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Estate planning principles

Quick facts

  • Estate planning is the process of controlling your assets during your life as well as at your death.
  • Your estate plan should focus on three objectives:
    • To ensure that your assets will provide you the necessary income and resources to live on.
    • To ensure that upon your death, your assets go to the people and/or organizations you intended.
    • To minimize your estate tax, fees and any associated court costs.

Estate planning encompasses many components. Your will or trust must be adapted or changed to meet your goals. Property/business ownership and transition must be examined and tailored to your plan. Life insurance issues must be reviewed. Family income requirements must be matched with projected income. Other issues include treatment of heirs, power-of-attorney, health care directive with HIPPA-authorized individuals, disability planning, tax planning, personal representative or trustee selection, estate administration cost savings, long-term health care issues, etc.

Estate planning is an ongoing process. As laws change and as life situations change, reviewing your estate plan is crucial.

Who needs an estate plan?

Many people feel that estate planning is for the elderly or the wealthy or is something they do not want to discuss because it focuses on death. No one knows what the future holds and so it is important that everyone have a plan.

For the young married couple with children under 18 years old, it is crucial to designate a guardian and conservator for those children. If both parents are killed and no provision for guardianship or conservatorship has been made, the courts will appoint the guardian and conservator. For the person who thinks they do not have enough money to worry about estate planning but have lots of life insurance, their death can create an estate tax problem. A person who is injured in an accident and suddenly is not capable of making their own medical and financial decisions, can name an individual who will make those decisions on their behalf. Bottom line is estate planning is important for everyone.
 

Property ownership

Property in Minnesota can be held in several ways. The method chosen depends upon the individual’s estate plan and how they wish their property to transfer to their heirs. Following is a list and description of the ways property can be held.

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Probate/non-probate assets

The probate process is established to prove that the decedent’s will is valid, to pay any debts held by the estate, to establish clear title to any assets, and to pay any necessary income or estate taxes. Solely owned property and property owned as tenants-in-common are subject to the probate process. Joint tenancy property, life insurance not owned by the decedent going to beneficiaries other than the estate, POD-TOD-TODD and revocable living trust property are not subject to the probate process. 

The probate process can be time consuming and costly as well as making the decedent’s estate information public. How property is held will dictate if the probate process applies or not.

Note: a will is the equivalent of a letter to the court system and therefore triggers the probate process. In Minnesota this occurs if you own $50,000 or more of assets or any real property. Having a will does not enable you to bypass the probate process.

Establishing a revocable living trust (RLT) does allow you to by-pass the probate process. If one of your goals is to avoid the probate process, you need to construct your estate plan utilizing a RLT.

Federal gross estate

Estate taxes will be assessed on any estate that exceeds the applicable exclusion exemption. This amount varies by year. The current federal amounts are listed in the following table. Note: state of Minnesota amounts are different than the federal amounts so plan accordingly. 

With passage of the American Taxpayer Relief Act of 2013, exclusion amounts, credits, tax rates and portability were established for future years. 

 

Federal estate tax exclusion

Year Exclusion Credit
2013 $5,250,000 $2,045,800
2014 $5,340,000 $2,081,800
2015 $5,430,000 $2,117,800
2016 $5,450,000 $2,125,800
2017 $5,490,000 $2,141,800

Gift tax exclusion

Year Exclusion Credit
2013 $5,250,000 $2,045,800
2014 $5,340,000 $2,081,800
2015 $5,430,000 $2,117,800
2016 $5,450,000 $2,125,800
2017 $5,490,000 $2,141,800

NOTE: Each person has one lifetime federal exclusion amount in any given year. You decide how you want to spend the exclusion amount. That is, you can use it to offset estate tax or gift tax. You do not have two separate exclusion amounts. Assets passing through one’s estate in 2013 and beyond will receive a step up in basis.

Also included in the federal tax law changes is a “portability” provision. It states that for 2013 and beyond, any unused portion of the decedent’s estate exclusion can be used by the decedent’s surviving spouse. This unused portion can be added to the surviving spouse’s exclusion amount. To qualify, an estate tax return for the decedent must be filed even though no federal estate tax is due. Check with your attorney.

An individual’s Federal Gross Estate includes all property or share in any property held at death. It will include all stocks, bonds, cash, land, machinery, livestock, life insurance policy death benefit of any life insurance policy the person owns regardless of who pays the premium or who is the beneficiary, as well as all other assets. The assets are valued at fair market value (FMV) as of the date of death or as of six months after the date of death if it is more advantageous for tax reasons.

Deductions from federal gross estate

Certain deductions are allowed against the decedent’s gross estate. Those can include debts owed by the decedent, funeral costs, administrative costs, last medical costs, a marital deduction, and charitable contributions, etc.

1. Marital deduction

A married person can pass any amount of estate assets to their spouse, free of any estate tax (exception: if spouse is a non-US citizen, limits apply so see your attorney). It is a deduction from the gross estate and is one of the biggest federal estate tax saving devices. The marital deduction is not available to the estates of widows, widowers or other unmarried persons. In a carefully constructed estate plan for a married couple, little or no estate tax is payable upon the first death. Each individual can pass through their estate an amount up to the Applicable Exclusion Exemption to other heirs, with the balance going to their surviving spouse using the marital deduction.

2. Charitable deductions 

The value of any property passing to qualified charities is deductible from the gross estate.

Federal estate and gift tax rates

For taxable estates over the exclusion amount the applicable tax rate is as follows:

  • 2011 - 35 percent
  • 2012 - 35 percent
  • 2013 and beyond - 40 percent maximum rate

Federal gift tax rates are the same as the federal estate tax rates. The rates are now permanent unless changed by Congress.

Minnesota estate tax

The 2017 MN Legislature changed the individual per person MN estate tax exclusion amounts. The exclusion amount represents the dollar amount of estate value you can pass to your heirs without any MN estate tax. The rates are effective for estates of decedents dying after December 31, 2016.
Applicable rates are as follows:

  • 2017 - $2,100,000 per person
  • 2018 - $2,400,000 per person
  • 2019 - $2,700,000 per person
  • 2020 - $3,000,000 per person thereafter

Note: This estate tax exclusion amount subtraction cannot reduce your Minnesota estate to less than zero.

Corresponding tax rates also changed and are categorized into two categories: decedents dying in 2017 and decedents dying in 2018 and thereafter.

For estates of decedents dying in 2017

Tax rate is 12 percent for estate not over $5.1 million. The rate increases and for estates $10.1 million or over the rate is a maximum of 16%.

For estates of decedents dying in 2018 and thereafter

Tax rate is 13 percent for estate not over $7.1 million. The rate increases and for estates over $10.1 million or over the rate is a maximum of 16%.

The new MN estate tax rates take effect for decedents dying after December 31, 2016.

In addition, the law change includes what is referred to as a “Q” election. For farm families who qualify for the MN Qualified Farm Business Property Exclusion (described in next section), the “Q” election will increase the previously mentioned personal MN estate tax exclusion. Farm families who meet all the qualifications for the MN qualified small business property qualified farm property exclusion will receive both exclusions but will be limited to a total maximum MN estate tax exclusion of $5,000,000 per person.

MN qualified small business property and qualified farm business property exclusion

On July 20, 2011 the Governor of Minnesota signed into law the Minnesota Qualified Small Business Property and Qualified Farm Property Exclusion.
The new legislation allows for a MN estate exclusion for qualified small business and farm property. The property must meet all the qualifications and cannot exceed the exclusion amounts mentioned in the previous paragraph. This exclusion is in addition to the MN personal estate tax exclusion outlined above.

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Additional estate tax rules

MN estate tax law allows for the taxation of a non- resident’s estate where the non-resident has ownership interest in MN property held in a pass- through entity that owns real estate or tangible personal property (machinery, livestock, crop inventory, etc.).

Pass-through entities are defined as S corporations, partnerships, single-member LLCs and trusts. This does not include publically traded entities.

The new law is effective for the estates of decedents dying after December 31, 2012.

Minnesota gift tax

Effective March 21, 2014 the MN gift tax law was repealed to the effective date of July 1, 2013.

The only provision in the gift tax law that was kept intact was the 3 year add-back of gifted assets. The value of gifts in excess of the federal annual gift exclusion amount of $14,000 (recorded on the IRS 709 form) made within 3 years of the decedent’s death will be added back into the decedent’s estate to determine if MN estate tax is due.

Special use valuation (SUV)

Closely held real property (farm land or small business property) can be valued not at FMV, but at a Special Use Valuation (SUV) if the estate meets several complex qualifications. SUV usually results in a lower valuation than FMV and may possibly reduce an estate tax obligation.
SUV is calculated using the 5 year average land rental rate for comparable land minus the real estate taxes paid, divided by the AgriBank FCBS 5 year average annual effective interest rate for the state where the decedent lived (rate changes periodically so see your attorney or accountant).

Example: Land is appraised at $5,200 (FMV) per acre with real estate taxes of $450 per acre, average cash rent of $200 per acre, and the FCB average effective interest rate of 4.87 percent (MN).

The SUV calculation is as follows:

Using the SUV on this land could save estate taxes on the value of $2,017/acre (Note: there are limits on the total dollar amount of reduction-see your attorney or accountant).

To find the Farm Credit System interest rates go online and search by “Farm Credit Bank Interest Rates”. MN is included in the AgriBank FCB System list.

Note:

  1. SUV should not be used on estates that are less than the Applicable Exclusion Exemption for the year in question. Doing so may result in a lower than necessary tax basis as well as unwanted rental and sale restrictions.
  2. The business must be in compliance with the SUV rules for 10 years or you lose the SUV designation. The recipient must farm the land for 10 years - that means materially participating by farming the land or farming on shares and having financial risk. The person cannot rent the land to someone else for cash - that violates the SUV conditions.
  3. To qualify the decedent’s estate must have included at least 50 percent ag assets and at least 25 percent farm land.
  4. With people living longer, this is usually not a viable alternative.
     

Power of attorney

An individual (grantor) can grant another individual power of attorney (POA) in the event they are incapable of making decisions due to disability or incapacity. The individual or individuals can manage your assets on your behalf. 

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Health

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Caution: This publication is offered as educational information. It does not offer legal advice. If you have questions on this information, contact an attorney.

Gary Hachfeld, former Extension educator; David Bau, Extension educator and C. Robert Holcomb, Extension educator

Reviewed in 2017

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