How federal and Connecticut estate taxes interact: exemptions, state death tax deduction, QTIP elections, portability, and combined planning strategies.

Federal and Connecticut Estate Tax: How They Interact

Connecticut residents with taxable estates face two separate estate taxes: federal and state. The two systems share some structural features but differ in critical ways. Understanding where they align and where they diverge is essential to minimizing the combined tax burden.

Exemption Comparison

For decedents dying on or after January 1, 2023, the Connecticut exemption equals the federal basic exclusion amount (CGS 12-391). In 2025, the federal basic exclusion amount is approximately $13.99 million per individual. Below that threshold, neither federal nor Connecticut estate tax is owed.

This alignment is relatively new. For years, the Connecticut exemption was far lower than the federal exemption. In 2017, for example, the Connecticut exemption was $2 million while the federal exemption was $5.49 million. That gap created a class of estates that owed Connecticut estate tax but not federal estate tax, and it drove the development of planning techniques (particularly state-only QTIP trusts) designed to minimize the state tax while preserving the full federal exemption.

The 2026 cliff. The federal basic exclusion amount is scheduled to be reduced by approximately half after December 31, 2025, under the sunset provisions of the Tax Cuts and Jobs Act of 2017. If Congress does not extend the current levels, the federal exemption could drop to approximately $7 million (adjusted for inflation) in 2026. Because the Connecticut exemption is tied to the federal basic exclusion amount, the Connecticut exemption would drop as well. This potential change affects planning for every Connecticut resident with an estate in the $7 million to $14 million range.

The State Death Tax Deduction

Federal law allows a deduction on the federal estate tax return for state death taxes actually paid (IRC 2058). This means the Connecticut estate tax paid reduces the federal taxable estate, which in turn reduces the federal estate tax owed.

The deduction operates as an above-the-line adjustment. If an estate pays $1 million in Connecticut estate tax, the federal taxable estate is reduced by $1 million, saving the estate approximately $400,000 in federal tax (at the top 40% federal rate). The net cost of the Connecticut tax is thus lower than its face amount.

This deduction replaced the former state death tax credit, which was phased out between 2002 and 2005. The credit was more valuable to taxpayers than the deduction (a dollar-for-dollar offset versus a reduction in taxable income), and its elimination was the catalyst for Connecticut and other states to enact standalone estate taxes.

Unified Credit and Applicable Exclusion Amount

Both the federal and Connecticut systems use an exclusion amount to shelter estates from taxation. The federal “applicable exclusion amount” combines the basic exclusion amount ($13.99 million in 2025) with any “deceased spousal unused exclusion” (DSUE) from portability. The Connecticut system uses only the basic exclusion amount; it does not recognize portability (more on this below).

The federal unified credit is the amount of tax that would be due on the applicable exclusion amount. Mechanically, the federal estate tax is computed on the entire taxable estate, and then the unified credit is subtracted. The effect is to exempt the first $13.99 million from tax.

Connecticut’s computation is structurally different. The tax is imposed only on the portion of the Connecticut taxable estate that exceeds the exemption threshold (the federal basic exclusion amount). There is no Connecticut unified credit in the traditional sense; the exemption simply removes the first tier of the estate from the tax base.

QTIP Elections: Federal vs. Connecticut

QTIP (Qualified Terminable Interest Property) trusts are a cornerstone of estate tax planning for married couples. Property placed in a QTIP trust qualifies for the marital deduction, deferring estate tax until the surviving spouse’s death.

The executor must elect QTIP treatment by making the election on the estate tax return. Under CGS 12-391, Connecticut permits a QTIP election that is independent of the federal election. The executor can:

Make a federal QTIP election and a Connecticut QTIP election on the same property
Make a federal QTIP election without a Connecticut QTIP election
Make a Connecticut QTIP election without a federal QTIP election (less common, but possible)

This independence creates planning flexibility. The most important application has been the “state-only QTIP” technique, used when the Connecticut exemption was lower than the federal exemption.

How the state-only QTIP works. Suppose a decedent dies in 2017 with a $5 million estate. The federal exemption is $5.49 million (no federal tax due). The Connecticut exemption is $2 million. Without planning, $3 million of the estate is subject to Connecticut estate tax. To avoid this, the estate plan creates a QTIP trust funded with the difference. The executor makes a Connecticut QTIP election (but not a federal QTIP election) on the trust property, deferring the Connecticut tax until the surviving spouse’s death.

For deaths on or after January 1, 2023, with exemptions aligned, this technique is less immediately useful. But it remains relevant for two reasons: (1) estates planned during the gap years may still contain state-only QTIP trusts that must be administered correctly, and (2) if the federal exemption drops in 2026 and Connecticut’s exemption follows, the technique may become important again.

Portability: Federal Yes, Connecticut No

The federal estate tax allows a surviving spouse to inherit the deceased spouse’s unused exclusion amount through “portability” (IRC 2010(c)(4)). If the first spouse to die uses only $5 million of the $13.99 million exemption, the surviving spouse can claim the remaining $8.99 million, giving the surviving spouse a combined exemption of approximately $22.98 million.

Connecticut does not recognize portability. The unused Connecticut exemption of the first spouse to die is lost. This is one of the most significant planning distinctions between the federal and Connecticut systems.

The consequence: married couples who rely solely on federal portability and do not create a credit shelter (bypass) trust at the first spouse’s death will waste the deceased spouse’s Connecticut exemption. For an estate where both spouses together have assets exceeding the single Connecticut exemption amount, this omission can cost hundreds of thousands of dollars in Connecticut estate tax.

A credit shelter trust funded with the first spouse’s exemption amount preserves the Connecticut exemption. The trust assets pass outside the surviving spouse’s estate for both federal and Connecticut purposes, effectively doubling the couple’s combined Connecticut exemption.

Planning Strategies to Minimize Combined Tax

Credit shelter trusts. Despite the availability of federal portability, credit shelter trusts remain essential for Connecticut estate tax planning. The trust is funded at the first spouse’s death with assets equal to the Connecticut exemption amount (or a formula amount). Those assets, plus any appreciation, pass to the next generation free of estate tax in both systems.

State death tax deduction optimization. Because the Connecticut estate tax is deductible on the federal return, the combined effective tax rate is lower than the sum of the two rates. For an estate in the top federal bracket (40%) paying the 12% Connecticut rate, the combined effective rate is approximately 47.2%, not 52%.

Lifetime gifting. Gifts that reduce the estate below the exemption threshold can eliminate both federal and Connecticut estate tax. However, gifts made on or after January 1, 2005 are added back to the Connecticut taxable estate, so the gift must actually reduce the overall tax, not just shift the timing.

Charitable planning. Charitable bequests reduce the taxable estate for both federal and Connecticut purposes. The charitable deduction is unlimited in both systems. For charitably inclined families, charitable remainder trusts, charitable lead trusts, and outright bequests to charity can substantially reduce the combined tax burden.

Life insurance trusts. An ILIT removes life insurance proceeds from the taxable estate for both federal and Connecticut purposes. For families that need liquidity to pay estate taxes or to equalize inheritances, an ILIT can be an efficient tool.

QTIP trust planning. Even with aligned exemptions, QTIP trusts provide flexibility. The executor’s ability to make independent federal and Connecticut QTIP elections means the estate can be structured to optimize both tax systems at the time of death, based on the facts then known.

Coordination in Practice

Estate tax returns must be prepared with both systems in mind. The Connecticut return (CT-706/709) is filed with DRS and the probate court on a different timeline (six months) than the federal return (nine months). Information from the federal return, including the gross estate calculation, deductions, and credit computations, feeds into the Connecticut return.

When the federal return is audited or adjusted, any changes that affect the Connecticut taxable estate require an amended Connecticut return (CGS 12-398). The fiduciary must file the amended return with both DRS and the probate court within 90 days of the final determination of the federal estate tax.

Coordinating the two returns, their deadlines, and their interaction is one of the most technically demanding aspects of estate administration in Connecticut.

For the full Connecticut estate tax rate schedule and exemption history, see our Connecticut estate tax guide. For strategies to reduce the combined tax burden through lifetime transfers, see gifting strategies.

Credit shelter trusts and ILITs are among the most effective tools for managing the combined federal and Connecticut estate tax burden. For more on these structures, see irrevocable trusts in Connecticut. For the executor’s role in coordinating tax filings across both systems, see executor and administrator duties.