Archive for January, 2011

The 2010 Tax Act made some significant changes to the estate tax system that could affect your estate.  Many attorneys have summarized the changes for their clients (special thanks to Gerry Beyer for his excellent summary), and I want to point out a few issues that will affect Minnesota farmers and business owners.  Here are some of the most important changes:

1. The Estate Tax exemption increased to $5 million per person.  This means that a married couple has a total of  $10 million of exclusion to use between them.  While $5 or $10 million sounds like a lot of money, remember that Minnesota farmland values are increasing.  If you own land, be sure that it is properly divided between you and your spouse to make the best use of your exemption.
2. The maximum rate for gift and estate tax has decreased from 55% to 35% only in 2011 and 2012.  Congress likes to keep people guessing about what the estate tax landscape may look like in the future, so don’t count on the lower tax rate beyond 2012.  It’s anyone’s guess what will happen at that time.
3. Spouses may now make use of a portability provision.  This means that unused exemptions from one spouse may be saved for use by the other spouse.  For example, imagine that Husband dies in 2011 with a personal estate worth $2.5 million.  Since he has an exemption of $5 million, he only needs to use half of that.  Wife now has a total exemption of $7.5 million for use upon her death.  However, if Wife remarries and Husband #2 dies, Wife loses Husband #1′s exemption.  Her total exemption would then be her $5 million plus Husband #2′s remaining exemption.  Hint: Don’t fail to file an estate tax return just because the first spouse to die is exempt from tax.  You don’t want to lose the portability for the remaining spouse.
4. The Generation Skipping Tax exemption has increased to $5 million through 2012.
5. The Lifetime Gift exemption is now $5 million, which is the highest it has ever been.  That exemption amount is set to expire at the end of 2012, so if you have a large estate, consider making gifts in 2011 and 2012 to take advantage of that exemption before it expires.

If it has been a while since you reviewed your estate plan, consider reviewing it now and anytime your life situation changes.  I am happy to discuss these changes with farmers, business owners, and rural Minnesota folks in need of estate planning advice.

You’ve bought a new calendar, put away the bubbly, and settled into your desk for another great business year.  If you own an LLC, don’t forget that Minnesota LLC annual business renewals must be filed every calendar year.  It takes minutes online, costs nothing, and keeps your company status valid for the entire calendar year.  The Minnesota Secretary of State website has an easy online form that even lets you look up your entity information.  Do it now and forget about it until next year.  Oh, and schedule it for next year in Outlook, Remember the Milk, or whatever you use for a to-do list.  If you’re a client of mine, I’ll happily remind you when the renewal is due.

Clients often ask me whether they should put their adult children on their bank account as owners. It will make things easier, they reason, if they ever need their children to help handle their affairs. Yes, that is true, but there are perhaps 10,000 reasons why it could make your financial affairs more difficult. This post will cover just a few of those reasons.

When you add another adult (your child, your caretaker, your grandson, whomever) to your bank account, that person becomes…an owner of your bank account. Which means legally that your child can access the money in the account any way he sees fit. Sure, you intend for him to write checks to the electric company while you’re on vacation or in the nursing home. But what about if he instead writes checks to cover his cable bill or a ski trip? If he is an owner of the account, he is authorized to write checks from the account to whomever he chooses, be it Spring Valley Care Center on your behalf or Welch Village Ski Resort on his.

Now you may be shaking your head. Your loved one would never take advantage of you financially like that, so there is nothing to worry about, right? Well, I believe you that you can trust your family. I trust mine in the same way and would gladly give them access to everything I have, except that there are other situations in which it could backfire, no matter how trusting and responsible you and your family are with one another.

Imagine that your daughter is a joint owner of your bank account. During one snowy Minnesota winter on her way from Rochester to Austin, she slides out of her lane, hits another car, and injures someone. When all is said and done, there is a judgment against your daughter in Mower County and it’s more than insurance will cover. The whole thing was an accident and yet, her assets are now available to cover the judgment. And her assets include your bank account.

The same situation holds true if that adult child goes through a divorce.  Maybe your adult son lives in Stewartville with his family, right up until he ends up in Olmsted County Court settling a marriage dissolution.  Your bank account may be considered as part of your child’s assets. And your funds could be distributed to your former in-law as part of the divorce.

What about when you pass away? Since your child is on the bank account, he is a legal owner and will be under no obligation to share the funds with siblings or other heirs. Not to mention the possible tax consequences that could arise. Contrary to popular opinion, it is not a good idea to give your children your bank account before you die instead of writing a proper will or estate plan.

So what can you do instead to maintain flexibility and protect your assets? If you need the child on the account now and you trust him, consider making him a signatory (not a co-owner).  Bankers in rural Minnesota are very helpful…ask your bank how you can set up the account to give your child signing privileges without making him an owner.  And if you’re considering it for estate planning purposes, please contact a qualified estate planning attorney who can help you develop a more comprehensive estate plan.