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How Do You Limit Your Estate Tax Liability in Minnesota?

A couple learning how to limit or avoid Minnesota estate tax

Navigating Estate Tax with Estate Planning

Navigating the intricacies of your financial legacy in the state of Minnesota can be a daunting task. Although there are no inheritance taxes in Minnesota, an estate tax is levied by both Minnesota and the federal government. Understanding the nuances of the estate tax and implementing robust estate tax planning strategies can ensure that your beneficiaries enjoy the fruits of your labor without being overburdened by tax liabilities.

What Is Estate Tax and Who Is Subject to Estate Tax?

The estate tax, often called the “death tax,” is a tax levied on the right to transfer property at your death. It is calculated based on the total value of a person’s estate that includes an accounting of everything you own or have certain interests in at the date of death. The executor of the estate is required to pay and file the tax form for the estate. If the value of the estate exceeds certain thresholds, it becomes subject to Minnesota estate tax and federal estate tax, potentially diminishing the wealth passed on to heirs.

Depending on your situation, most people do not need to be concerned about federal estate tax because only individuals who have estates worth more than $13 million dollars per person, or $26 million dollars as a married couple, will be subject to federal estate tax. That number is called the lifetime exemption, and only a small fraction of people need to worry about the death tax.

Minnesota imposes a tax on the estates of individuals who are residents of the state when they die or who own tangible property, often real estate, in Minnesota. The tax filing threshold is $3,000,000, which is much lower than the federal estate tax. Any wealth in the estate up to $3,000,000 is not taxed, while any wealth above this amount is taxed by the state in progressive brackets at at rate ranging between 13-16% according to SmartAsset’s article “Minnesota Estate Tax.”  Furthermore, for married couples, when both spouses die, only one $3,000,000 exemption can be applied to the estate.

Why Is Estate Tax Planning Essential?

Proactive estate tax planning is crucial to preventing your heirs from facing unexpected tax burdens. Without careful planning, a significant portion of the estate you’ve worked hard to build could end up in the hands of the government, instead of your loved ones.

Tax planning involves a comprehensive look at your assets and potential tax liabilities, ensuring that your beneficiaries are safeguarded. The goal is to reduce estate tax significantly, allowing more wealth to transition to the next generation.

How Can Revocable Living Trusts Benefit Your Estate Plan?

Incorporating trusts into your estate plan can be a strategic move to minimize estate taxes. Revocable living trusts allow you to transfer wealth from your estate, reducing the overall value subject to estate taxes upon your death.

Revocable living rusts offer control over assets while the grantor is living and after death, ensuring that your wishes concerning asset distribution are honored. The grantor has the right to change the trust document while they are living and not incapacitated. With proper planning of a trusted Minneapolis estate lawyer, a revocable living trust provides the added benefit of avoiding court proceedings related to the management and distribution of assets to heirs.  Read more in our article, Who Can Change My Revocable Trust?

Are Gift Taxes and Estate Taxes Interconnected?

Yes, gift taxes and estate taxes are closely linked. Strategically gifting assets during your lifetime can reduce your estate’s size, subsequently decreasing estate tax liability. Minnesota does not have a gift tax. However, it’s essential to understand the federal gift tax exclusion limits in your tax planning.

Large gifts that exceed these exclusions may still be taxable. These count towards your estate and are potentially subject to estate tax if they surpass the lifetime exemption limit. It’s wise to consider the long-term implications of gifting on your overall estate.

What Do Changes in Tax Laws Mean for Your Estate Planning Strategies?

Federal and Minnesota estate tax laws are not static; they undergo changes and adjustments that could impact your estate. These changes in tax laws could influence exemption thresholds, tax rates and what assets are considered part of your taxable estate.

Keeping abreast of these changes is critical. Working with a tax professional who understands the latest federal estate tax laws ensures that your estate plan remains effective and compliant, safeguarding your estate from increased tax liability.

Can You Minimize Minnesota Estate Taxes with Charitable Contributions?

Making charitable contributions is an effective strategy to minimize estate taxes. Donations to qualifying charitable organizations can reduce your taxable estate’s size, while allowing you to contribute to causes you care about.

This estate planning tool requires proper documentation and adherence to tax laws to ensure that your estate benefits from the tax reductions applicable to charitable contributions.

How Does the Tax Cuts and Jobs Act Affect Estate Tax Planning?

The Tax Cuts and Jobs Act significantly impacted estate tax planning by increasing the federal estate tax exemption. This change means fewer estates will be subject to the estate tax. However, it is essential to remember that many parts of the Jobs Act are temporary.

Estate plans should consider future changes, possibly with lower exemptions. Careful planning and continual review of your estate strategy are necessary to adapt to legislative shifts and protect your estate from excessive taxation.

Closing Thoughts: Estate Tax Planning Takeaways

To review, here are the key points to remember in your Minnesota estate tax planning journey:

  • Understand the implications of the federal and Minnesota estate tax on your assets.
  • Use revocable living trusts and lifetime gifts strategically to reduce estate size.
  • Keep updated with changes in tax laws, including Minnesota estate taxes.
  • Consider charitable contributions as part of your estate strategy.
  • Consult with a tax professional to navigate complex estate scenarios.

By working with the Minneapolis estate tax team of Stone Arch Law Office, you can apply effective estate tax planning to preserve your wealth for future generations, ensuring that your legacy endures as you envision. Book a call with our team to get started today.

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