"Nothing can be said to be certain, except death and taxes."
Benjamin Franklin in a letter to Jean-Baptiste Leroy, 1789
Minnesota Estate Tax
In 2017, decedents may pass up to $2,100,000 in assets to whomever they want without paying any estate tax. In 2018, that number increases to $2,400,000 and continues to climb to $2,700,000 in 2019 and $3,000,000 in 2020.
Note, however, that you may give an unlimited amount of assets to either a spouse or charity free of estate tax. If the first spouse dies and everything passes to the surviving spouse, the first spouse to die has given up his or her ability to preserve their estate tax exemption amount. In Minnesota we are not able to transfer our unused exemption amount to our surviving spouse like we can at the federal level. Therefore, it is extremely important that you utilize proper estate planning techniques to ensure that this exemption is not lost on the first death. With effective estate planning strategies, a married couple can pass up to $4,800,000 free of estate tax in Minnesota. Anything over that amount is taxed at rates between 12 – 16%.
Federal Estate Tax
At the Federal level, the estate tax exemption amounts were recently doubled. In 2018, a single individual can pass up to $11,180,000 free of estate tax and a married couple can pass $22,360,000 without paying estate tax. If you exceed that amount, the estate tax can be as much as 40%.
There are estate planning techniques to decrease valuation of assets. Use of Irrevocable Life Insurance Trusts, Family Limited Partnerships, LLC’s, and Charitable Trusts provide numerous ways to decrease the on-paper value of your estate.
There is currently no gift tax in Minnesota. There is, however, a Federal gift tax that is unified with the estate tax exemption amount. In 2018, you may give away $15,000 per year, per donee. This is known as the annual exclusion amount. If you give away more than $15,000 in a calendar year to an individual, you will most likely not have to pay any gift tax. However, you will have to file a gift tax return to report the amount that you gave away if it exceeds the annual exclusion. You can give away up to $11,200,000 during your life and you won’t have to pay any gift tax on those gifts, but your estate tax exemption amount will be reduced if you give over the annual exclusion amounts. For instance, if you give $3,000,000 in a calendar year to your nephew, you would need to file a gift tax return, no tax would be due, but now your estate tax exemption amount is $8,200,000 when you die rather than the full $11,200,000.
Advanced Estate Planning Techniques in Minnesota
Irrevocable Life Insurance Trusts (ILIT)
An irrevocable life insurance trust is a type of trust designed to own a life insurance policy. The purpose of an irrevocable life insurance trust is to remove the value of the life insurance policy from the estate while still allowing your family to benefit from the proceeds of that policy.
An irrevocable trust may not be cancelled or revoked. Most irrevocable trusts require that you select someone other than yourself to be the trustee. Since you are giving up control of the assets and will not be able to cancel this arrangement, the IRS does not include the assets of an Irrevocable trust in the grantor’s estate for estate tax purposes.
If you have an estate that is close to having to pay estate tax, an ILIT is a great way to provide cash to the family to pay those estate taxes while not increasing the value of your gross estate.
Family Limited Partnerships
By using a Family Limited Partnership clients may be able to reduce their estate tax bill, maintain control over the assets owned in the Family Limited Partnership, and achieve asset protection for the assets held in the Family Limited Partnership. The idea is to control everything, but own nothing.
By transferring fractional interests to your family members during your life, you are able to take advantage of valuation discounts for lack of marketability and lack of control. These discounts are regularly recognized by the IRS. Family Limited Partnerships save estate taxes by discounting the value of limited partnership interests that you create and then gifting the discounted limited interests. You are using less of your Gift Tax Exemption by utilizing this strategy.
Other Advanced Estate Planning Techniques
While Irrevocable Life Insurance Trusts and Family Limited Partnerships are a couple of advanced planning techniques to minimize taxes and protect assets, there are many other advanced planning trusts including Charitable Remainder Trusts, Charitable Lead Trusts, Qualified Personal Residence Trusts, Domestic Asset Protection Trusts to name a few.
If you feel that your situation is complex, you should speak with a Minnesota estate planning attorney who is familiar with these planning concepts.