Forbes recently published an article entitled “Where Not to Die in 2013”. Not surprisingly, Minnesota made the list. The list is based on those states that have a separate estate and/or inheritance tax.
Now that the federal estate tax only applies to those who die with more than $5.25 million in assets (as of 2013 and indexed for inflation), many people mistakenly believe they no longer need to worry about the estate tax. However, Minnesota is one of only 21 states that has a separate estate or inheritance tax, and it applies to much smaller estates.
In Minnesota, estates over $1 million dollars in total assets are subject to the estate tax. For many families with life insurance in place to take care of their children in the event of their death, their life insurance alone causes them to have a taxable estate – without even considering the value of their home, 401(k)s, IRAs and other assets. The estate tax rate varies from approximately 5%-16% depending on the size of your estate. However, based on how it is calculated, it can be as much as 41%. In general, approximately $100,000 is due in estate tax for each $1 million you have over and above $1 million dollars.
However, if you plan ahead, you can minimize or possibly even avoid the state death tax. If you are married, the use of a trust by you and your spouse would allow you to increase the amount of your estate that passes estate tax free to your children at your passing from $1 million to $2 million dollars; saving approximately $100,000 in death taxes. If you are single, or have an estate in excess of $2 million dollars, other planning options are available as well that could also reduce or minimize your death taxes and thereby increase the amount of your estate available to take care of your children at your passing.
The trend in other states that impose an inheritance or estate tax is to either raise the exemption amount so that it only applies to larger estates or to eliminate it entirely. However, there is no such legislation currently pending here. This means that in order to minimize death taxes, you’ll want to make sure that you have your estate planning taken care of.
This reminds me of the two cardinal rules of estate planning: Rule number one; don’t die. Rule number two; if you can’t follow rule number one, then plan ahead.
If you need help planning your estate, give us a call today at 763-420-5087.