By Thomas M. Fafinski
As we approach the end of another year, our minds seem to naturally wander to estate, asset protection and income tax planning strategies for you.
The Federal Estate Tax—The Sky’s The Limit, BUT NOT FOR MINNESOTA ESTATE TAXES
The current federal estate tax only affects couples with combined assets of around $23,000,000.00 but, at the Minnesota level, planning (at some level) is required if net worth plus life insurance proceeds are above $3,000,000. Only about 1,900 estate tax returns resulted in a payment of a tax to the IRS for federal estate taxes last year, or about 0.01%, but that is not the case for Minnesota Estate Taxes.
To Give Or Not To Give, That Is The Question
The federal estate tax story though is set to conclude on December 31, 2025 and the January 1, 2026 exemption will revert to $5,000,000 with inflation adjustment—a significant drop. Certain Democratic nominees, if elected, will likely look to lower the estate tax before the sunset provision. As a result, you may want to consider engaging in estate planning on the theory of “use it or lose it” sometime in the next six months. It may be beneficial for you to transfer highly appreciating assets out of your estate. You are passing your wealth before, and in anticipation of, the federal exemption changes. For example, it may be beneficial to get highly appreciating assets out of your estate now if you think your estate may some day be subject to taxation. Not only would you reduce your current exposure to estate taxes but you will be removing all of that asset’s growth from your estate as well.
What about the rest of us, though? Does that mean we do not need to think about the tax consequences of our estate planning? To the contrary, now is the time for income tax planning too. Another consideration is to give low basis assets to older members of your family and then redesigned their estate plan so that you inherit those low basis assets at a stepped-up basis and free of income taxes or capital gains the gain between the time of the gift in the time of inheritance. You see, basis is transferred to heirs at the fair market value of the asset at or within six months of the testator’s death. This phenomenon is referred to as a step up in basis and the income taxes on the gain between the testator’s basis (what they pay for it) and the fair market value at the time of testator’s death is eliminated.
As an example, we recently counseled a client who purchased the family farm a contract for deed many years ago to default on that contract so that he would be in a position to inherit the farm upon the passing of his parents. This strategy, have a projected savings of in excess of $350,000 of income taxes, which was the income taxes on the gain if you were to sell the property today.
As you can see from the above discussion, the decision as to WHEN to give is critical and we here at Virtus willing to assist you in planning for that gift.