Minnesota Governor Tim Walz recently proposed a budget for 2022-2023 with the goal of raising revenue and providing relief to those most impacted by the COVID-19 pandemic, calling it ‘Minnesota’s COVID-19 Recovery Budget. The budget calls for an increase in several taxes, and, specifically, a decrease in the Minnesota estate tax exemption from $3.0 million to $2.7 million.
Estate taxes, often called ‘death taxes’, are not popular, and the recent trend has been to increase and not decrease the estate tax exemptions at both the state and federal level. So, what does this mean for your own estate plan and potential estate tax liability?
There are estate taxes in Minnesota and at the federal level. The Minnesota estate tax exemption is $3,000,000 per individual for 2020. If the value of an individual’s estate is over $3,000,000 when the individual passes away, then estate taxes will be due. The Minnesota estate tax rate is 13-16% and assessed on the value of an individual’s estate over the exemption. The federal estate tax exemption is $11,580,000 per individual for 2020, and the federal estate tax rate is high at 40%. There is something called ‘portability’ at the federal level, and a married couple can combine their estate tax exemption to $23,160,000.
This ‘portability’ is not available in Minnesota, and so an individual’s estate tax exemption must be claimed at the time of death. Call it ‘use it or lose it’ at the time of death. For assets that transfer from one spouse to another during life and at the time of death, no estate or gift taxes are due under what’s called the ‘Unlimited Marital Deduction’. So, no estate taxes are due when everything passes from one spouse to another, but such transfers do not make use of the $3,000,000 exemption of the first spouse who passes away.
The risk in allowing for such transfers to the surviving spouse upon the first death is that the surviving spouse ends up with a larger, taxable estate. With careful estate planning, this can be avoided. The purpose of an ‘A/B disclaimer’ trust plan, for example, is to use the Minnesota estate tax exemption available for the spouse who passes away first. The surviving spouse disclaims assets to the ‘disclaimer trust’. Typically, the ‘disclaimer trust’ stays in place during the life of the surviving spouse, and the trustee pays out income and principal to the surviving spouse for ‘health, education, maintenance and support’. The assets within the ‘disclaimer trust’ are not distributed out until the death of the surviving spouse.
Generally, for the purposes of determining whether an estate is taxable or falls under the exemption, the value of all assets of the decedent are taken into account, and that’s everything from real property to retirement savings. If you’re concerned that you may have a taxable estate, putting in place a trust plan is a good way to reduce potential estate tax liability. In addition, certain deductions are available such as bequests to charities and for certain types of assets. At the state level, there is a deduction available for a ‘qualified small business and farm property’. Up to $2,000,000 can be deducted from an estate for a small business or farm ownership interest, if certain requirements are met. Gov. Walz’ proposed budget retains this qualified deduction for small businesses and farm property. Lifetime gifts to others and charitable gift planning are additional ways to reduce the size of an individual’s estate.
If you have questions or seek additional information about state and federal estate taxes, it’s important to talk to your tax advisor, charitable advisor, and estate planning attorney. Your advisors can help put in place an estate plan that’s tailored for you, one that addresses estate taxes and other concerns that you may have.
Any requests for topic suggestions may be sent to rene@breenandperson.com. Although we cannot give you legal advice through the column, we can provide some general information that may be helpful for you to know. Our purpose is to educate and we hope that you can take something new away from this column each time you read it.