Estate tax is both a federal and a Minnesota state tax on the transfer of property upon death. It applies to the net value of the deceased person's estate (assets minus liabilities) that exceeds a certain threshold. As of 2024, the federal estate tax exemption amount is $12.92 million per individual. This means that if an individual's estate is valued below this amount, it will not be subject to federal estate tax.

In Minnesota, the estate tax exemption is significantly lower. For 2024, the Minnesota estate tax exemption is $3 million. Estates exceeding this amount may be subject to state-level estate taxes, which vary in rates depending on the value of the estate. Minnesota utilizes something called the augmented estate to determine when estate taxes should be paid. That is important because that means insurances, retirement assets and other things that don’t pass through probate, can still be taxed.​

1. Portability of Exemption: Federally, if a deceased spouse does not use up their entire exemption, the surviving spouse can elect to use the remaining exemption, potentially doubling the amount that can be shielded from estate taxes. However, the same is

2. State Estate Taxes: Not all states have an estate tax. Some states have inheritance taxes, which differ in that they tax the beneficiaries rather than the estate itself.

3. Step-Up in Basis: Beneficiaries often receive a "step-up" in the cost basis of inherited property, which can significantly reduce capital gains taxes if the property is sold.

1. Trust-Based Planning:

- Disclaimers and Clayton Election: A surviving spouse can disclaim (refuse to inherit) a portion of the estate, allowing it to pass into a bypass trust without being taxed. The Clayton election offers flexibility by allowing the surviving spouse to decide the trust's allocation after the decedent's death, which can optimize tax savings.
- Pitfalls: The disclaimer must be executed within nine months of the decedent’s death, and the disclaiming party cannot benefit from the disclaimed assets, which can be a complicated and time-sensitive process.

2. Lifetime Gifting:

- Annual Exclusion: An individual can reduce their estate by giving money away year over year to people of their choosing. Individuals can gift up to $18,000 per recipient annually without incurring gift tax. If you’re married, that could look like giving $36,000 per year (one - $18,000 gift per spouse) to each of your children, grandchildren or whomever, to lower the overall amount of the estate.
- Lifetime Exemption: Larger gifts can utilize the lifetime gift tax exemption, which is currently unified with the estate tax exemption ($12.92 million in 2024).
- Pitfalls: Exceeding the annual or lifetime exclusions can trigger gift taxes. Additionally, gifted assets do not receive a step-up in basis, which could result in higher capital gains taxes for the recipient.

3. Charitable Giving:

- During Life: Charitable donations given during an individual's life can reduce the size of the taxable estate and even provide income tax deductions. Bequests at death to qualified charities are deductible from the estate as well, thus reducing the taxable amount.
- Pitfalls: It's important to ensure that charitable gifts are properly documented and that the charities qualify under IRS rules. Charitable gifts should also align with the donor’s overall estate plan to avoid unintended consequences.

Tax planning is inherently complex and requires a deep understanding of current laws and regulations. Missteps in executing disclaimers, lifetime gifting, or charitable giving can lead to significant tax liabilities or unintended consequences. Working with estate planning attorneys, tax advisors, insurance professionals and financial planners is crucial to navigating these complexities and ensuring your estate planning goals are met efficiently.

At Legacy Estate Planning, we're here to help you craft a robust estate plan that minimizes taxes and maximizes the value passed on to your heirs. Contact us today to learn more about how we can assist you in building a lasting legacy.

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This article aims to provide an overview of estate tax and planning strategies. This is not intended to be direct legal advisor forming a lawyer client relationship with you. For personalized advice, don’t hesitate to make an appointment with the firm at: https://calendly.com/legacyestate/discovery-call.
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