All estates face compliance with Internal Revenue Service estate tax regulations. Only 18 states, including Minnesota, still impose estate or inheritance taxes. Although the Minnesota estate tax rate was weakened in 2017, taxes could still take a large chunk out of high-net-worth estates. However, there are strategies for reducing your estate tax burden.
The IRS taxes estates with a value that exceed the applicable exemption limit. Though the limit is indexed to inflation and may change from year to year, the current exemption limit is a little more than $5 million. If an estate is worth more than the limit, taxes may be due.
Minnesota’s estate tax exemption also may change, but the 2017 limit is set at $1.8 million.
Methods for Reducing Taxes
People with higher-value estates may consider using some of the following strategies to reduce their estate’s tax burden:
- Gifts. Gifts to family members reduce the value of your estate, perhaps even to a level below the exemption limits. There are restrictions, however, including the total amounts that can be gifted each year. Also, transfers within three years of a party’s death may be included in the estate for purposes of calculating estate tax.
- Trusts. Moving assets to certain types of trusts may lower taxes owed by an estate or its heirs. Ask the advice of an expert before choosing, setting up, and funding a trust.
- Charitable Donations. Making gifts to charities through a trust is another way to reduce the value of an estate. To replace the value of the donations, individuals may buy life insurance policies and then name heirs as beneficiaries.
- Family Limited Partnership. Family-owned business owners may consider setting up family limited partnership or other business entities. The owner still controls the business as general partner with family members or heirs serving as limited partners.
The federal government is currently considering tax reform and changes also may be proposed at the state level. The attorneys at Virtus Law know how to coordinate a defense that legally protects your estate from paying more tax than necessary. To set up a consultation, call us at 612.888.1000. Our offices are in Minneapolis, Edina, Mendota Heights, and Red Wing, but we serve clients throughout Minnesota.