Trusts & Estates Law/Estate Taxes
I live in Minnesota and realize that you would probably not be familiar with MN estate taxes. However there was a recent change in MN tax law that closely mimics federal tax law, except that estate tax kicks in at a threshold of $1M. Prior to this being implemented one could be on their death bed and give away all their assets and no estate tax would be accessed. Now, one must report any gifts that exceed $14K given to an individual in each calendar year. I could not find answers to my questions in the MN statutes so I am hoping you can tell me how the federal government would treat these situations.
I am six years older than my wife and so it is likely that I will predecease her. She and I have named each other as sole beneficiaries to all our assets and in our IRA’s have named each other as the sole primary beneficiaries with our two sons as secondary beneficiaries, with one exception.
I have one IRA that lists one of my sons as primary beneficiary and his children as secondary beneficiaries. It seems to me that when I pass on that the IRA would be considered part of my estate and as it is on the order of 1/10th of $1M, it would pass on to my son with no encumbrances. Say that it was a 2 -3 million, would that be true with the federal government?
Say that whichever one of us passes on first was to disclaim enough of the deceased's IRA’s to get remaining assets below the $1M threshold. If it were the federal government and that were done to get assets below the federal threshold would that pass muster?
Actually the "Gift Tax" has been around for a very long time. You may not have been introduced to it, since for the last decade everyone was simply expecting the estate tax to be wipe away. Now that it is back all the old information is being recirculated.
Good News!! the Gift Tax threshold has been raised from $10,000 per person per year to $14,000. Whoopee.
The one IRA could pass from you to your son without taxation, since it is an estate event, and within the untaxed limits. IF, you were to be the first to die, otherwise it is just a larger portfolio that you will be passing to your sons.
Your option to disclaim would have to happen before the passing of the spouse. At the moment of demise, the estate and probate process kick in. Which is an interesting piece of minutiae. If both were instantaneously killed in a plane crash the process would still claim that one died before the other so that the spousal transfer would happen, and only then would the pass to the next generation happen, thus insuring a higher potential estate tax.
What you are quandering over is exactly what a Living Trust is intended to solve.
Disclaimer: Living trusts have been promoted as a superhero able to leap tall taxes in a single bound and to stop the locomotive of litigation with a swipe of a pen, by some less than credible sources. It is not.
A properly structured and implemented living trust is simply a declaration that allows for a married couple to take advantage of both (each spouses) tax exempt conduits to pass assets to the next generation. Yet able to maintain those assets at the parents level until both pass, allowing all assets to be used by the surviving spouse for their own support and lifestyle.
A properly structured and implemented living trust is a useful, limited, tool in estate management, whose real value is in these three areas:
1. Avoiding the probate process
2. Providing for specific distribution.
3. Resolving any concern regarding who will take over the management of affairs if one or both spouses become unable to care for themselves. A Living Trust eliminates the litigation process in this.
But it cannot reduce the actual estate tax, nor can it protect those assets from lawsuits, creditors, and illegitimate claims.
If your estate has any assets at all, then there are some fundamental solutions that can reduce the estate tax, AND ALSO reduce the annual taxes that you pay personally, like your required distributions from the IRAs or any other income that you may receive, along with protecting your assets, so that you can keep what you have spent your life earning.
Give me a call.