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Lifetime gifting for residents with a state estate, gift or

A common question for residents of states with an estate, gift or is whether to gift assets prior to death to reduce the taxable estate or retain assets. This would leave a taxable estate, causing beneficiaries to pay state estate or inheritance . Each strategy has merit, with the decision riding largely on the cost basis of the assets (assuming assets are not needed for lifestyle expenses).

Federal annual gift the stock is sold at a gain, the donee date the shares were distributed to Individuals may give any number of recognizes the gain and pays the tax. the heir, if sooner). Since you receive a basis adjustment, you will only be people up to $15,000 (in 2021) each Inherited stock: The general rule responsible for capital gains that in cash or in assets ($30,000 if your is your basis equals the might occur between the date of spouse joins in making the gift) value of the asset on the date of the death and date of sale. The holding without causing a federal taxable gift. donor’s death, unless the executor period automatically becomes long- chooses to value the estate’s assets term regardless of when purchased. Federal gift/estate on the alternate valuation date (six tax exemption months after date of death or the For gifts that exceed the annual exclusion, an individual would Minnesota example utilize all or part of the federal gift/ estate tax exclusion. The federal applicable exclusion amount is Assumptions: currently $11.70 million in 2021 (adjusted annually for inflation) and If gifted or sold Gross estate: If inherited $4,000,000 may be used during one’s lifetime. federal/MN MN estate tax: income tax: Consequently, if an individual utilizes MN asset to be gifted/inherited: $160,000 part or all of their gift/estate tax $252,375 $1,000,000 $1,000,000 exemption during their lifetime, Fair market value ($1,000,000 X 16% this will reduce the federal estate – 250,000) Cost basis of asset: tax exemption available at death. X 33.65%*) $250,000 How these gifts may be brought MN state estate back into the state taxable estate tax exemption (2021): varies, which is why careful $3,000,000 planning is recommended. *Max federal capital gains tax + NII tax + MN income tax Gifted vs. inherited assets The lesson learned: It might be better to hold low basis assets in the estate and distribute them upon passing, instead of gifting them while Gifted stock: If you receive stock as a the owner is still living. gift, you retain the donor’s cost basis and the donor’s holding period for the purpose of qualifying for long- term capital gain treatment. When

Investment and insurance products offered through RBC Management are not insured by the FDIC or any other federal government agency, are not deposits or other obligations of, or guaranteed by, a bank or any bank affiliate, and are subject to investment risks, including possible loss of the principal amount invested. Page 2 of 2 Lifetime gifting for residents with a state estate, gift or inheritance tax, continued

Gifting : If the 2021 estate tax 2021 top estate State Type of death tax strategy is to make the most of exemption tax rate the annual exclusion amount Connecticut Estate tax $7,100,000 12% when gifting real estate, gifting District of Columbia Estate tax $4,000,000 16% in pieces—physical pieces, or Hawaii Estate tax $5,490,000 20% percentages of , is worth Illinois Estate tax $4,000,000 16% consideration. Here is an example: Iowa Inheritance tax $25,000 15% Kentucky Inheritance tax $500 16% Samuel and his wife, Rhonda, want to Maine Estate tax $5,900,000 12% give their vacation cabin to their son, Estate tax, Maryland* $5,000,000, $0 16%, $10% Bryan. The cabin has a fair market inheritance tax value of $100,000, but their equity is Massachusetts Estate tax $1,000,000 16% only $60,000 because there is still Minnesota Estate tax $3,000,000 16% $40,000 left on the mortgage. In Inheritance tax Nebraska Up to $40,000 18% November, Samuel and Rhonda sign a (county level) Inheritance tax deed transferring the cabin to Rhonda New Jersey Inheritance tax 16% and Bryan as joint tenants, meaning up to $25,000 that Rhonda and Bryan each own New York** Estate tax $5,930,000 16% a one-half interest in the . Oregon Estate tax $1,000,000 16% (Samuel gave Bryan his $30,000 share Pennsylvania Inheritance tax $0 15% of the equity in the cabin.) Bryan’s gift Rhode Island Estate tax $1,595,156 16% from his parents is tax-free, because Vermont Estate tax $5,000,000 16% together they can give him up to Washington Estate tax $2,193,000 20% $30,000 each calendar year, so long * On April 5, 2018, HB 0308 became law. The new law provides that for 2019 and thereafter, as they file gift tax returns indicating the Maryland threshold will be capped at the fixed amount of $5 million rather than both spouses agree to split the gift being equal to the inflation-adjusted federal exemption as provided under prior law. ($15,000 per individual in 2021). The new law also provides for the portability of the unused predeceased spouse’s Maryland exemption amount to the surviving spouse beginning in 2019. The next calendar year, Rhonda ** As of January 1, 2019, the New York estate tax exemption amount will be the same as the federal estate tax applicable exclusion amount prior to the 2017 Tax Act which is $5,000,000 gives her half-share, worth $30,000, adjusted for inflation. The New York estate tax is a cliff tax. If the value of the estate is to Bryan. Even though only Rhonda more than 105% of the then current exemption, the exemption will not be available. makes the gift with gift splitting, the Source: Brentmark Estate Planning Tools v2020.02. The American College of Trust and Estate Counsel: https://www.actec.org/resources/state-death-tax-chart/ IRS considers it, for tax purposes, to have come from both spouses. The whole issue is very complex and state-specific (see map). Your financial advisor will be happy to help you and your legal advisors evaluate your options, including taking a look at the potential advantages and drawbacks of making lifetime gifts. By preparing cash flow projections using the RBC WealthPlan® analysis, we can help estimate how much you may feel comfortable gifting without jeopardizing your own financial security.

n State estate tax n State inheritance tax n State estate tax and state inheritance tax Source: CCH, A Wolters Kluwer Business

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