At Guttman Law, we utilize innovative estate tax planning strategies to assist clients throughout Minnesota. We have in-depth knowledge of the applicable trusts, estates, and tax laws and a well-deserved reputation for providing our clients with sophisticated legal advice and dependable service.
When you consult with us, we will work with you to explore ways to minimize your potential estate tax liabilities and preserve your legacy for future generations. Contact our office today to speak with an experienced estate tax planning attorney.
What is the estate tax?
The first thing to know is that there are both state and federal estate taxes. Estate taxes are paid when a person passes away with an estate valued above the applicable estate tax exemption. An “estate tax exemption” is the amount of assets, valued in dollars, that a person can pass away owning in their individual name before a federal and/or estate tax is owed.
At the federal level, changes to the tax code in 2017 temporarily doubled the federal estate tax exemption through 2025 to above $11 million; however, the exemption amounts will sunset in 2026 and revert back to pre-2018 levels, which were $5 million indexed for inflation. As of January 2021, individual estates valued at $11.7 million and over (the federal exemption amount) are subject to an estate tax of up to 40 percent on the amount above the federal exemption.
Moreover, the federal exemption amount for married couples may be “portable,” which means that it can essentially be transferred between spouses. “Portability” is the term that describes the federal estate tax law which may allow a surviving spouse to take advantage of any unused federal estate tax exemption of his or her deceased spouse. By doing this, the surviving spouse can protect or shelter assets from a potential future estate tax liability upon the surviving spouse’s subsequent death. The estate of the spouse who died will only be able to use the individual exemption amount, but the remainder of the estate may be subject to estate taxes.
It is important to be aware that portability is not automatic and in order to take advantage of it, an estate tax return must be filed with the IRS within 9 months of the passing of the first spouse. This is true even if there are no estate taxes due at the death of the first spouse. If the surviving spouse timely files a federal estate tax return (Form 706), then that spouse would be able to “port” or keep the amount of the federal estate tax exemption that was not utilized by the deceased spouse. This means that if one spouse dies, and passes their wealth to the surviving spouse, the total exemption amount for that couple could exceed $23 million in 2021.
A potential alternative to relying on portability is to utilize a special planning tool referred to as a credit shelter trust (also referred to as a family, bypass or A-B trust). If properly established, such an estate plan will work much in the same way as portability, it will “shelter” the estate tax exemption of the first spouse to pass, but may not require filing of an estate tax return.
Portability and credit shelter trusts often work hand in hand. It is important to consult with an experienced estate planning attorney to determine how the estate tax could impact your legacy.
In any event, the majority of estates do not pay federal estate taxes, but this issue is a concern for high-net-worth individuals.
What Is the Minnesota estate tax?
The current accumulated asset threshold for paying the Minnesota estate tax is $3 million. Subject to certain exceptions, estates valued at less than $3 million are not subject to the Minnesota estate tax. The Minnesota estate tax rate for estates subject to the Minnesota estate tax ranges from 13-16 percent, based on the value of the estate. The Minnesota estate tax is owed on the amount of the deceased person’s estate valued above the Minnesota estate tax exemption. Significantly, a married Minnesota couple that plans their estates may be able to utilize two Minnesota estate tax exemptions. Unlike the federal estate tax, the Minnesota estate tax exemption amount is not portable between spouses. Ultimately, while your estate may not be subject to federal estate taxes, there may be a potential Minnesota estate tax liability to consider.
Limiting Your Minnesota Estate Tax Liability
While the majority of estates are not subject to federal estate taxes, high-net-worth individuals should consider ways to minimize their estate tax liabilities, now and in the future. And Minnesotans who have accumulated more than $3 million in assets can also benefit from proper estate tax planning. The experienced trusts and estates attorneys at Guttman Law can advise you about a number of innovative strategies, such as:
Tax-Free Annual Gifting
For the year 2021, the annual gift tax exclusion is $15,000 for individuals and $30,000 for married couples. This means that you are allowed to make annual monetary gifts up to these amounts to as many individuals as you like without paying gift or estate taxes. Tax-free annual gifting may be used to reduce potential estate tax liabilities. This type of gifting may allow you to provide beneficiaries with a portion of their inheritance while you are living, which could allow you to see them enjoy it.
Many people would like to leave a charitable legacy. One way to do so is to establish a charitable trust. In a charitable remainder trust, for example, certain property is transferred into the trust, and beneficiaries are designated to receive trust income for a set period of time. After that period ends, the “remainder” or the amount that is left is provided to a charitable organization, such as a university, nonprofit organization, or medical center.
Irrevocable Life Insurance Trust
Although proceeds from life insurance pass outside of your estate, the cash value of the policy is included in a deceased persons’ estate for taxable value. This could significantly impact the final proceeds received by the beneficiaries. By properly transferring ownership of an insurance policy to an Irrevocable Life Insurance Trust (ILIT) or buying a life insurance in the ILIT, the proceeds will be excluded from the taxable estate, which can then be used to pay debts, final expenses, and income to the beneficiaries.
Qualified Personal Residence Trust
For many, a home is one of the largest components of their taxable estate. However, it is possible to minimize estate taxes by establishing a qualified personal residence trust (QRPT). Here’s how it works: title to the home is transferred into the trust for the benefit of family members, and you continue residing in the home for a specified period of time. After the end of the specified period, you may continue to live in the home, but you must pay rent to your family or designated beneficiary in order to avoid the inclusion of the residence in your estate.
Upon your death, the property and any appreciated value from the time of the transfer passes to your beneficiaries, without estate tax consequences. Should you pass away before the set time period ends, however, the value of the home will be included in the taxable value of your estate.
A generation-skipping trust (GST) is one in which assets are passed directly to grandchildren, great-grandchildren, and other descendants (the “skip persons”), thereby skipping the next generation (your children). Also referred to as a dynasty trust, a GST can take advantage of the current exemption amounts, but there are potential estate tax consequences to consider when the exemption amounts revert back to pre-2018 levels.
Contact Our Experienced Minnesota Estate Tax Planning Attorneys
When you partner with Guttman Law, our legal team can work with you to minimize your estate tax liability. We are up-to-date with applicable estate tax laws and can help you prepare for potential tax law changes down the road. You’ve worked hard to build your legacy, and we are available to help you preserve it. Contact our estate tax planning attorneys today.