Case #8873 ♦

Jack and Alice Wilson came to me to ask some questions about estate planning they were completing in Minnesota. Their attorney had suggested a revocable living trust with half of the estate going to a by-pass or marital trust upon the first death.

"Our attorney suggested the revocable living trust to make certain our large estate – approximately $8,000,000–does not go through probate and help us avoid taxes,” Jack said. "He thought we could use our first Federal exemption of $5,340,000 to put into this trust–upon first death, likely me–so that this amount would grow without taxation to our two children. Neither child farms so it’s really about tax avoidance using the revocable living trust.”

"We have two children who have never showed an interest in farming. We question whether or not they would handle the value we have accumulated wised,” Alice said. "Maybe they would but their husbands would be a handful. Our attorney told us the revocable trust would help us with this, as well.”

"So, we have two problems here. One, you want to avoid estate taxes and two, you’d like something put together so the two children (or their spouses) can mature into their inheritance, is that about right?” I said. Both agreed this is where we they want to go with their planning.

I read through the revocable living trust and, curiously, I found nothing about the preservation of assets. There was a lot of legal stuff about splitting the estate upon the first death into two parts for estate taxes, but there was nothing there about the ability–or the taking away of–the children to handle the estate. In fact, they were named as secondary trustees.

But nowhere was it stated when (what age) the children received their inheritance, how they would receive it (lump sum or over time), how they receive it (based on their life circumstances at the time), etc. In other words, it was a nice looking document but left people in charge with no instructions about how to handle things in the event of Jack and/or Alice Wilson’s death, or their inability to handle affairs prior to their death. If I tell my trustees, “You’re in charge if I am disabled or dead,” I sure want to give them some guidelines about how to handle things.

Also, I asked Jack and Alice, "Would your two children or your trustees be able to better handle things upon your death or mental disability with this document? Or does this document just make them more confused and more likely to return to the attorney for help when this situation arises? As far as decisions made during your lifetime, wouldn’t a simple Power of Attorney to the people of your choosing accomplish the same thing as naming trustees today?”

Last but not least, I was confused with the standard document stating half of the estate would go to a by-pass trust upon the first death. This is normally a great feature–unless you happen to live in a state where they have inheritance taxes such as Minnesota.

In Minnesota, there are state taxes. In essence, every person is given a $1,400,000 exemption which rises every year until 2019 when the state exemption reaches $2,000,000 and then stops growing. Estates in excess of this are taxed at a low rate of ten percent and a high rate of sixteen percent. With an estate of eight million dollars, I’m now confused by the language in the trust.

If I put half or four million dollars into a trust to escape estate taxation upon the second death, wouldn’t I incur taxes on the excess (somewhere between two million six hundred thousand and two million) to my estate from the state of Minnesota at the first death?

And if I only put the amount the state of Minnesota allows me to put (the aforementioned amounts) and leave the rest of my estate to my spouse, aren’t I back loading the second death for both Federal and Minnesota taxes? Was that the intent of the legislation was to have people pay ten percent taxes upon the first death to Minnesota to avoid the possible fifty (State and Federal) percent tax rate later on upon the second death?

What it tells me is two things. One, I don’t know the answers for certain and two, a typical will or revocable trust that avoids Federal estate taxes – at least in Minnesota or other states with an estate tax – may not be enough.