An estate plan provides an opportunity for a testator to create a legacy. Many testators try to maximize the value of the assets that they pass to their loved ones, possibly by proactively planning for taxes, debts and other liabilities that could diminish the value of their estate. Individuals with valuable personal property that they want to pass to loved ones, family members or charitable organizations often need to consider the impact that taxes could have on their estates.
There are three different types of taxes that require particular consideration when establishing an estate plan in Minnesota.
Estate taxes
If there is one type of tax planning many people recognize is necessary, it is estate tax planning. After all, estate taxes can significantly reduce the value of an estate. Both the federal government and the state of Minnesota collect estate taxes from larger estates. In 2024, the threshold for Minnesota state estate taxes is $3 million. The tax rate is between 16 and 18%. If the estate is worth more than $13.61 million, then federal estate taxes may apply. Federal estate tax rate is much higher, ranging from 18 to 40% depending on the value of the estate.
Income taxes
The personal representative of an estate generally needs to file a final income tax return on behalf of the person who died. In fact, they may have to file an income tax return on behalf of the estate as well if the estate plan includes instructions to sell certain estate resources. Ensuring that there is adequate property set aside to cover income tax obligations can help maximize the legacy someone leaves when they die.
Capital gains taxes
Technically, an estate usually doesn’t pay capital gains taxes. Instead, beneficiaries are responsible for capital gains taxes when they sell assets that have appreciated in value after inheriting them. Trusts and other estate planning tools can help reduce the likelihood of beneficiaries incurring substantial tax obligations when they inherit certain resources. Although the estate itself isn’t responsible for covering capital gains taxes, they can have a major negative impact on how much beneficiaries retain from their inheritances.
Making smart, carefully planned moves when establishing an estate plan can be beneficial for those hoping to leave a lasting and meaningful legacy after their death. Taxes are one of several financial obligations that require careful consideration during the estate planning process.
