2017 Estate Taxes
I. Federal Gift & Estate Tax Considerations:
In General - The federal gift tax is part of what’s called the “unified” federal gift and estate tax. Gift tax applies to lifetime gifts; the estate tax applies to assets left at death. The idea is that whether you give assets away while you’re alive, or leave them at your death, they are taxed the same way, at the same rate. (If there were no gift tax, then anyone could completely avoid the estate tax by giving everything away just before death.)
Under current law, each of us can give away or leave up to $5.45 million without owing federal gift and estate tax. So, for example, if during your life you give your children your house, worth $1 million, plus another $4 million in stocks and bonds, no federal gift tax will be due. The exemption amount is indexed for inflation and goes up each year.
In addition to the $5.45 million exemption, many other gifts are not subject to the gift tax—for example, gifts to a spouse. So if you give your $1 million house and $4 million of other property to your children, and another $7 million to your spouse, you still won’t owe any gift tax.
A. Federal Gift Taxes - If you make a taxable gift, then you will need to file a gift tax return (IRS Form 709). A gift is any transfer for which you receive nothing, or less than “fair market value,” in return. For example, if you hand someone a check for $1,000.00, that is a gift. And if your house would fetch $100,000.00 on the open market but you sell it to your son for $10,000.00, you’ve made a $90,000.00 gift to him. What is a taxable gift? Lots of ordinary gifts are NOT taxable, including:
- Gifts that are not more than the annual exclusion amount, which is currently $14,000.00 per recipient (you can give this amount to any number of different recipients; you and your spouse can give $28,000.00 per year per recipient)
- Tuition, if you pay it directly to the school (other expenses related to education, such as books, supplies and living expenses, do not qualify for this exemption)
- Medical expenses and health insurance you pay directly for another
- Gifts to your spouse (if your spouse is a U.S. citizen)
- Gifts to a political organization for its use
- Gifts to certain charities
B. Federal Estate Taxes - Generally speaking, a decedent’s estate is subject to federal estate taxes once the value of
- the assets that the decedent held at death (including life insurance proceeds on their life and retirement plan assets); and
- the value of the taxable gifts made during their life;
exceeds $5,450,000.00. This amount is known as the federal estate tax exemption (the “Federal Exemption”). The Federal Exemption is scheduled to increase in future years as a result of indexing for inflation.
Furthermore, there is “portability” relative to any unused Federal Exemption. Portability of the Federal Exemption between married couples means that if the first spouse dies and the value of the estate does not require the use of all of the deceased spouse's Federal Exemption, then the amount of the Federal Exemption that was not used for the deceased spouse's estate may be transferred to the surviving spouse's Federal Exemption so that he or she can use the deceased spouse's unused Federal Exemption plus his or her own Federal Exemption when the surviving spouse later dies.
II. Minnesota Gift, Estate, & Inheritance Tax Considerations:
Minnesota has an estate tax, but does not have either a gift tax or an inheritance tax.
Minnesota’s estate tax exemption, per individual, is currently scheduled to be as follows:
2017 - $2,100,000.00
2018 - $2,400,000.00
2019 - $2,700,000.00
2020 (and later) - $3,000,000.00
There is no portability for any portion of the Minnesota estate tax exemption that remains unused at the death of the first spouse to die.
Minnesota also has a $5,000,000.00 exemption for “Qualified Small Businesses Property”. This exemption is in addition to the normal estate tax exemption shown above. The election is taken on Minnesota Form M706Q, and is defined in Minnesota Statute Section 291.03, subdivision 9 as follows:
Property satisfying all of the following requirements is qualified small business property:
(1) The value of the property was included in the federal adjusted taxable estate.
(2) The property consists of the assets of a trade or business or shares of stock or other ownership interests in a corporation or other entity engaged in a trade or business. Shares of stock in a corporation or an ownership interest in another type of entity do not qualify under this subdivision if the shares or ownership interests are traded on a public stock exchange at any time during the three-year period ending on the decedent's date of death. For purposes of this subdivision, an ownership interest includes the interest the decedent is deemed to own under sections 2036, 2037, and 2038 of the Internal Revenue Code.
(3) During the taxable year that ended before the decedent's death, the trade or business must not have been a passive activity within the meaning of section 469(c) of the Internal Revenue Code, and the decedent or the decedent's spouse must have materially participated in the trade or business within the meaning of section 469(h) of the Internal Revenue Code, excluding section 469(h)(3) of the Internal Revenue Code and any other provision provided by United States Treasury Department regulation that substitutes material participation in prior taxable years for material participation in the taxable year that ended before the decedent's death.
(4) The gross annual sales of the trade or business were $10,000,000 or less for the last taxable year that ended before the date of the death of the decedent.
(5) The property does not consist of cash, cash equivalents, publicly traded securities, or assets not used in the operation of the trade or business. For property consisting of shares of stock or other ownership interests in an entity, the value of cash, cash equivalents, publicly traded securities, or assets not used in the operation of the trade or business held by the corporation or other entity must be deducted from the value of the property qualifying under this subdivision in proportion to the decedent's share of ownership of the entity on the date of death.
(6) The decedent continuously owned the property, including property the decedent is deemed to own under sections 2036, 2037, and 2038 of the Internal Revenue Code, for the three-year period ending on the date of death of the decedent. In the case of a sole proprietor, if the property replaced similar property within the three-year period, the replacement property will be treated as having been owned for the three-year period ending on the date of death of the decedent.
(7) For three years following the date of death of the decedent, the trade or business is not a passive activity within the meaning of section 469(c) of the Internal Revenue Code, and a family member materially participates in the operation of the trade or business within the meaning of section 469(h) of the Internal Revenue Code, excluding section 469(h)(3) of the Internal Revenue Code and any other provision provided by United States Treasury Department regulation that substitutes material participation in prior taxable years for material participation in the three years following the date of death of the decedent.
(8) The estate and the qualified heir elect to treat the property as qualified small business property and agree, in the form prescribed by the commissioner, to pay the recapture tax under subdivision 11, if applicable.
Contact us if you have any questions about estate taxes, estate planning, or to discuss your specific circumstance.