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How strategic gifts can impact your estate tax risks

On Behalf of | Aug 18, 2022 | Estate Planning |

The federal government and the state of Minnesota assess estate taxes in some situations. When people die with millions of dollars in personal property, their estate will likely have to pay taxes based on the overall value of the estate.

Exactly how much someone owes in tax will depend and how much their estate exceeds the exemption threshold. The state limit for the value of an estate is currently $3 million, while the federal estate tax exemption threshold is $12,060,000. People often use a combination of strategic gifts and estate trusts to minimize their tax liabilities.

If you intend to use gifts to reduce the value of your estate, those gifts could potentially affect whether or not your estate will have to pay estate taxes.

Previous gifts can increase your estate’s value

Each year, an individual testator can gift family members and friends up to $16,000 each without any tax implications for the recipients or them as the gift giver. In theory, those annual gifts will reduce how much property is in your estate when you die and potentially protect you from estate tax obligations.

However, the gifts that you have made in recent years actually count toward the total value of your estate. The last three years’ worth of gifts can all increase the total value of your estate. You need to consider that when deciding how much to put in a trust or how many years of gifts you want to integrate into your estate plan.

When estate planning, it is better to err on the side of caution

The laws pertaining to estate taxes and gift taxes are in constant flux. If you miscalculate, you could pay up to 40% in taxes to the federal government and another 16% to the state of Minnesota, reducing what you leave for those you love by more than half.

Rather than planning for a razor-thin margin, it may be better to reduce your estate by more than the minimum so that even if the federal exemption drops or the state adjusts its estate tax rules, your estate won’t require massive retooling. Increasing the buffer between your estate’s value and the exemption threshold will reduce the likelihood that dying earlier than you expect will trigger estate taxes because of your strategic gifts.

Learning more about how to address tax liabilities in your estate plan will help you pass on as much as possible to the next generation.