• Estate Planning Update
  • May 7, 2003
  • Law Firm: Fredrikson & Byron, P.A. - Minneapolis Office
  • We would like to call your attention to two recent developments which may require you to take action. The first relates to the Minnesota estate tax and may require revision of your estate planning documents. The second relates to the generation-skipping transfer ("GST") tax exemption and may require that you file a Federal gift tax return (due April 15, 2002).

    As you are aware, President Bush signed a new tax law last year which increases the Federal estate tax exemption to $1 million in 2002, $1.5 million in 2004, $2 million in 2006 and $3.5 million in 2009. In 2010, the Federal estate tax is repealed for one year.

    Minnesota has not adopted the new Federal estate tax exemption schedule. The Minnesota estate tax remains tied to the Federal law in place prior to enactment of the new tax act. Under the prior Federal law, the estate tax exemption increased to $700,000 effective January 1, 2002, and will increase to $1 million in 2006. Therefore, Minnesota residents currently have a $700,000 estate tax exemption for Minnesota estate tax purposes and a $1 million exemption for Federal estate tax purposes. This discrepancy may produce unanticipated results. For example:

    A Minnesota estate tax may be imposed even though there is no Federal estate tax due. If an unmarried Minnesota resident with an estate valued at $999,999 dies in 2002 (without having made any taxable gifts during life), no Federal estate tax return will be filed and no Federal estate tax will be paid. However, a Minnesota estate tax of about $33,200 will be imposed.

    A Minnesota estate tax may be imposed even if the estate planning documents use a funding formula provision intended to reduce the Federal estate tax to zero. Many of the estate planning documents that we have drafted for married couples provide that, on the death of the first spouse, the amount which is exempt for Federal tax purposes passes to a Family Trust or directly to children or grandchildren. The amount passing under these formulas will continue to be exempt for Federal estate tax purposes. However, a Minnesota estate tax will be imposed on the amount in excess of the Minnesota exemption.

    Governor Ventura has proposed that Minnesota waive the estate tax return filing requirement on estates of less than $1 million, but has not proposed to enact the Federal estate tax exemption schedule. There is no certainty that the legislature will adopt his proposal or take any action at all to coordinate the Minnesota estate tax with the new Federal estate tax.

    We would also like to call your attention to a little-noticed provision of the Federal tax act passed last year which provides for the automatic allocation of GST tax exemption to certain irrevocable trusts. This new law may affect you even if you did not intend to create a generation-skipping trust and even if transfers to the trust do not require the filing of a Federal gift tax return. As a result of the new law, individuals who made (or will make) transfers to an irrevocable trust after December 31, 2000, may inadvertently and inappropriately "waste" a portion of their GST tax exemption unless they file a Federal gift tax return opting out of the automatic allocation.

    If you made a transfer to an irrevocable trust in 2001, you may need to file a Federal gift tax return opting out of the automatic allocation by April 15, 2002. Please advise us if you would like us to review the trust instrument to determine whether it is necessary or desirable for you to file a gift tax return in order to opt out of the automatic allocation. If appropriate, we would then be happy to assist you with the preparation and filing of the return.