The exemption from federal estate taxes – currently $5.25 million in assets per person – is so large that most of us won’t need to worry about it. However, Minnesota also has an estate tax, and the exemption from Minnesota estate taxes is $1 million in assets.
Minnesota’s estate tax differs from the federal exemption in ways beyond the exemption size. Consequently, the only way that spouses can each claim a $1 million Minnesota exemption is by setting up a special type of trust, which is often called a Family Trust or Credit-Shelter Trust.
Here’s how the Family Trust works:
When the first spouse dies, up to $1 million of the deceased’s assets is placed in the Family Trust. The rest of the assets go to the surviving spouse or to other named beneficiaries.
The surviving spouse receives the income generated by the assets in the Family Trust each year. The surviving spouse also is eligible to receive some of the principal from the Family Trust if the principal is used for the surviving spouse’s health, education or support.
Except for the annual income and principal for the surviving spouse’s support, the assets in the Family Trust are destined to be inherited by the couple’s children when both parents are deceased.
Because the surviving spouse doesn’t have title to the assets in the Family Trust, the Family Trust assets are not taxed when the surviving spouse dies. In other words, those assets are not considered part of the survivor’s estate. In this way, the $1 million exemption of the first spouse is preserved, and the estate of the second spouse to die also receives a $1 million exemption.
An estate planning attorney can help you set up the proper trust to help both spouses take advantage of the Minnesota estate tax exemption amount.
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