Estate Taxes FAQ
Will My Estate Be Subject to Death Taxes?
There are 2 types of death taxes that you should be concerned about: the federal estate tax and state estate tax. The federal estate tax is computed as a percentage of your net estate. Your net taxable estate is comprised of all assets you own or control minus certain deductions. Such deductions can be for administrative expenses such as funeral and burial costs as well as charitable donations.
Even if you believe that that you may not be affected by the federal estate tax, you still need to determine whether you may be subject to state estate and inheritance taxes. Further, you may have a taxable estate in the future as your assets appreciate in value. You should regularly review your estate plan with an estate planning attorney to ensure your estate plan takes into account changes in the tax laws as well as shifts in your individual circumstances.
What Is My Taxable Estate?
Your taxable estate is comprised of the total value of your assets, including your home, other real estate, business interests, your share of joint accounts, retirement accounts, and life insurance policies minus liabilities and deductions such as funeral expenses paid out of the estate, debts owed by you at the time of death, bequests to charities, and the value of the assets passed on to your U.S. citizen spouse. The taxes imposed on the taxable portion of the estate are then paid out of the estate itself before assets are distributed to your beneficiaries.
What Is the Unlimited Marital Deduction?
The federal government allows every married individual to give an unlimited amount of assets, either by gift or bequest, to his or her spouse without the imposition of any federal gift or estate taxes. In effect, the unlimited marital deduction allows married couples to delay the payment of estate taxes at the passing of the first spouse, because, at the death of the surviving spouse, all assets in the estate over the applicable exclusion amount ($5,120,000) will be included in the survivor’s taxable estate. It is important to keep in mind that the unlimited marital deduction is only available to surviving spouses who are United States citizens.
What Is a Credit Shelter or A/B Trust and How Do They Work?
A credit shelter trust, also known as a bypass or A/B trust, is used to eliminate or reduce federal estate taxes and is typically used by a married couple whose estate exceeds the amount exempt from federal estate tax. Because of the Unlimited Marital Deduction, a married person may leave an unlimited amount of assets to his or her spouse, free of federal estate taxes and without using up any of his or her estate tax exemption. However, for individuals with substantial assets, the Unlimited Marital Deduction does not eliminate estate taxes but simply works to delay them. This is because when the second spouse dies with an estate worth more than the exemption amount, his or her estate may be subject to estate tax on the amount exceeding the exemption. Meanwhile, the first spouse’s estate tax credit was unused and, in effect, wasted. This could be avoided by ensuring that, after the passing of the first spouse, an estate tax return is filed even if no taxes are due.
The purpose of a credit shelter trust is to ensure the preservation of both spouses’ exemptions. Upon the death of the first spouse, the credit shelter trust establishes a separate, irrevocable trust with the deceased spouse’s share of the trust’s assets. The surviving spouse is the beneficiary of this trust, with the children as beneficiaries of the remaining interest. This irrevocable trust is funded to the extent of the first spouse’s exemption. Thus, the amount in the irrevocable trust is not subject to estate taxes on the death of the first spouse, and the trust takes full advantage of the first spouse’s estate tax credit. Special language in the trust provides limited control of the trust assets to the surviving spouse which prevents the assets in that trust from becoming subject to federal estate taxation, even if the value of the trust goes on to exceed the exemption amount by the time the surviving spouse dies.
What Is a Qualified Personal Residence Trust (QPRT) and How Does It Work?
Our homes are often our most valuable assets and hence one of the largest components of our taxable estate. A qualified personal residence trust, or a QPRT (pronounced “cue-pert”), allows you to give away your house or vacation home at a great discount, freeze its value for estate tax purposes, and still continue to live in it.
Here is how it works: You transfer the title to your house to the QPRT (usually for the benefit of your family members), reserving the right to live in the house for a specified number of years. If you live to the end of the specified period, the house (as well as any appreciation in its value since the transfer) passes to your children or other beneficiaries free of any additional estate or gift taxes. 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. This may be an added benefit as it serves to further reduce the value of your taxable estate, though the rent income does have income tax consequences for your family. If you die before the end of the period, the full value of the house will be included in your estate for estate tax purposes, though in most cases you are no worse off than you would have been had you not established a QPRT. An added benefit of the QPRT is that it also serves as an excellent asset/creditor protection vehicle since you no longer technically own the property once the trust is established.
What is the federal lifetime gift, estate, and GST tax exemption for 2024?
As of January 1, 2024, the federal lifetime gift, estate, and GST tax exemption amount increased to $13,610,000 per person or $27,220,000 for a married couple. This may allow individuals or married couples to transfer assets up to these amounts during their lifetime or at death without incurring federal gift or estate taxes. Unless Congress makes a change, the current exemption will "sunset" on January 1, 2026, and the exemptions will go back to 2017 levels, which was $5,000,000 for an individual and $10,000,000 for a married couple, indexed for inflation.
What is the estate tax exemption in Minnesota for 2024?
Minnesota’s state-specific estate tax exemption remains at $3,000,000 per person for 2024. A married couple that utilizes estate tax planning would likely be entitled to two exemptions for a total of $6 million (for deaths occurring in 2024).
Who needs to pay Minnesota estate tax?
If you are a resident of Minnesota and your estate's value exceeds $3 million (for deaths occurring in 2024), your estate may be subject to Minnesota estate tax. Additionally, nonresidents who own real estate or tangible assets in Minnesota might also need to file a Minnesota estate tax return (Form M706) upon death.