The Minneapolis-St. Paul Business Journal held a panel discussion recently on estate planning. Panelists included Sharon Olson, president, Olson Wealth Group; Nicholas Hulwi, attorney, Hellmuth & Johnson; Erika Toftness, attorney, Larkin Hoffman; and Jennifer Lammers, attorney, Best & Flanagan. Dyanne Ross-Hanson, president, exit planning strategies, served as moderator.
Dyanne Ross-Hanson: Estate planning is such a crucial topic that affects us all, whether we are planning for our own future or helping our clients navigate their options. And while many tools exist, including wills, trusts, etc. what do you find are often the most valuable?
Erika Toftness: Wills and trusts certainly each have their various practical applications. The primary difference between wills and trusts is that wills are meant to go through the probate process and trusts are not. There are certainly times when it is advantageous to be in the probate court, because that means that we get judicial oversight. I probably tend to choose the use of a will over a trust when I think the use of a judge might come in handy, because we anticipate disagreement among heirs. And wills tend to be useful for more modest estates where we’re relying on beneficiary designations, or where we have modest estates and minor children. With all of that said, though, most of my clients probably prefer the use of trusts. We frequently use irrevocable trusts to make lifetime gifts. And I find that my clients with closely held businesses like the idea that the size and extent of their estates will not become public knowledge, and so trusts are appealing to clients who are interested in privacy. Many of the financial advisors I work with also like trusts because they can be a bit more nimble, and faster to deal with post-death.
Jennifer Lammers: I think your best tool is a good advisor. It’s most helpful to have a professional lead the solution and help you with your goals. Who you want to have your money isn’t as different to determine, but how the people get your money can make all the difference. So whether or not you use a trust or a will really depends on what your circumstances are.
Sharon Olson: We put our clients at the heart of our approach and focus on what they want to accomplish. When we do estate planning, we actually do what’s called wealth transfer, and it involves so many aspects of wealth in the broadest sense. It’s the traditional financial assets, of course, that you put on your balance sheet, but then it’s also all the other harder to quantify assets, things that are intangible, like family name and reputation. Obviously, we spend a lot of time talking to families about their values and vision and create mission statements for them which we use to help families focus on what really matters and what they really want to accomplish. What is your overall legacy that you want to leave? What is it that you want your family to have said or done? What is the purpose of your wealth? Starting with some of these fundamental questions helps develop the other stuff. How do you approach asset protection? How do you balance using up estate tax exemptions and liquidity, while still maintaining flexibility? Starting out with some broad-based questions and decisions helps us build out the other part of it while keeping our clients and their families at the center of everything we do.
Ross-Hanson: Nick, what are some of the best strategies for Minnesota residents to protect their assets from potential creditors?
Nick Hulwi: Asset protection planning is an extremely popular topic. Asset protection planning has one simple goal: to shield assets from potential creditors. Of course, and unfortunately, there is no simple answer regarding how to accomplish that goal. In each situation, we need to consider who the potential creditors are, the nature of the potential claims, and the nature of the assets at issue. Without getting too specific, we typically consider the following: (1) maintenance of adequate insurance coverage to cover the potential risks; (2) the use of qualified retirement accounts, as such accounts may be protected from creditors under state and/or federal law; (3) the use of irrevocable trusts; and (4) the formation of entities such as LLCs or corporations to separate and protect personal assets from business liabilities.
Ross-Hanson: How does the Minnesota Department of Revenue identify residency when calculating potential Minnesota Estate Tax obligation?
Hulwi: Residency for estate tax purposes is focused on domicile, which is the place you intend to make your home permanently. The Department of Revenue considers several factors when determining an individual’s domicile. For example, where is the individual registered to vote? Where is the individual’s employer located? Where is the individual’s driver’s license issued? Where does the individual receive their mail? Does the individual still own residential property in Minnesota?
Ross-Hanson: Erika, can you help our readers understand how the Minnesota Estate Tax is levied and how they can plan for it?
Toftness: In Minnesota, you may be taxed if your net worth exceeds $3 million. You can leave an unlimited amount of money to your spouse if you are the first spouse to die without accruing any tax at that stage. And any gifts to charity that you make will reduce your overall Minnesota estate tax liability. But absent that, if your estate exceeds $3 million, amounts over that threshold may be taxed at a graduated rate between 13 and 16 percent. Minnesota has not adopted the concept of portability, which means that married couples cannot automatically combine their $3 Million exemption amounts. But there is some estate planning that we can do to try to help married couples pass up to $6 million estate tax free, instead of just the $3 million. Making gifts to charity is a great way to reduce your overall estate tax liability, as is making annual gifts to family. Each year you can give a certain amount to any individual on the planet without having to report that. In 2024, that exemption amount is $18,000 per person.
Ross-Hanson: The Tax Cuts and Jobs Act of 2017 (TCJA) brought about substantial changes to the tax landscape, significantly increasing the lifetime estate and gift tax exemption amounts ($13.61 million for individuals and $27.22 million for married couples). However, these exemption amounts are set to expire on Jan. 1, 2026, and — absent new legislation before then — will revert to approximately $7 million for individuals and $14 million for married couples, subject to inflation adjustments. Jennifer, are you advising clients to act in any way prior to this scheduled expiration date?
Lammers: We did a lot of planning in 2012 and we did a lot of, I would say, reactionary planning. And we also had clients that had buyer’s remorse from that. If you have a plan, your plan should not just be all about avoiding tax. Because when you go and you put yourself into these situations and you have a long life left, and you are planning to avoid tax with a long life left, it can be very difficult when you feel as if your estate plan is controlling your wealth. What is your lifestyle? What do you need for your lifestyle? And is it better to say I’m going to chip away at gifting over the years so that I feel like my gifting can keep pace with me and my age and my life than just doing these big lump sum gifts?
Ross-Hanson: How about you Nick, are you advising clients to make any sort of significant transfers or gifting prior to the scheduled expiration?
Hulwi: Although estate and gift taxes always need to be considered, such taxes are only one factor. Clients must consider the implications of a significant transfer of wealth on their personal finances and on their children (or other recipients of the gift). After the transfer, will the clients have the ability to maintain their current lifestyle or achieve their desired lifestyle? Will there be potential adverse consequences to the recipients of the gift? These factors may outweigh the potential estate and gift tax savings associated with making a significant transfer now to take advantage of the current exemption amount.
Ross-Hanson: Sharon, what are you finding some of the more effective tools that families can use to help convey their individual values across generations?
Olson: The first thing that we try to encourage is making sure that we have multiple generations involved in the process and sitting around the table together. We use the values cards as an example, because that’s an easy way to have family members engage about values. Each child selects five cards that reflect their values. And then as a family, they go around, share their values, and then the family comes up with their five shared values, just as an exercise, for example. Some family members will say, I’m worried about how much wealth I give away and what impact that will that have on my beneficiaries. I want them to feel good about it, but I also don’t want them to lose an incentive to work, or I don’t trust that they’ll have the ability to manage this beyond me. For some larger families with three+ generations and numerous branches of the family, in order to drive the values discussion, we will not hesitate to bring a dedicated facilitator to help guide the conversation and build trust.
Ross-Hanson: Are you noting any trends surrounding generational differences when it comes to investing?
Olson: Younger generations tend to be very focused on values and how their values can have a real-world impact. So, I’ve seen more of Gen Z, Millennial, and even Gen X family members wanting to talk about how their values align with their investments. A lot of discussions about ESG (environmental, social, governance) type investments tend to come from this next generation. The Environmental component of ESG has been a focus of the Next Gen for some time, with the Social and Governance aspects increasingly coming to the center of the conversation in recent years. Also, how the Next Gen uses technology and digital tools to absorb and process information about their investments and estate planning continues to be a rapidly evolving area.
Ross-Hanson: Erika, share with our readers how you assist clients who are interested in charitable giving as it pertains to their estate planning?
Toftness: Yes, there are certainly a number of different ways to give money to charity. Of course, you can just make charitable gifts, but usually there are more income and estate tax-efficient vehicles for making charitable gifts, both throughout your life and at death. Retirement accounts are a great way to leave money to charity, especially since the passage of the Secure Act in 2019, which drastically changed the way that retirement funds get taxed when we leave them to non-spouses. When we leave retirement accounts to our children now, most of the time we can only stretch that retirement account over a 10-year period. For clients of mine who would like to give a portion of their estate to charity, we’re directing retirement funds to charitable organizations, because we can then take monies that have never been taxed from an income perspective and give them to organizations who are never going to pay tax on them.
Donor-advised funds have also become very popular in the last 10 years. A donor-advised fund is like a charitable account that you can set up at an organization, usually a brokerage house, and they sponsor that account, and you can make donations to that tax-free. The money in the Donor Advised Fund then grows tax-free. Clients tend to really like donor-advised funds because they are flexible and inexpensive to set up. The organization that is responsible for custody of that account helps manage the investments of that account, and also can direct where those monies end up going if clients wish.
And, of course, we can always use charitable remainder trusts. Clients tend to like the use of charitable remainder trusts when they’re trying to create an income stream for themselves over their lifetime, but they can also get an immediate tax deduction by giving money to a charitable remainder trust. The downside to charitable remainder trusts is that they can be a little bit less flexible, because they are irrevocable trusts.
Olson: The qualified charitable deduction as well for an RMD, I think, is another avenue that for IRAs that really works well. To preserve the stretch, we’ve actually named a charitable remainder trust as the beneficiary of the IRA so that when the IRA owner dies, their kids get income and then eventually goes to charity. At times, we have taken an additional step and named a donor-advised fund as the beneficiary of a charitable remainder trust. Decisions around the selection of charities and the family values on which those charities are chosen can bring generational continuity and cohesion among generations about family wealth. A donor-advised fund allows those decisions to continue within the family even after the death of the original donor.
Lammers: The donor-advised fund is such a great tool for clients, especially if they change their minds about charities frequently. You can also name the donor-advised fund as a beneficiary under your will or trust. And you don’t have to change your will or trust every time you want to designate your beneficiaries under that.
Ross-Hanson: Do you find that a family’s approach to charitable gifting may reinforce family values or cohesion?
Lammers: I don’t think people are looking at a charitable gift just as a way to donate money. It is a shared vision that combines the purpose of the family wealth and, as I mentioned earlier, the discussions around values. If it’s a private foundation, the question as to why was it created and what has been important — most of that is described or transcribed through a family mission statement. That is something that can help for family decisions for multiple generations.
Ross-Hanson: Nick, any suggestions, considerations, or best practices that you advise clients on with regard to health care directives or power of attorney as they develop their estate plan?
Hulwi: The second part of the Minnesota health care directive asks a lot of specific questions. Rather than complete this part of the directive, I typically advise my clients to discuss these issues with their nominated health care agents. That way, as long as the client keeps the agents up to date with the client’s wishes, the client does not have to update the directive each time the client’s thoughts and feelings change.
Ross-Hanson: Any other advice surrounding health care directives or power of attorney?
Olson: One area that gets missed is having those documents for adult children.
When children turn 18, they legally become adults, and parents lose the right to make health care and financial decisions on their behalf. This transition can leave parents in a difficult position if their adult child becomes incapacitated or unable to make decisions independently, which is why we begin conversations about these issues with parents and their children well in advance of the children turning 18, so that there is not a gap in later years.
Regularly reviewing and updating these documents as adult children continue through young adulthood is also important to reflect any changes in preferences or circumstances.
Lammers: Clients have a tendency to think of the health care directive in Minnesota as the pull-the-plug document. The document is actually used more for where you’re going to receive your care, who’s going to be your care provider, how your care is going to be administered to you, what medications you’re on. It’s a more encompassing document than a simple decision. So I think it’s important for clients to understand that it’s your caregiver you are naming not just a one-time decision maker. Who would you want to be your caregiver, more than, who do you want to be the ultimate decision maker? Be cautious about being too specific. We all lived through COVID and we had people who put on their health care document, “I don’t want a ventilator.” Well, a ventilator can be used as a treatment, not necessarily an end-of-life mechanism. I think it’s important to look through that health care directive and have a conversation with your health care agent, and let there be some ambiguity, because the circumstances are never black and white.
Ross-Hanson: As advisors, we often recommend that clients revisit and review their estate plan and corresponding documents. Are there any unusual “life events” that prove critical to initiate review?
Olson: The big life changes, of course. Conventional rule of thumb is to at least look at your documents every three to five years. I find people forget who they chose as their trustees. Choosing a trustee is really an important piece. As wealth grows, is the trustee that you chose when your estate was here, the same trustee that you want now that things have changed? Then the obvious ones, marriage and babies and all of that kind of change.
Lammers: I always say, death, disability and maturity. Those are sort of the big three that I look at. You have someone who passes who you’ve had named as your fiduciary, or you have children that have matured into new roles, or they can take on those roles, or they don’t need to have assets and trust anymore.
Ross-Hanson: How about common misconceptions surrounding estate planning? Anyone want to share opinion on those?
Toftness: I have a number of clients who think that because they have a will, their estate is going to avoid probate. That’s a super common misconception—that wills avoid probate, when it’s actually the reverse. Wills are basically like a letter to a judge telling the judge how you’d like your estate to be administered. It’s one of the biggest misconceptions I see.
Olson: Once they have their documents in place, if it’s a trust, I think people inevitably forget that they have to put assets in there. They also forget that your beneficiary on your IRAs take precedence over other documents. That one becomes surprisingly confusing to people. People get very confused, like I said before, by their trusts, by trusts in general.
One thing I was going to get back to, should you use your exemption today. I think that if you are a business owner who is that is planning to sell your business anyway, that you may be a more likely candidate. You do get the marketability minority discount on the gift. That also doesn’t mean you have to sell your business to another firm. You can transfer ownership to other family members.
Ross-Hanson: Thank you all for your valuable insight today.
You can read the original Minneapolis/St. Paul Business Journal article here