Estate planning with the federal estate tax in mind

Like just about any financial transaction these days, the handing down of property through a will or intestacy in Minnesota does not necessarily happen tax-free. In fact, depending on the value of one’s estate, the federal estate tax may apply.

Calculating a person’s taxable estate starts with determining what their gross estate is. The gross estate includes all of the decedent’s property, including cash, real estate, trusts, annuities, business interests and insurance, among other pieces of property. For purposes of the estate tax, the value of the decedent’s assets will be what the fair market value is, even if the decedent paid more or less for them when they acquired them.

Once one’s gross estate is determined, deductions will be taken to determine what the decedent’s taxable estate will be. Some items that might be deducted, depending on the circumstances, are assets that pass on to a surviving spouse or certain eligible charities, a mortgage on a home or other piece of real estate, other debts still owed at the time of death and costs associated with estate administration, among others. Then, once one’s taxable estate is calculated, the amount of any taxable gifts granted during the decedent’s lifetime will be added. From that final number, the estate tax owed will be calculated.

Of course, the federal estate tax threshold is quite high. In 2018, it will only apply to those who die with taxable estates worth $10,000,000 or more. However, it is important to keep in mind that Minnesota has a state estate tax as well. Estate taxes reduce the size of the decedent’s estate and, thus, reduce what will ultimately be inherited by the decedent’s heirs.

Therefore, people will want to make sure they understand how the estate tax will apply to them, as it may influence their estate planning strategies. There are tax exemptions that may be available to some people. Some people may choose to give gifts during their lifetimes, making sure their gifts aren’t so large as to be subject to the gift tax. Certain trusts may also bypass the estate tax. Devising an estate plan that reduces the amount of estate taxes owed can be complex, so those doing so may want to make sure they make informed decisions before executing any estate planning document to achieve this goal.

Source: IRS, “Estate Tax,” April 7, 2018