In order to minimize the incidence of Minnesota estate taxes following the death of the surviving spouse, a married couple residing in Minnesota who own assets in excess of $3.0M should include specific provisions in their estate plan during their joint lifetimes. Through the creation of a “Tax Savings Trust” following the first death between a married couple, it is possible to make use of both exemptions following the second death.
The Problem with the “One Exemption” Plan
Under an estate plan in which all assets are immediately distributed to the surviving spouse following the first death (a “One Exemption Plan”), there is no estate tax liability due following the first death, regardless of the extent of the deceased spouse’s assets. However, following the death of the surviving spouse, all of the assets owned by the surviving spouse, including the assets the surviving spouse received from the first spouse to die, are subject to estate taxes. Under this scenario, the surviving family members would have only the surviving spouse’s exemption to use to minimize any estate tax liability. In other words, this “One Exemption Plan” only allows a husband and a wife to use the estate tax exemption of the surviving spouse, but not the estate tax exemption of the first spouse to die. If the estate of the surviving spouse exceeds the surviving spouse’s remaining exemption amount, the children would be required to pay a greater amount of estate taxes than would have been paid had the couple used a “Tax Savings Trust,” as summarized below.
The Benefit of the Tax Savings Trust
In contrast to a “One Exemption Plan,” the creation of a “Tax Savings Trust” would allow for the use of both a husband’s exemption as well as a wife’s exemption. Under this plan, some (or all) of the assets of the deceased spouse are transferred to a “Tax-Savings Trust” following the first death, and not directly to the surviving spouse. About the Tax-Savings Trust:
- Ownership: The assets transferred to the Tax-Savings Trust would be owned by this Trust and not in the name of the surviving spouse. By reason of this ownership structure, the assets remaining in the Tax-Savings Trust at the death of the surviving spouse are not subject to estate taxes, regardless of the amount held in the Trust. The tax result of this planning is that the couple will have successfully shielded from any estate taxes both (i) the assets initially contributed to the Tax-Savings Trust following the first death and (ii) any appreciation in the assets owned by the Tax Savings Trust between the first and second deaths.
- Benefit to Surviving Spouse: The surviving spouse is named as the primary beneficiary of the Tax-Savings Trust. The administrator (“Trustee”) of the Tax-Savings Trust would be required to make distributions to the surviving spouse that would allow the surviving spouse to maintain his or her accustomed standard of living. Moreover, the surviving spouse could direct that distributions be made directly to other family members from this trust free of any estate or gift tax ramifications.
For married Minnesota residents with a combined financial worth in excess of the current Minnesota estate tax exemption amount, a Tax Savings Trust should be considered.
TAX SAVINGS TRUST PLANNING
** Following First Death **
Deceased Spouse’s Assets:
Family Trust:
- Owns an amount of assets equal to the lesser of (i) Minnesota estate tax exemption and (ii) Federal estate tax exemption.
- For benefit of surviving spouse and children during surviving spouse’s lifetime.
- All remaining assets in Family Trust, including any appreciation in the value of the assets contributed, pass free of estate tax.
Surviving Spouse:
- After making provision for assets to the Family Trust, surviving spouse receives all of the deceased spouse’s remaining assets.
- Surviving spouse owns and controls all assets throughout lifetime.
- Remaining assets owned by surviving spouse do not necessary pass free of estate taxes.
** After Both Spouses Have Died **
Surviving Spouse’s Assets AND Family Trust Assets
(less any taxes and expenses)
Balance to Children, Grandchildren, or other Beneficiaries
- All remaining assets divided and distributed for the benefit of children, grandchildren, or other non-charitable beneficiaries, in the manner specified by clients.