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Part 1 of the Estate planning series

Estate planning principles

Gary A. Hachfeld, David B. Bau, and C. Robert Holcomb, Extension Educators
July 2013


Estate planning is the process of controlling your assets during your life as well as at your death. Your estate plan should focus on three objectives. Those objectives are

  1. to ensure that your assets will provide you with the necessary income and resources upon which to live,
  2. to ensure that upon your death, your assets go to the people and/or organizations you intended, and
  3. to minimize your estate tax, fees, and any associated court costs.

Estate planning encompasses many components. Your Will or trust must be adapted or changed to meet your goals. Property/business ownership and transition must be examined and tailored to your plan. Life insurance issues must be reviewed. Family income requirements must be matched with projected income. Other issues include treatment of heirs, power-of-attorney, health care directive with HIPPA authorized individuals, disability planning, tax planning, personal representative or trustee selection, estate administration cost savings, long-term health care issues, etc.

Estate planning is an ongoing process. As laws change and as life situations change, reviewing your estate plan is crucial.

Who needs an estate plan?

Many people feel that estate planning is for the elderly or the wealthy or is something they do not want to discuss because it focuses on death. No one knows what the future holds and so it is important that everyone have a plan.

For the young married couple with minor aged children, it is crucial to designate a guardian and conservator for those children. If both parents are killed and no provision for guardianship or conservatorship has been made, the courts will appoint the guardian and conservator. For the person who thinks they do not have enough money to worry about estate planning but have lots of life insurance, their death can create an estate tax problem. A person who is injured in an accident and suddenly is not capable of making their own medical and financial decisions, can name an individual who will make those decisions on their behalf. Bottom line is estate planning is important for everyone.

Property ownership

Property in Minnesota can be held in several ways. The method chosen depends upon the individual's estate plan and how they wish their property to transfer to their heirs. Following is a list and description of the ways property can be held.

Sole Ownership

Sole Ownership is the simplest form of ownership. One person owns the property. Upon their death, the property passes via their Will through the probate process or through their trust. If they have no Will, state law dictates how assets are transferred to the designated heirs. With sole ownership, heirs receive a step up in basis on asset value upon the decedent's death, if IRS law allows.

Tenancy In Common

Tenancy In Common allows two or more people to own property together. Upon the death of any tenant, the decedent's portion of the property does not go to the survivor. That property passes via the decedent's Will, through their trust or via state law. At the time of death, the value of the decedent's portion of the property is included in his/her estate. It is subject to the probate process if the decedent has a Will, not if they have a trust. The heirs receive a step up in basis on only that portion of the asset owned by the decedent.

Note: If the real estate deed or abstract does not state the type of ownership, it is automatically Tenancy in Common.

Joint Tenancy

Joint Tenancy is ownership between two or more people. They own the property together and upon the death of one joint tenant, the surviving joint tenant or tenants receive the decedent's property automatically regardless of what the decedent's Will or trust says. To create joint tenancy, specific wording is necessary on the ownership documents. Typical wording is "John Doe and Mary Doe, as joint tenants with rights of survivorship, not as tenants in common" for assets placed into joint tenancy established after December 31, 1976.

Upon the death of one joint tenant, his/her portion of the property is included in their estate for estate valuation purposes. Joint tenancy property is not subject to the probate process upon the first death, but may be upon the second death. This is a complex area of tax law so check with your attorney.

Note: The State of Minnesota may now recover value of joint tenancy property where Medicaid (Medical Assistance) payments have been made to either joint tenant. There may be exceptions so consult with an attorney who practices in the area of elder law.

Ownership by Contract

Ownership by Contract allows insurance contracts, investment accounts, bank accounts, and trusts to designate owners or beneficiaries upon the occurrence of a stated event such as the death of the owner. This method of ownership is not subject to the probate process and the asset is not subject to the decedent's Will or trust. The accounts are titled as Payable on Death (POA) or Transferrable on Death (TOD). With regard to deeds, there is a new provision in MN whereby a deed can be titled Transferrable on Death Deed (TODD).

Life Estates

Life Estates are another method of transferring property. A Granted Life Estate is another form of ownership. It is usually done through a Will or living trust. A person can hold title to property as a life tenant or as a remainderman. For example, if a husband passes land to his children, but with a life estate (life use) to his wife, the children are the remainderman and the wife is the life tenant. The wife receives all income from the property and must manage, maintain and pay all property expenses on it during her lifetime. Upon her death, the property passes outright to the children without being included in her estate. The property would receive a stepped up basis (valued at fair market value) on the date of the death of the husband.

A Retained Life Estate occurs when a living person gifts an asset they own to their heirs while at the same time they retain a life estate or lifetime use of the property until their death.

Example: A mother might gift her personal residence or farmland to her children. She reserves the right to live in the house or receive income from the farm as long as she lives. Upon her death the property passes completely to the children. It would be included in her estate and receive a stepped up basis upon her death.

Note: there have been changes in Minnesota law regarding life estates. If put into place after August 1, 2003, the assets of the life estate are subject to claim by the State of Minnesota if any Medicaid/Medical Assistance payments are involved. Creating a life estate no longer protects all assets from that process. Consult an elder law attorney for assistance with this issue.

Probate/non-probate assets

The probate process is established to prove that the decedent's Will is valid, to pay any debts held by the estate, to establish clear title to any assets, and to pay any necessary income or estate taxes. Solely owned property and property owned as tenants-in-common are subject to the probate process. Joint tenancy property, life insurance not owned by the decedent going to beneficiaries other than the estate, TOD - POD - TODD, and revocable living trust property are not subject to the probate process.

The probate process can be time consuming and costly as well as making the decedent's estate information public. How property is held will dictate if the probate process applies or not.

Note: a Will is the equivalent of a letter to the court system and therefore triggers the probate process. This occurs if you own $50,000 or more of assets or any real property (in MN). Having a Will does not enable you to by-pass the probate process. Establishing a Revocable Living Trust (RLT) does allow you to by-pass the probate process. If one of your goals is to avoid the probate process, you need to construct your estate plan utilizing a RLT.

Federal Gross Estate

Estate taxes will be assessed on any estate that exceeds the Applicable Exclusion Exemption. This amount varies by year. The current federal amounts are listed in the following table. Note: State of Minnesota amounts, listed later in this document, are different than the federal amounts so plan accordingly.

With passage of the American Taxpayer Relief Act of 2013, exclusion amounts, credits, tax rates and portability were established for future years. Details are as follows:

Federal Estate Tax Exclusion
Year Exclusion Credit
2011 $5,000,000 $1,730,800
2012 $5,120,000 $1,772,800
2013 $5,250,000 $2,045,800
2014 & beyond $5,000,000 indexed for inflation NA
Gift Tax Exclusion
Year Exclusion Credit
2011 $5,000,000 $1,730,800
2012 $5,120,000 $1,772,800
2013 $5,250,000 $2,045,800
2014 & beyond $5,000,000 indexed for inflation NA

NOTE: Each person has one lifetime federal exclusion amount in any given year. You decide how you want to spend the exclusion amount. That is, you can use it to offset estate tax or gift tax. You do not have two separate exclusion amounts.

Assets passing through one's estate in 2013 and beyond will receive a step up in basis.

Also included in the federal tax law changes is a "portability" provision. It states that for 2013 and beyond, any unused portion of the decedent's estate exclusion can be used by the decedent's surviving spouse. This unused portion can be added to the surviving spouse's exclusion amount. To qualify, an estate tax return for the decedent must be filed even though no federal estate tax is due. Check with your attorney.

An individual's Federal Gross Estate includes all property or share in any property held at death. It will include all stocks, bonds, cash, land, machinery, livestock, life insurance policy death benefit of any life insurance policy the person owns regardless of who pays the premium or who is the beneficiary, as well as all other assets. The assets are valued at fair market value (FMV) as of the date of death or as of six months after the date of death if it is more advantageous for tax reasons.

Deductions from Federal Gross Estate

Certain deductions are allowed against the decedent's gross estate. Those can include debts owed by the decedent, funeral costs, administrative costs, last medical costs, a marital deduction, and charitable contributions, etc.

Marital Deduction

A married person can pass any amount of estate assets to their spouse, free of any estate tax (exception: if spouse is a non-US citizen, limits apply so see your attorney). It is a deduction from the gross estate and is one of the biggest federal estate tax saving devices. The marital deduction is not available to the estates of widows, widowers or other unmarried persons. In a carefully constructed estate plan for a married couple, little or no estate tax is payable upon the first death. Each individual can pass through their estate an amount up to the Applicable Exclusion Exemption to other heirs, with the balance going to their surviving spouse using the marital deduction.

Charitable Deductions

The value of any property passing to qualified charities is deductible from the gross estate.

Federal estate and gift tax rates

For taxable estates over the exclusion amount the applicable tax rate is as follows:

2011 - 35%
2012 - 35%
2013 & beyond - 40% maximum rate

Federal gift tax rates are the same as the federal estate tax rates.

Minnesota estate tax

In addition to federal estate taxes, there are some states that have estate or inheritance taxes. Most states with estate tax provisions did not raise their exemption amounts to match the federal increase.

For Minnesota, the exemption amounts per person are as follows:

2005 - $950,000
2006 and beyond - $1,000,000

In MN many attorneys and accountants state that an entire estate of a MN resident is taxed upon their death. The first $1,000,000 in estate value is taxed but there is an offsetting unified credit currently equal to $99,600 (the tax due on the first million) which erases the estate tax on the first $1,000,000 of estate value. The estate tax then begins on the first dollar of any amount over the first $1,000,000 of estate value.

Currently, the Minnesota marginal estate tax rate ranges from a beginning rate of 41% for the first dollar over the $1,000,000 exclusion amount and declines to 9.96% for the last dollar in the second $1,000,000 estate value.

New Minnesota estate law addition

On July 20, 2011 the Governor of Minnesota signed into law the Minnesota Qualified Small Business Property and Qualified Farm Property Exclusion. The new legislation allows for an additional $4 million dollar estate exclusion for qualified small business and farm property. The property must meet all the qualifications and cannot exceed the $4 million. This exclusion is in addition to the exclusion outlined above.

Qualifications for farm property

To qualify, the property must meet the following criteria:

  1. The value of the property was included in the decedent's federal adjusted taxable estate, which is after deductions including debts, expenses and bequests to a surviving spouse.
  2. The property consists of a farm meeting the requirements of Minnesota Statutes (M.S.), section 500.24.
  3. The property was classified for property tax purposes as the homestead of the decedent and/or decedent's spouse under M.S. 273.124. If the owner has lost homestead designation, the property does not qualify for the exclusion.
  4. The property was classified for property tax purposes as class 2a property under M.S. 273.13, subd. 23.
  5. The decedent continuously owned the property for the three-year period ending at the decedent's death.
  6. A family member maintains the 2a classification for the three years following the decedent's death.
  7. The estate and qualified heir agree to pay the recapture tax, if applicable.

NOTE: Currently farm property that qualifies for the exclusion is land held as sole proprietor, land in any form of partnership, a limited liability company, S or C corporation or trust. See your attorney for information specific to your situation.

Qualifications for small business property

In addition to farm property, the exclusion includes small business property as well. The rules are very similar to those for qualified farm property with the exception of following issues. They are as follows:

  1. Property consists of a trade or business property (or shares of stock or other ownership interests that are not publically traded).
  2. Decedent or decedent's spouse materially participated in the trade or business during the taxable year that ended before the decedent's death.
  3. Trade or business had gross annual sales of $10 million or less during the last taxable year that ended before the decedent's death.
  4. The property does not consist of cash or cash equivalents.
  5. A family member materially participates in the operation of the trade or business for the three years following the decedent's death.

Qualified family member/heir

  1. The decedent's ancestors (parent, grandparent, etc.);
  2. The decedent's spouse;
  3. A lineal descendent (child, grandchild, etc.) of the decedent, of the decedent's spouse or of the decedent's parents; or
  4. The spouse of any lineal descendent described above.

Recapture tax

If any of the following occur within three years of the decedent's death and before the death of the qualified heir, then a recapture tax is imposed:

  1. The qualified heir disposes of any interest in the qualified property (other than by a disposition to a family member),
  2. For the qualified farm property deduction, a family member does not maintain the 2a classification for the qualified property,
  3. For the qualified small business property deduction, a family member does not materially participate in the operation of the trade or business.

The recapture tax equals 16 percent of the amount of the exclusion and must be paid to the Minnesota Department of Revenue within six months after the date of the disqualifying disposition or cessation of use.

To claim the exclusion, complete and submit Schedule M706Q, Election to Claim the Qualified Small Business and Farm Property Exclusion when filing the decedent's Minnesota estate tax return.

Information returns

When an estate elects for this deduction, a qualified heir must file two informational returns to confirm that no recapture tax is due. The first return is due 24 - 26 months after the decedent's death. The second return is due 36 - 39 months after the decedent's death. This requirement is effective for returns due after December 31, 2013 (that is, for estates of those who died after Dec. 31, 2011).

Additional estate tax rules

MN estate tax law allows for the taxation of a non-resident's estate where the non-resident has ownership interest in MN property held in a pass-through entity that owns real estate or tangible personal property (machinery, livestock, crop inventory, etc.).

Pass-through entities are defined as S corporations, partnerships, single-member LLCs and trusts.

The new law is effective for the estates of decedents dying after Dec. 31, 2012.

MN estates can be affected as well by the new MN gift tax laws. See gift tax section following.

Minnesota gift tax

Effective July 1, 2013 there will be a gift tax in MN. It allows for an annual gift exclusion of $14,000 per donor, per person, per year to any number of persons without any tax consequence. This annual exclusion is doubled to $28,000 for couples. To qualify they must writing two checks equal to $14,000 each or file a gift tax return. For gifts that exceed the $14,000 per individual ($28,000 per couple) exclusion amount, the donor must complete both an IRS 709 and MN M709 gift tax form.

Each person has a MN lifetime gift exclusion amount of $1,000,000 with an associated $100,000 lifetime gift tax credit. For couples that amount doubles to $2,000,000 exclusion with an associated lifetime gift tax credit of $200,000. This exclusion is in addition to the $1,000,000 MN estate tax exclusion amount mentioned previously.

Gifts in excess of the lifetime exclusion amount will be taxed at a flat rate of 10 percent.

The value of gifts in excess of the annual exclusion amount (recorded on the IRS 709 & M709 forms) made within 3 years of the decedent's death will be added back into the decedent's estate to determine if MN estate tax is due. The 3 year add back provision is retroactive applying to estates of decedents dying after Dec. 32, 2012. The amount of MN estate tax due is reduced by the amount of MN gift tax paid on any gift added back and included in the decedent's MN adjusted taxable estate.

MN gift tax applies to the transfer of property located in MN only. The MN gift tax applies to MN residents and to gifts of real estate and tangible personal property located in MN but owned by any non-resident.

MN residents transferring real and tangible personal property located outside MN are not subject to the MN gift tax.

Special Use Valuation (SUV)

Closely held real property (farm land or small business property) can be valued not at FMV, but at a Special Use Valuation (SUV) if the estate meets several complex qualifications. SUV usually results in a lower valuation than FMV and may possibly reduce an estate tax obligation.

SUV is calculated using the 5 year average land rental rate for comparable land minus the real estate taxes paid, divided by the AgriBank FCB 5 year average annual effective interest rate for the state where the decedent lived (rate changes periodically so see your attorney or accountant).

Example: Land is appraised at $5,200 (FMV) per acre with real estate taxes of $26 per acre, average cash rent of $200 per acre, and the FCB average effective interest rate of 6.2 percent (MN). The SUV calculation is as follows:

$200 rent - $26 RE tax = $174 = $ 2,806/acre SUV
 .062 FCS interest   .062

Using the SUV on this land could save estate taxes on the value of $2,394/acre (Note: there are limits on the total dollar amount of reduction—see your attorney or accountant).


  1. SUV should not be used on estates that are less than the Applicable Exclusion Exemption for the year in question. Doing so may result in a lower than necessary tax basis as well as unwanted rental and sale restrictions.
  2. The business must be in compliance with the SUV rules for 10 years or you lose the SUV designation. The recipient must farm the land for 10 years—that means materially participating by farming the land or farming on shares and having financial risk. The person cannot rent the land to someone else for cash—that violates the SUV conditions.
  3. To qualify the decedent's estate must have included at least 50% ag assets and at least 25% farm land.
  4. With people living longer, this is usually not a viable alternative.

Power-of-Attorney (POA)

An individual (grantor) can grant another individual Power-of-Attorney in the event they are incapable of making decisions due to disability or incapacity. The individual or individuals can manage your assets on your behalf.

Power-of-Attorney categories

Common Law Power of Attorney

Common Law Power of Attorney powers are specifically listed by the grantor. There are no gifting limits. Can be either general or springing (begin at a specified time). Grantor authorizes powers to be effective immediately or upon disability. Granted powers remain in effect throughout grantor's life or incapacity.

Statutory Short Form Power of Attorney

Statutory Short Form Power of Attorney powers are governed by state law and are generally very broad. Powers can be changed at any time by legislative law change. Powers typically take effect immediately and there is a $10,000 gifting limit per person in MN. In MN, after June 1, 2104 all former statutory short forms become common law trusts and you cannot enforce the statutory rights and the form can be changed. In addition, a new ruling allows any government agency to require an accounting of the "attorney in fact" (person who is power-of-attorney) for anything they are doing financially on behalf of someone else.

Durable Power-of-Attorney

Both Common Law and Statutory Powers-of-Attorney can be durable. Durable means the powers will continue to be affective after disability. If an individual does not have the durable form of POA and becomes incapacitated or disabled, the courts will appoint a new POA.

Sometimes a POA alone is not accepted by banks, health care facilities, etc. Generally the reasons are the document is too old, too new, too long, too short, has in it the wrong wordage or missing a required phrase, etc. The solution to this issue is to: 1) name the same person as your trustee, POA, guardian, and conservator. Use a Common Law Durable POA in conjunction with your Revocable Living Trust to avoid guardianship and conservatorship. Include in the package your Health Care Directive and HIPAA authorization.

Health Care Directive

A Health Care Directive allows one to decide what level of health care you want if you become disabled or death is eminent. You can list whether or not you want to be kept alive or not. You can list if you want to be an organ donor. You can outline your funeral in the document as well. It is a binding contract document that family members and health providers must follow.

HIPAA designations

In 1996 the federal Health Insurance Portability & Accountability Act (HIPAA) was passed. It requires you to list individuals you grant access to your medical records. If an individual is in the hospital and cannot speak for themselves or give permission for someone to have access to their medical records, the health care facility legally cannot release your health care information, not even to your spouse or children. This applies to adults as well as to any person 18 years of age or older.

Attorneys will sometimes place the HIPAA documents within the health care directives. Others will make it a separate document. While others will include it as a separate document and include it in the health care directive as well. Whichever way it is done, this is a key document for your personal estate plan.

Disability panel

A disability panel can assist in determining if you are disabled and no longer able to make decisions on your own behalf. The panel may include your current physician, a specialist, and family members. Many hospitals and health care providers have information on developing the care directive as well as forms to complete.


To by-pass the probate process and to have your needs taken care of in the event you become disabled or incapacitated, you need to establish a RLT, Durable Common Law Power-of-Attorney, a Health Care Directive, a disability panel, HIPAA authorization, guardianship designation and a pour-over Will. Lifetime trust shares held in a protected trust within the RLT can protect some assets from lawsuit and other adverse actions.

If one spouse places assets in the RLT within the protected trust as lifetime trusts shares, upon their death those assets are protected and held for the remaining spouse's health, education, and maintenance. Parents can use the same process for assets passing to their children. Assets passed in this manner to an individual on Medicaid, will not make them ineligible for those benefits.

For legal advice in this area, see an attorney that practices in the area of elder law.

For more details see the following information sheets in this series:
Estate Planning #3: Establishing a Will (214 K PDF)
Estate Planning #5: Revocable Living Trusts (226 K PDF)

Caution: This publication is offered as educational information. It does not offer legal advice. If you have questions on this information, contact an attorney.

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