The post below was originally posted on the blog for Liljenquist Law.
In estate planning, the topic of estate tax will often come up. See below for details on this tax.
Federal Estate Taxes
The IRS levies an estate tax on the assets of high net-worth individuals. This tax is imposed on estates larger than $13.61 million (as of 2024). This $13.61 million exemption is applicable to each person. Therefore, a married couple must be worth $27.22 million before they owe federal estate taxes.
Portability
Portability refers to the ability of a surviving spouse to receive the unused portion of the first spouses exemption. For example, if husband dies with assets of $10 million, he has an unused exemption of $3.61 million. With portability, the husband can transfer the unused portion of his exemption to his spouse so that when she dies she has a total exemption of $17.22 million.
State Estate Taxes
Several states, including Minnesota, charge a state-level estate tax. As of 2023, the Minnesota exemption for estate taxes is $3 million. However, one important difference between the Minnesota estate tax and the Federal estate tax is that Minnesota does not allow portability. So, if husband has assets of $1 million at death, meaning that $2 million of his Minnesota estate tax exemption is unused, he does not have the ability to transfer that unused amount to his spouse.
Gift Taxes
As you read this article, you may think that you want to avoid the estate tax by giving away your assets before your death. These tax systems have already thought of that and have things in place to prevent that. The gift tax is integrated with the estate tax. For example, if you were to give someone $1 million so you can reduce the size of your estate, your exclusion available at your death would be reduced from $13.61 million to $12.61 million to account for the $1 million that you gave away. The recipient of the gift does not pay taxes on the amount received, but your exclusion available to you upon your death is reduced.
Oftentimes I will get asked about the exclusion from gift tax and people think that this exclusion is the amount you can give before the recipient pays tax. This is not correct. The exclusion amount is $18,000 per person in 2024. This simply means that you can give someone $18,000 and you are not required to reduce your exclusion or file a gift tax return. If your estate is unlikely to ever reach the exemption level, you can still give more than this $18,000 amount and as long as you still have enough of an exclusion to cover the size of your estate, this is not a taxable transaction.
Planning Opportunities
If you’re fortunate enough to have earned the assets to be liable for the estate tax, you do have some strategies available to you which I will discuss in more detail in future blog posts. Some of these strategies are:
- Periodic Gifting
- Family Limited Partnerships
- QTIP Trusts
- Irrevocable Life Insurance Trusts
- Self-Cancelling Installment Notes
Disclaimer: This post is a general overview of this topic and is not a substitute for a formal opinion from an attorney or tax accountant. This article is not sufficient guidance to avoid tax-related penalties. Should you need a formal opinion, Liljenquist Law is willing to provide such an opinion which would be the subject of a separate engagement letter.