from your taxable estate, lowering the overall amount subject to estate taxes.
Here’s how it works: you would continue living in the home for a predetermined period, known as the “retained interest period.” During this time, the IRS calculates the taxable value of the gift based on the fact that your heirs won’t take ownership of the property immediately. This reduces the taxable value of the home compared to its market value at the time of transfer. Once the transfer is complete, your heirs will inherit the home with a reduced taxable value, resulting in significant tax savings.
We’re Here to Help You Protect Your Estate
Estate planning, especially when it involves high-value assets like your home, can be complicated. At the Law Offices of Charles L. Kurmay, we specialize in helping families across Connecticut create customized estate plans that protect their wealth and minimize tax exposure. Whether you’re concerned about estate taxes or simply want to ensure that your home is passed on smoothly to your heirs, we’re here to guide you through every step of the process.
If you’d like to explore estate tax efficiency strategies, or if you have questions about how your home fits into your overall estate plan, call our office at (203) 380-1743 or reach out to us through our contact page to schedule a consultation.
Disclaimer: This blog post is for informational purposes only and does not constitute legal or tax advice. For advice regarding your specific situation, please consult with an estate planning attorney or tax professional.
