The Federal Estate Tax Exemptions Will Be Changing.

Federal estate tax code allows for an exemption for estate taxes due after a person's death. This exemption has been increasing annually over the past several years, and is currently $13.61 million for an individual and $27.22 million for a married couple. This exemption is the amount the federal government allows each person to pass to non-charitable and non-spouse heirs before any federal estate tax is owed.

Beginning on January 1, 2026, the federal exemption for estate taxes will be reduced. This change is not due to recent law changes, as it was built into current law. The law included a sunset provision that would roll back the exemption after the end of 2025. After the law's sunset, we can expect these exemptions to be cut in half in 2026, to approximately $7 million for an individual's estate and $14 million for the estate of a married couple. It is possible that Congress could act on this before 2026, but it appears unlikely, and one should not count on that.

Note that Minnesota's estate tax exemption stands at $3 million for an individual and $6 million for a married couple. At this time, there is no Minnesota tax law provision changing those exemption amounts.

While exact numbers for the 2025 exemption have yet to be announced (it's based on inflation), it is estimated that next year's estate tax exemption will be approximately $14 million per couple. What this means is that if your estate is valued at greater than $7 million or $14 million for a couple, you may need to make some plans before the end of 2025.

There are a number of ways you can shelter some of your estate assets while you are still alive. For example, you can set up trusts, give to charities, or give gifts to people. It should be noted that there are no plans at this time for the federal government to reduce the annual gift tax exclusion, which is $18,000 per person gifted per year.

The impact of these changes can be complicated, and can vary based on many factors. The sunset deadline is approaching and will be here before you know it. It would be wise to seek the advice of a qualified estate planning attorney and a qualified financial planner.

The Generation-Skipping Transfer Tax.

The generation-skipping transfer tax (GSTT) can be incurred by your estate if you bypass your children and give assets directly to your grandchildren. This tax, which is assessed by the IRS at a rate equal to the highest federal tax rate in effect at the time (currently 40%), is in addition to the federal estate tax.

Fortunately, there is a significant generation-skipping tax exemption, which is the maximum amount that can be directly transferred to grandchildren without the grandparents incurring the GSTT. The GSTT shares the same lifetime exemption as the federal and Minnesota gift tax exemptions. The federal exemption is $11.58 million per person, and the Minnesota exemption is $3 million per person.

Most estates are well within the exemption limits and grandparents can transfer significant amounts of cash and property without incurring the GSTT. However, if your estate is valued greater than the exemption amounts, you should seek the advice of an attorney or tax advisor.

There is an annual GSTT exclusion, which is the same as the annual gift tax exclusion. As of 2020, you can give up to $15,000 per person per year without incurring the GSTT. Married couples can give double that amount, as they are each allowed to give up to $15,000.

There is an exception for grandchildren whose parents have predeceased them. In this case, the grandchildren effectively move up into their parents' place in line so the GSTT no longer applies to them. The inheritance is not skipping a generation. 

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A qualified estate planning attorney can help you protect your assets for the future of your loved ones.