Estate Planning- How Does the Estate Tax Work?

It’s been an interesting year to-date from a number of perspectives when considering estate planning in Minnesota.  The Minnesota legislature recently adjourned and the U.S. Congress continues to review laws that might greatly affect the estate planning process.  Listed below are a few of the important rules that have either survived another session, have been changed, or might still be amended in the near future.


As a cautionary point, I have greatly simplified some of the information stated below to give the reader a beginning point on understanding estate taxes.  To find a more precise expectation of your potential true value of your taxable estate, please seek competent professional guidance.  Many other factors come into play in calculating the estate tax discussed below that are not addressed in this article..


Minnesota Legislature


  1. Adjustment of the Estate Tax- The Minnesota legislature recently passed a bill to raise the estate tax exemption limit to $3 million.  Currently the limit is $1.8 million and is scheduled to increase to $2 million in 2018.  The exemption limit excludes estates from paying a tax until the value of an estate exceeds the limit.  For example, if a person dies with an estate valued at $1.5 million, no state estate tax would be due.   But if a person dies with an estate valued at $2.5 million, an estate tax would be due to the state of Minnesota.  So, when the Minnesota legislature passes a bill to raise the exemption limit, it’s a tax reduction for more people in Minnesota, generally.


An important note that should be understood, the Minnesota estate tax, when applicable after the $1.8 million is exceeded, ranges from 10-16% based on the size of the estate.  The top  rate applies at about $110 million.  So Prince’s estate, estimated at $225 million, will pay 16%, on most of his estate.  An estate valued at $5-10 million would pay closer to the 10% amount.


Statistics seem to indicate that less than 2% of estates in Minnesota actually pay an estate tax, indicating that this might be seen as a tax break for the rich.  Given that 98% of estates pay no estate tax, meaning the decedent held assets that were valued at less than $1.8 million, it seems a fair comment on the tax break.  Still, an estate worth $1.8 million is hardly a large estate either.  Estimates indicate that the Minnesota estate tax will generate about $161 million for the state coffers,   Total tax revenue from 2014 of all taxes, income, sales, estate, property, equate to about $21.5 billion, meaning that the estate tax is a pretty small portion of the overall revenue generated.


To raise the limit to $3 million would seem to only exempt another portion of the relatively wealthy.  But the response is that it is well understood that only about half the people in the state actually pay any income tax.  So the top 2% probably account for a significant portion of the tax collected by the state.   In some respects, why shouldn’t the top 2% (or some portion thereof) get the tax break?


The use of the estate tax is a philosophical debate that won’t be settled in this article, nor will the author take a side.  Instead, the attempt is simply to present as much practical information as possible to encourage the reader to consider a viewpoint that is balanced and fair, in whatever context the reader believes is just.


To bring you up-to-date on the legislature’s passing of the increased exemption, Governor Dayton vetoed the bill, so, the exemption amount remains at $1.8 million for 2017 and $2 million in 2018.  However, with the other bills that were vetoed by Gov. Dayton, it is likely that another special session may be in the near future and the estate tax subject may yet be adjusted from its current level.


Federal Estate Tax Limits


In a separate but related discussion the federal estate tax exemption limit is also currently being debated, but by the national Congress.  President Trump’s tax proposal intends to eliminate the federal estate tax entirely.


Currently, an individual who dies in 2017 and leaves an estate worth less than $5.49 million would not find any tax owed to the federal government.  For estate amounts greater than the exemption limit, the tax brackets ranges from 18 to 40%.    So the person’s estate valued at $5 million would pay no federal estate tax.  The estate valued at $10 million would pay a federal estate tax on the amount of $4.51 million (the amount exceeding the exemption limit of $5.49 million).    In either circumstance, a state of Minnesota estate tax would also apply.  (See the discussion above on the Minnesota estate tax.)


Again, the estate tax generates a very small portion of the overall revenues coming in to the federal treasury.  This means that most of our estates will not pay estate taxes under current rules.  The total eradication of the estate taxation seems to favor those with larger estates. But, as with the state tax situation,  most of the taxes paid are done so by those same people.  It’s the same philosophical argument that was addressed in the discussion with the state, although the numbers change.  The concepts remain nearly identical.


As an update, currently, President Trump’s tax bill is being debated in Congress.  It will likely be several months before any resolution will be completed and numerous revisions and amendments will probably occur before then.   We will continue to update you as events change.  But for now, it is enough to know some of these basics regarding the estate tax.


Application of Understanding Estate Taxes to Your Situation


How does this information affect your situation?  If estate taxes are a concern because you own property that might launch your estate into a taxable area, there are numerous planning techniques that can be employed to bring your estate’s total worth back into the exemption zone.  But for the most part, these techniques must be implemented before your death.  But if you own stock or real estate or some other asset that might escalate in value quickly, it is important to have done proper planning for these contingencies.


The final point in applying this information to your situation is to review your situation regularly and consistently.  If you have had any major changes in your life such as children becoming adults, grandchildren being born, new marriages or divorces, a spousal death, the death of an heir, or a dramatic change in value of any or all of your assets, it is important to review your estate situation. If your goals have changed since you last reviewed your situation, you should meet with a professional to address these changes.


If you are interested in discussing these ideas further, please contact our office to set an appointment.  We look forward to seeing you and hope all is well with you until then.


This article does not intend to provide any tax or legal advice but suggests that you contact an appropriate professional to consult with on your specific situation and whether these ideas meet with your goals and objectives.