The Federal government assesses an estate or death tax only on estates valued at more than $5.43 million. Married couples can avoid these taxes if their net worth is less than $10.86 million. In fact, only a fraction of a percent of all Americans who die in 2015 will owe any estate taxes, unless you're from one of a handful of other states that assess an estate tax at the state level.
As a Minnesota resident myself, let's take a look at a possible situation for MN residents who die this year. They will be assessed an estate tax by the state of Minnesota if the value of their estate exceeds $1.4 million (increasing to $2.0 million by 2018).
How much are you worth?
The value of your estate is calculated by adding up all your assets (house, cabin, 401k, IRA, investment accounts, etc.) and subtracting your liabilities -- amounts that you owe others (mortgage, student loans, credit card debt, etc.). For example, if your assets equal $800,000 and you owe $200,000 in mortgages and other debt, your net worth might be $600,000.
At $600,000 you would owe $0 in Federal or state estate taxes.
Don't forget life insurance.
When calculating their net worth, most people forget to include their life insurance. Generally, the proceeds you receive from the death benefit of life insurance also get included in the value of your estate. In the example above, if your assets minus liabilities add up to $600,000 and you have $1.0 million in life insurance, you have an estate that would be valued at $1.6 million upon death. Since this exceeds the current exemption amount of $1.4 million, $200,000 of your estate would be taxable at a rate of at least 9 percent.
Most pay no tax.
According to the MN Department of Revenue only about 2 percent of all Minnesota residents will owe any estate tax this year. However, I would take that statistic with a huge grain of salt. If you are the kind of person that reads financial planning blogs and/or works with a financial advisor, odds are pretty good you may subject to a future estate tax.
In the example above, a MN resident who dies with an estate valued at $1.6 million would owe about $18,000 in estate tax. With some basic estate planning, those taxes can usually be avoided - especially if you are married.
Coming up soon, I will tell you how you can avoid most of these unnecessary taxes. Until then, just ASK MIKE.