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The Wealth & Wisdom Blog

Information on Estate Planning, Estate and Trust Administration and Unique Asset Planning

“Hey honey, you can’t use the microwave now– I have to start a zoom call.”

Throughout much of the stay-at-home period in 2020 and into early 2021, my wife and I “suffered” (in a very first-world sense of the word, of course) from a few technology-related issues in our home.  Until about six months ago, using our microwave for more than approximately 30 seconds effectively disabled all our wired devices.  I learned that I could not conduct a zoom call at the same time as my wife was using the microwave to prepare breakfast for our kids.  While I made some very feeble attempts to rectify the situation myself, I am glad to report that after hiring a home technology expert, we are no longer forced to choose between oatmeal for breakfast or an early morning zoom meeting.  I never would have known how to fix our home technology on my own (“I didn’t know what I didn’t know”) and we greatly benefitted from a professional’s insights.

Just as “I don’t know what I don’t know” when it comes to technology matters, most of our clients approach us with the same “I don’t know what I don’t know” mentality on estate and gifting matters, open to our advice and counsel.  In this month’s update, I summarize three commonly-misunderstood planning issues over which even the most astute clients have remarked, “I would not have known about that issue.”

  • Lifetime gifts are less “taxing” than clients are led to believe.

Many clients must be disabused of the notion that taxes must be paid by making lifetime gifts to family in excess of the “annual exclusion amount.”  From an income tax perspective, neither the donor nor the recipient pays any income taxes on a gift.  From a gift tax perspective, if an individual makes total gifts of less than the annual exclusion amount to any one beneficiary in a particular year (the annual exclusion amount is currently $15,000 per beneficiary per year, but increasing in 2022 to $16,000 per year), the gift is not considered a “taxable” gift.  It is critical to note, however, that even if the size of a gift is a “taxable” gift, the only ramification to such a “taxable” gift is that the taxpayer must utilize some of his or her unified credit against federal estate taxes.  The unified credit is increasing to $12,060,000 for deaths occurring in 2022.  If clients make taxable gifts, the client must arrange for the filing of a gift tax return, either with our law firm or his or her CPA firm.  Only once total lifetime taxable gifts exceed $12,060,000 over an entire lifetime would a client actually pay any gift tax.

Minnesota residents are often unaware that if they make “taxable” gifts more than three years before her or his death, the entire value of the gift will escape any Minnesota estate or gift taxes.  While there is a three-year “look back” rule for Minnesotans who make taxable gifts within three years of death, such a rule is not applicable to annual exclusion gifts made within three years of death, nor is it applicable to taxable gifts made more than three years before death.  Therefore, Minnesotans who wish to give more than $3.0 million to their families following death ($6.0 million for married Minnesotans) can avoid Minnesota estate taxes if they are willing to make significant gifts. I commonly joke with my clients, “You may not want to hear this, but tax ramifications are not a good excuse for making bigger gifts to your kids and grandkids.”

  • The legal authority to act under a power of attorney arises even before an official “incapacitated” diagnosis.

A financial power of attorney is of critical importance for every adult, as it provides a trusted friend or family member with the legal authority to make financial decisions if he or she experiences poor health.  We generally recommend that our clients use a “statutory short form power of attorney” that authorizes the named agent (“attorney-in-fact”) to have authority immediately upon execution of the document. By arranging the power of attorney in this fashion, it is not necessary for the family to obtain a doctor’s certification as to the individual’s health before the power of attorney can be used.  Many “unsuspecting” adult children of our clients don’t know that they have immediate authority even in the absence of a doctor’s certification.  This is generally good news to the family, as it provides a more graceful and efficient transition of decision-making authority to the appointed decision-makers.

  • Residents of other states owning Minnesota real estate or business assets may still owe Minnesota estate taxes at death.

I sometimes have the distinct displeasure of advising my non-Minnesota resident clients their heirs may still pay Minnesota state estate taxes if they die owing a Minnesota real estate property or Minnesota business interests.  This seems particularly egregious to these clients if the total value of the assets physically located in Minnesota is less than the $3.0 million Minnesota estate tax exemption amount. For example, a non-Minnesota resident who dies with $10 million in total assets and with a $1.0 million Minnesota business interest will pay $91,000 Minnesota estate taxes.  Note that the “trigger” for the Minnesota estate tax liability is not having Minnesota-located assets in excess of $3.0 million, but total assets in excess of $3.0 million, wherever located, and as little as $1 of value in any Minnesota property (that is, real estate or business).   A full explanation of the calculation methodology, together with a calculation example, can be found on our firm’s blog.  In order to avoid Minnesota estate taxes, the client must either (1) own total assets of less than $3.0 million in assets at death or else (ii) sell the Minnesota real estate or business.  Our law firm, licensed not only in Minnesota but also in Wisconsin, Florida and Arizona, is well-positioned to assist these clients with these often-misunderstood Minnesota estate tax issues.

As we close the end of the calendar year, I want to extend my thanks to you, our valued professional advisory partners, for the opportunity to work together on behalf of common clients.  As demonstrated by the three issues outlined in this update, the scope of services provided by the Erickson & Wessman law firm extends beyond our representation of clients for the implement of a “core set” of estate planning documents, as important as those decisions are, but also ongoing planning and administration legal advice.  We enjoy “clearing up” the murkiness of these complex issues so that our common clients can move ahead in decisions with greater clarity and confidence.