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Using trusts to minimize estate taxes

A lot of Minnesota readers know that a big element in estate planning is tax planning. It is not everyone’s top priority, but for those who may have estates near or over the amount for the federal or state exemptions, planning in advance for tax efficiency can be an important way to pass more assets onto the next generation.

While the federal estate tax exemption has stabilized at a moderate $5.5 million with adjustments for inflation, the Minnesota estate tax exemption is only for the first $1 million of an estate. This might seem like a lot, but take the time to add up retirement savings, a home, stocks, and valuables, and the number could reach that limit faster than one might expect. It is also important to take into account a spouse’s holdings, since there is a likelihood that one spouse will outlive the other, causing a portion or all of their assets to combine into one estate.

There are various structures that individuals can use to minimize tax liability for an estate, most of which take careful planning in advance. One method used frequently by individuals with very large holdings made up of diverse assets is a grantor-retained annuity trust, which works to process stocks, bonds, real estate, and other assets from the original holder so that they can be passed to the next generation without a large tax liability. These types of trusts can be controversial since they take advantage of what some view as a loophole in tax policy, so taxpayers who wish to utilize one should consult with experienced estate and tax planning counsel to make sure that they are following the law to the full extent. 

Source: Bloomberg, “Look How Easy It Is to Game Estate Taxes,” Dec. 17, 2013

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