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Estate planning and tax planning go hand-in-hand

When Minnesotans think about estate planning, one of the first topics that probably comes to mind is tax planning. This issue has recieved a lot of attention over the past few years as a hot political topic, but it also has very real applications in our regular lives. One way that the estate tax matters is during the planning process, since it only applies to estate valued over a certain threshold, currently set at about $5 million for an individual.

This means that it is very important to put an accurate value on each asset to avoid overpaying taxes once the estate crosses that threshold. However, some assets are much harder to value than others and many Minnesota families own property with fluctating or difficult to determine values.

Various commonly held types of property can be hard to value, such as a domain name, intellectual property, movie or television credits, or a piece of art. These assets are hard to value because their earning potential over time fluctuates based on various unforeseeable circumstances.

For example, a piece of art purchased from a young artist or graduate student might have been more for aesthetic purposes than as an investment, and it could remain as a decorate in the owner’s home for many years. However, if the artist who create the work suddenly rises to prominence, the value could suddenly spike. By the same token, it could also suddenly decrease. This can cause problems because the estate tax liability is determined by the date of death or by a date designated after a grace period. If an asset changes value signficant between the date of death and a later date, the IRS may try to pursue additional taxes.

Source: New York Times, “Putting an Estate Value on the Assets Unique to You,” Paul Sullivan, Sept. 27, 2013.