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October 2018

Charlie married Olga in 1985 and one week before they got married, they signed a pre-nuptial agreement.  The agreement had a clause in it that stated neither party would be responsible for the debts of the other party which accrued before and during the marriage.  After they were married, Charlie then moved into Olga’s home.  This home was solely owned by Olga.

In 1995 - 10 years after they were married - Olga took out a home equity line of credit with a local bank.  The line of credit was in the amount of $50,000 and it was secured by a mortgage against Olga’s home.  Two years later, Olga went to her lawyer and made a will.  The will specifically devised Olga’s home to her son but it also reserved a life estate to her husband, Charlie.  The will also said that as long as Charlie occupied the home, he shall be responsible for and shall pay all expenses relating to the use and maintenance of the home which include but are not limited to the taxes, insurance, utilities and repairs.  Elsewhere in the will, there was a paragraph which specifically incorporated by reference, the pre-nuptial agreement that Charlie and Olga signed in 1985.  Then, Olga died two months later.  

After she died, Charlie paid the taxes, insurance, utilities and maintenance expenses associated with Olga’s property.  Nevertheless, he did not pay anything towards the line of credit nor did he pay any interest associated with it.  To put it mildly, Olga’s son was not happy with this decision, so he sued Charlie, claiming that it was his obligation to pay the line down, including any interest that accrued on it.

Does Charlie – as the life tenant – have any legal obligation to pay the line of credit or any interest associated therewith?  You may be surprised to learn that Connecticut law generally obligates a life tenant to pay a mortgage secured by the property that is the subject of the life estate but that a specific will provision can override or supersede the law, thereby excusing the life tenant from having to do that.

The first thing the court will do is construe the testator’s will and they will examine the entire will in order to determine the testator’s intent.  In this particular case, the court will try to discern what Olga’s intention was concerning the life estate that she created in Charlie in light of the language in the entire will.  In other words, since Olga’s will incorporated and referred to the pre-nuptial agreement, the court will consider that document as well, when determining what she intended.

Under the facts of this case, the will said that Charlie was responsible for - and had to pay - all expenses relating to the use and maintenance of the house.  Nevertheless, the pre-nuptial agreement – which Olga signed 12 years before her will - explicitly provided that Charlie and Olga would be responsible for his or her own individual debts acquired both before and during the marriage. The will made no reference to the home equity loan payments but the pre-nuptial agreement demonstrated Olga’s intention not to obligate Charlie to pay any debt that she alone contracted for after the date that the agreement was signed.  Thus, in this case, Olga’s will relieved Charlie of any obligation the law might have imposed on him otherwise, to pay down the principal or interest on the home equity line of credit.

This story demonstrates how someone would not be responsible to pay for a mortgage (or the interest associated with that mortgage) if they were named as a life tenant under a will.  Be advised, however, that this is not how Connecticut courts typically rule upon this issue.  Since the will discussed here, incorporated a pre-nuptial agreement, the life tenant was not legally obligated to pay this expense.  Scenarios like these are more common than you would think.  If you find yourself in a situation similar to the one that I’ve described here, you should contact the probate attorneys at Cipparone & Zaccaro, PC.  We would be happy to analyze your situation and guide you through this tricky and often - complicated - process.  

Income earned by limited liability companies (LLCs), partnerships and S Corporations traditionally passes through to members, partners and shareholders (collectively “partners”). That is why limited liability companies (LLCs), partnerships and S Corporations are commonly referred to as pass-through entities.  Partners pay tax on their distributive share of income from the business and typically make estimated payments for that liability. 

On May 31, 2018, Connecticut changed the way it taxes pass-through entities. Public Act 18-49 initiates a pass-through entity tax on LLCs taxed as a partnerships, general and limited partnerships, and S corporations (“PTEs”). The legislation does not impact publicly-traded partnerships, sole proprietorships or single-member LLCs that are disregarded entities. Connecticut taxes Connecticut source income of PTEs at the rate of 6.99%.

PTEs must make estimated tax payments to cover their pass-through entity tax. Because the law passed in the middle of the year, PTEs must make “catch-up” estimated tax payments.  The law requires estimated payments equal to 22.5% of the pass-through entity tax each quarter. Thus, a PTE is seriously behind on its estimated tax obligations if it has not started making payments to the state.  Because individual partners will get a credit for the pass-through entity tax paid by their PTE, many resident individuals will no longer need to make estimated income tax payments to cover Connecticut income from their PTE. If a nonresident individual does not have any other income from Connecticut sources and the PTE pays the pass-through entity tax, then the nonresident individual will no longer have to file a Connecticut income tax return or make estimated tax payments to Connecticut.  Most PTEs with corporate partners will elect the alternate method of calculating the new tax, which means the corporation will pay the pass-through entity tax on its distributive share of income from the PTE. 

The impetus behind this new entity level tax arises from the new federal income tax law (PL 115-97). The new federal income tax law caps the state and local tax deduction (“the SALT deduction”) for individuals at $10,000. No such limit applies to state and local taxes deducted by business entities.  Consequently, the PTE can take a deduction on its federal income tax return for the pass-through entity tax paid to Connecticut.  Public Act 18-49 allows partners in a PTE a deduction of 93.01% of the partner’s share of the pass-through entity tax paid by the PTE. In that way, it neutralizes the effect of the new pass-through entity tax and assures that the Connecticut income tax will be deductible on the business federal income tax returns.     

If you hold your business or vacation home in an LLC, partnership or S corporation and have not heard of this new law, you must calculate the projected income of your PTE for 2018 and pay 7% of it as estimated taxes.  Do not hesitate to contact the estate planning attorneys at Cipparone & Zaccaro, PC if you need any help understanding this new Connecticut tax.