If your net worth is near or above three million dollars, this quick note is for you.
Please consider talking to your estate planning attorney about your situation before the year is up.
Timing is everything, and the federal estate tax exclusion is set to revert to lower limits in 2026. The exclusion, or exemption amount, could drop even further depending on what our friends in Washington decide. The lower the exclusion amount, the greater the chance your estate could be subject to the dreaded ‘death tax.’
With soaring government budget deficits and currently low tax rates, higher future tax rates seem inevitable – particularly for those with sizable estates. It is also very possible that the opportunity for making large asset transfers will close (or be significantly reduced) with new legislation. If you do not have an estate planning attorney, please consider hiring one or at least brush up on estate tax rules yourself.
In Minnesota, three million dollars per person is the current estate tax exemption. Your heirs are liable for taxes on estates valued above that amount. Proper tax planning can help legally avoid that tax, however. There are strategies to help bypass the estate tax. Gifting assets to family or charity during your lifetime is a valuable tool. Other planning strategies include accelerating IRA distributions, Roth conversions, and many more.
The critical action step is to review your estate situation soon to determine if leveraging these tools is appropriate.
In my hierarchy of needs, family comes first. Other people and my personal causes come next. While taxes are not among my highest priorities, taking relatively easy steps today to remove the possibility of a significant future tax burden definitely makes sense. In many cases, minor paperwork shuffling and perhaps a small tax bill today pale in comparison to a major potential tax burden down the road.
We can also help you with these often uncomfortable conversations. Suppose you are considering gifting to your children to them save for college. We can ensure the money is invested responsibly so that those goals are achieved. Who knows – it’s possible there is enough left over to help them start investing for retirement. The proper context and communication with your family is important.
Don’t fret about the $15,000 gift tax limit – I can’t emphasize this enough. If you give more than $15,000 to someone in a year, all we have to do is file a form with the IRS stating how much you gave. In most cases, there will not be a tax liability for you or your family. Filing the form is easy when we are talking about saving huge dollars in the future. Again, the window for large gifts might be closing soon, so take advantage now.
One last point. In Minnesota, there is a three-year lookback for gifts included in your estate. This rule is to prevent last-ditch "deathbed gifts". It’s crucial you know all of the estate tax details and strategies to minimize your risk.
This is not legal advice, rather it is a request for you to map out your estate plan with an estate planning attorney if you think you might be at risk. There are many important considerations, including a step-up in cost basis at death in taxable accounts, new IRA distribution rules for children in peak-earning years, charitable contribution optimization strategies, and the list goes on.
Thanks for taking a look, and please consider taking steps to manage your risk.
Tom