Why Does Estate Planning Matter?

Why Does Estate Planning Matter? Presented by: Bradley J. Frank Barnes & Thornburg LLP (612) 367-8720 bradley.frank@btlaw.com

What is Estate Planning? • Accumulation • Wealth Preservation • Distribution of Assets in a way that is • Tax Efficient • Cost Effective • In line with your goals

Everyone has an estate plan • Wills • Trusts • The law of the state of residency • Asset Titling • Is your estate plan minimizing taxes?

The Problem: Estate and Gift Taxes • The federal government taxes transfers of property during life (gift taxes) and upon death (estate taxes). The state of Minnesota taxes transfers of property upon death. The tax rates are as follows:

Federal Exemptions: • The federal government allows each person to transfer some property without paying gift or estate taxes:

Recent History of the Federal Exemption:

Minnesota Exemptions: • Minnesota allows each person to transfer some property without paying gift or estate taxes:

Do I pay tax on everything? • What Asset Transfers Are Taxable? • Assets held in your name when transferred by gift or as part of your estate are taxed, including, among other items: • Homes • Businesses • Retirement Accounts • Investment Accounts • Property Held in Joint Tenancy • Insurance Proceeds Paid • Cars, Boats and Other Vehicles • Personal Property Including Jewelry, Antiques, and Art • Assets Inherited or Received by Gift Outside of a Trust

Impact of Minnesota Estate Tax on Married Clients with a Combined Estate of $2,400,000: • A typical married person’s goals for an estate plan are to provide for his or her spouse during his or her life and to provide for his or her children after the death of the surviving spouse. Assuming that all children were the children of both spouses, this is what a plan would look like if you did not have an estate plan or one that did not consider estate taxes: Husband’s Estate: $1,200,000 Wife’s Estate: $1,200,000 + $1,200,000 inherited from Husband = $2,400,000 Husband’s Death: No Tax Is Due Since He Transfers Property To His Spouse (Unlimited Marital Deduction).

Impact of Minnesota Estate Tax on Married Clients with a Combined Estate of $2,000,000: • On the death of the surviving spouse, the children would have to pay an estate tax to the state of Minnesota equal to $99,600: Wife’s Estate: $2,400,000 Minnesota Estate Tax Calculation: $2,400,000 Gross Estate -$1,200,000 Exemption $1,200,000 Taxable Estate Tax Due: $120,000 Children Receive: $2,280,000

How to Save Your Children $120,000: If the Husband and Wife in our example had an estate plan that considered estate taxes, they could have accomplished the same goals and saved their children $120,000. Here is what their estate plan should have looked like: Family/Credit Shelter Trust: • Trustees pay income and principal to spouse (and children) as needed. • Upon surviving spouse’s death, assets pass to children outside of surviving spouse’s estate. Husband’s Estate: $1,200,000 Husband’s Death: No tax is due since husband can transfer $1,200,000 to nonspouse without paying Minnesota estate tax.

The Result of a Plan that Considers Estate Taxes: • On Wife’s subsequent death, only her estate will be subject to estate taxes since the family trust is not in “her name.” Since it is $1,000,000, both the family trust and Wife’s estate will pass estate-tax-free to children. Thus, the children will receive all $2,400,000 of the husband and wife’s combined estate and save $120,000 in estate taxes. • Family Trust: • $1,200,000 • Upon surviving spouse’s death, assets pass to children outside of surviving spouse’s estate, free of estate taxes Wife’s Estate: $1,,00,000 Minnesota Estate Tax Calculation: $1,200,000 Gross Estate -$1,200,000 Exemption $ 0 Taxable Estate Tax Due: $0 Children Receive: $2,400,000

How you Title Assets Matters Each person can transfer $1,000,000 free of Minnesota estate taxes, but you can only transfer assets that are held in your name. If one spouse owns too many assets and the other spouse owns too few, you can incur unnecessary estate taxes. Consider the following example: Wife’s Estate $500,000 Husband’s Estate $1,500,000 Husband Dies Second: $64,400 Estate Tax Wife Dies First: No Estate Tax Family Trust $500,000 Children Receive: $1,935,600

Keep Estate Balanced In the previous example, the children paid an additional $64,400 in Minnesota estate taxes because the wife died first and could not take full advantage of her ability to transfer assets tax free since she had less than $1,000,000 in her name. If the husband and wife kept roughly the same value of assets in each spouse’s name, the result would have been different: Wife’s Estate $1,000,000 Husband’s Estate $1,000,000 Wife Dies First: No Estate Tax Husband Dies Second: No Estate Tax Family Trust $1,000,000 Children Receive: $2,000,000

Other Documents • Health Care Directive • Power of Attorney • Personal Property Memorandum • Naming of Guardian • Beneficiary Designations

Why Does Estate Planning Matter?