A key competent of estate planning is considering the taxes a person will pay both during their life and after their death. A person’s assets are everything that a person owns, including anything that is paid out upon their death such as life insurance. When a person dies, the total dollar amount of all their assets is calculated before being distributed according to their estate plan or through intestacy. This dollar amount is important because there are state and federal dollar amount “thresholds” after which, estate taxes are levied. Estate taxes are taxes on certain assets in an estate which are paid by the estate itself. Estate taxes are different than inheritance taxes, which are taxes on assets that are inherited by a person and paid by the person receiving the inheritance. There is no inheritance tax in Minnesota or federally, so it will not be the subject of this article.
The Minnesota estate tax threshold is $3 million. All assets owned by a person up to $3 million are not taxed when they pass down to the beneficiaries of their estate plan. However, any assets over $3 million are taxed and are referred to as the “taxable estate.” The Minnesota estate tax ranges from 13% to 16% according to the following chart, with the dollar amounts being total dollars over $3 million:
- $1 million to $7.1million: 13%
- $7.1 million to $8.1 million: 13.6%
- $8.1 million to $9.1 million: 14.4%
- $9.1 million to $10.1 million: 15.2%
- Above $10.1 million: 16%
Additionally, the Minnesota estate tax threshold is “non-portable” meaning that for a married couple, if one spouse dies, their threshold does not transfer to the surviving spouse giving them a $6 million threshold, but instead the surviving spouse is still subject to the $3 million threshold.
The Federal estate tax threshold is $12.92 million and is portable, meaning that a married couple (or the surviving spouse after one spouse dies) can avoid paying federal estate taxes on up to $25.84 million. The federal estate tax rate ranges from 18% to 40% and escalates much more quickly on assets above the threshold than the MN estate tax rate. For most people, the state estate tax is a much more pressing issue due to the $22.84 million difference in thresholds, but people with the assets to surpass the federal threshold could face a significant estate tax bill without proper planning.
What does all this mean? Consider this example:
- A family consisting of a married couple and 1 child (though the number of children would not matter here) has the following assets: each spouse has a $1 million life insurance policy on the other, they jointly own a $500,000 home, and a $300,000 cabin. Already they are only $200,000 away from the Minnesota estate tax threshold without accounting for any other assets like savings, retirement, 401k, or other accounts because of the non-portability of the MN estate threshold.
- In this example, if spouse A dies leaving everything to Spouse B, then Spouse B gets a $1 million life insurance payout, plus ownership of everything that the couple owned together. Soon after, Spouse B dies, leaving everything to their child. The $1 million life insurance from each parent, plus the value of the properties comes to $2.8million. If the parents had more than $200,000 in other assets, the estate of the surviving spouse would be over the tax threshold and anything over would be taxed according to the MN estate tax tiers.
Because of how surprisingly quickly estates can creep towards the MN estate tax threshold, it is important to be aware of some strategies to minimize your taxable estate such as utilizing a trust (or multiple trusts) to split up an estate or gifting assets prior to death.
Jacob Grow