Estate Planning: “Estate and Gift Taxes – What are they?”

Taxes, as most of us already know, are obligations we have to the state (we live in, work in, or own things in) and federal governments. Many of us pay income tax and property tax, so we’re pretty up on how those work, but many of us don’t have experience dealing with estate (inheritance) tax or gift tax. And, our introduction to them is often as a result of creating a Will or Trust document. Below is a quick definition of both for the state of Minnesota and the Federal government. The law-makers change these rules on us often, so it’s always a bit of a moving target.

Estate Tax

These are taxes paid based on the value of your estate upon your death (and are usually calculated by the value of the assets of your estate on the day that you pass away). Your executor or personal representative will need to file an estate tax return, but taxes will only be owed on what is not excluded, and there are a number of exclusions, often resulting in paying no estate tax. Excluded from Minnesota Estate Tax are:

–   $1 million in assets,

–  $4 million additional assets in a family farm or small business (with certain limitations and special rules that apply),

–  Certain assets you transfer to your spouse (like your home, for example).

If you take a quick look at your assets, many of us won’t have a million dollars in assets when we die, or we won’t once all the exclusions are counted – and, we won’t have to pay estate taxes!  That amount excludes a good many people.

Same principal with Federal Estate Taxes, but then the exclusion limit rises to $5.25 million. So, we have even more room there before we need to worry about paying federal estate taxes. For the genuinely wealthy Americans who do pay estate taxes, they are high. Ouch. 

Gift Tax

In Minnesota, the Gift Tax calculations generally follow the Federal rules. Again, it’s a matter of staying within the exclusion categories to avoid paying them. The exclusions for Minnesotans on Gift Tax are:

– Up to $14,000 per year, per person (with a life-time cap of $1 Million for total of all gifts given)

–  Charitable gifts

–  Qualified medical expenses given for someone else

–  Certain education expenses given for someone else

–  Gifts to your spouse

If your gifts are outside these exclusions in any year, you need to file a Gift Tax return. And, new Minnesota laws allow someone’s estate to “claw back” into the deceased’s assets (for estate tax purposes), any gifts made within three years of their death.

In short, estate planners exist to assist you with figuring these things out. You can think through a number of these issues on your own, but actually knowing and understanding what financial ramifications your loved ones can expect upon your death can be a big relief. There are, of course, all sorts of details, definitions, and subtle twists that can make big differences in your tax consequences that are not covered here. If you need help thinking through your estate plan, or documenting your plans, contact your estate planning professional to assist you.

Here’s another perspective from Minnesota Public Radio News you may be interested to hear:      http://www.mprnews.org/story/2013/10/08/finance/estate-tax-middle-class

ALL READERS:  This blog is not, nor shall it be deemed to be, legal advice or counsel. This blog does not create an attorney-client relationship with any reader.  It is designed to encourage thoughtful consideration of important legal issues with the expectation that readers will seek professional advice from a licensed attorney.