Thrifty Thinking: Gift and Estate Taxes

I recently got the following information in my email box:

As predicted by McManus & Associates Founding Principal John O. McManus earlier this year, another state – Minnesota – has decided to follow Connecticut’s lead and, as of July 1, 2013, impose a decoupled state gift tax (and more states could soon follow suit, even making it retroactive). Minnesota continues to have a $1 million state estate tax exemption, but the new tax law expands the estate tax to reach more assets than in the past for decedents who die after Dec. 31, 2012. The estate tax is even imposed on assets located in Minnesota that are owned by a non-resident (even if the property is in a LLC or RLT). If a tax is imposed, a credit is available to the extent that the decedent paid estate taxes on the asset in their home state. Also, ALL gifts made within 3 years of death are clawed back into the estate for Minnesota estate tax purposes.

To be honest, I really had no idea what most of that meant, so I followed up to find out more.

What are gift and estate taxes? Estate taxes are taxes paid on assets, due upon death. All assets held in the decedent's name alone, or the fractional portion of ownership for anything owned in common with another, must be accounted for with a date of death value. If the amount of assets is in excess of $5.25 MM, there will be federal tax due at a rate of 40%. That said, there is often a much lower threshold for state estate taxes. In NJ, the exemption amount is only $625K. NY is $1MM. Gift taxes are levied on gifts made during one's lifetime to loved ones. The exemption amount at the federal level for gifts is equal to the estate tax exemption. Both are also now "permanently" indexed for inflation (technically Congress could change the law again). There are now two states that have a lower exemption amount for gifts made during lifetime: CT and MN. MN is the newest law to be passed. It will be effective July 1, 2013.

 

What is a "decoupled state gift tax?" In a decoupled state, the state enacts a gift tax that is unique from the Federal tax rate and exemption level. MN is decoupling it's gift tax from the $5.25MM federal exemption, joining CT as the only other gift tax decoupled state. Many states have no gift tax exemption limit or match the federal level.

 

What does it mean that gifts within 3 years of death are "clawed back into the estate?" Generally after three years any gifts made during life cannot be audited by the IRS having exceeded the statute of limitations. Any gifts made within three years of a person's death in MN, after July 1 of this year, will not be treated as a gift, but instead will be included in the decedent's estate and will be subject to estate tax.

 

What are the implications for people dealing with settling an estate after a relative's death? If someone has recently gifted assets into trust for the benefit of his or her spouse or children and passes away after July 1, 2013, but before the three year window has closed, those assets could be forced back into the taxable estate for the decedent.

If you find yourself in a situation with estate or gift taxes, I encourage you to find a reputable professional to help you navigate the complicated waters!