The saying goes that you can’t know what you don’t know; and nowhere is this statement more apt than for do-it-yourself estate planners. Many people are completely unaware of the potential for either a federal or Minnesota estate tax. They have often seen that there is no “death tax” on our assets or have heard that assets should get a “step-up in tax basis” at death to avoid any taxes on heirs. People have heard the accurate statement that there is no “inheritance tax” in Minnesota and assume wrongly that it means that no taxes ever have to be paid as part of an estate. Here are three dangers when it comes to making mistakes about taxes and do-it-yourself plans:

1. Not knowing the difference between federal and state estate tax liability. People may have heard that the federal estate tax exemption amount is up to $15,000,000.00 per individual, only taxing the portion of a deceased person’s estate that exceeds that relatively high amount. Minnesota’s estate tax exemption amount is nowhere near as gracious, being significantly less per individual. In addition, because the federal amount allows for portability between spouses, allowing a surviving spouse to take advantage of the deceased spouse’s exemption amount, a surviving spouse can effectively double that $15,000,000.00 amount to take advantage of a $30,000,000.00 estate tax exemption. Not so in Minnesota. There is a way to preserve portability and take advantage of a spouse’s estate tax exemption, but it must be set up by a lawyer who understands how laws and regulations actually work.
2. Assuming that because you aren’t “rich,” you don’t need to worry about estate tax. People with modest estates and lifestyles may still be subject to Minnesota estate tax. Just because someone does not own a million-dollar home or multiple lake cabins, that does not mean that person avoids a taxable estate. Often, life insurance policies may make the difference between a taxable and non-taxable estate. This comes as a surprise to many people because they were often told by brokers that their life insurance policies are “tax-free” and “pass to named beneficiaries without taxes.” The problem comes where the considerably large death benefit amount is considered part of a decedent’s gross estate, despite the fact they never had access to that money. There is a way to reduce the overall size of a gross estate, but it requires more than a do-it-yourself attitude; it requires an estate planning attorney’s careful guidance.
3. Mistaking how lifetime gift and estate tax exemptions interact. Because there is no “gift tax,” do-it-yourselfers often plan to simply give away their assets to avoid any possibility of taxation at death. They may even know that gifts to one recipient over a certain amount per year need to be declared on a tax form. But gifting can have the effect of lowering the estate tax exemptions (both federal and Minnesota). This is because the lifetime gift exemption and the estate tax exemption amounts are linked (despite having different rules around each). Even if the gift was effective and planned for, there is a possibility that Minnesota could “claw back” the gift amount to attribute it to the estate. An estate planning lawyer can help you understand these topics and plan for the issues.

There are many laws and regulations around estate taxes at death, and all of them include scrutiny from places like the IRS and Minnesota Dept. of Revenue. Inaction or—even worse—mistakes that were made in minimizing tax liability are extremely costly later on. And the mistake of the do-it-yourself estate plan will not be discovered until it is far too late. Don’t rely on what you don’t know. Instead, contact one of the attorneys in the Estate Planning Department at Henningson & Snoxell, Ltd. to assist you with your estate planning, estate administration, and elder law needs.