Our Minnesota tax clients have many questions. Most of them relate to farm valuations and other estate planning strategies. But what about the Minnesota estate tax?
In this guide, we will examine the Minnesota estate tax and also cover gift and inheritance tax questions. The goal is to give you a starting point to understanding your current estate tax exposure and to set the stage for some planning ideas. If you have a sizable estate (or hope to someday), you may want to pay attention.
Table of contents
Minnesota Estate Tax
Unfortunately, Minnesota does impose an estate tax. The estate tax rate begins at 13% and goes up to 16% for estates that exceed $10 million. The Minnesota estate tax exemption is $3 million. So if your estate is less than that you will have no estate tax liability.
Very few residents will have assets that exceed $3 million. This is the reason 99% of residents will not be subject to it.
Is the Minnesota Exemption Portable?
Unlike the federal estate exemption, the Minnesota estate tax exemption isn’t portable. This means that you cannot combine both spouse’s Minnesota exemption to avoid paying the Minnesota estate tax. In other words, if one spouse passes away, the surviving spouse can only use the $3 million exemption.
Federal Estate Tax Limit
Commonly referred to as the death tax, the estate tax has been around for a while. It’s just that many people are not aware of it because it impacts so few estates.
The calculation itself is simple. The person in charge of the estate should identify all assets of the decedent. They would reduce this amount for any mortgage debt or other liabilities like credit cards or medical bills.
The most critical part is performing a valuation or appraisal on any businesses owned. Business interests can be very complex and there is a whole set of authoritative guidance that applies to their valuations. But needless to say, this is the part of the process that can take the most time.
Once net assets are calculated and all debts are reduced, the net amount over the exemption is multiplied by the 40% tax rate to determine the final estate tax liability.
If you think you may be subject to the estate tax, make sure to get with your CPA and estate attorney as quickly as possible. There are things you can do to mitigate your exposure. It’s never too late.
Estate & Trust Tax Returns
If you have a decedent spouse and have not yet filed your estate tax return, you may want to consider preparing a joint return for that year to avoid the inheritance tax. The exemption amount will continue to grow and will eventually expire after 2025.
However, if you’re the surviving spouse, there are a few different ways to maximize your exemption. The first option is to use the surviving spouse’s unused exemption.
This will enable you to claim your full estate. It is also important to keep in mind that estate taxes are based on fair market value, not the original purchase price. The value of estate assets will increase, but that will be reflected in the estate tax. This method protects your beneficiaries from paying taxes on their peak values.
Therefore, it is vital to protect your beneficiaries from any unexpected tax bills. However, this doesn’t mean that you can eliminate the tax, and the tax will be based on what you really owned at the time of your death.
The total value of your estate is based on the value of your assets, less your debts. Depending on the type of assets in your estate, determining the fair market value will be easier.
For instance, liquid assets are easy to value, so you can use this approach for valuing your estate. The unified credit will be used to reduce your tax bill. You can also use a combination of both methods, if necessary.
Minnesota Gift Tax & Inheritance Tax
Minnesota does not assessed an inheritance tax. But a Minnesota resident could face inheritance taxes if they receive money from a deceased person who lived in another state. This sounds counter intuitive. But in fact each state can impose it’s own tax structure.
In addition, Minnesota does not levy a gift tax. But you are still exposed to the federal gift tax. The IRS allows gifts up to $15,000 to individuals without the need to file a tax return.
How to Avoid the Minnesota Estate Tax
There are many strategies that can reduce or eliminate the estate tax. Make sure you consider the following options:
- Grantor Retained Income Trusts (GRIT)
- Gifts Below Annual Exemption
- Qualified Terminable Interest Property (QTIP)
- Irrevocable Life Insurance Trust (ILIT)
- Qualified Personal Residence Trusts (QPRTs)
- Grantor Retained Annuity Trusts (GRATs)
- Direct Medical and Tuition Payments
- Dynasty Trusts
- Charitable Gift Annuity
- Crummey Trusts
- Special Valuation of Farms and Businesses
- Family Limited Partnerships (FLPs)
- Charitable Remainder Trusts (CRUT)
- Minor Trusts
- 529 Plans
- Grantor Retained Unitrusts (GRUTs)
- Intentionally Defective Grantor Trust (IDGT)
- Donor-Advised Funds
When should you consider estate tax planning?
Estate planning can be tough. But each and every person should consider it. Folks who have the following situations should discuss an estate plan with their CPA and attorney:
- Business owners and serial entrepreneurs
- Retirement accounts over of $1 million
- People with large real estate holdings
- folks with life insurance policies in excess of $1 million
- People who stand to gain a large inheritance
- Medical and healthcare professionals
- CPAs, attorneys, engineers, IT professionals
- Consultants with significant earning potential
Tax Structure
Minnesota has a variety of taxes. We will summarize the taxes and the rates below:
- Minnesota’s state tax rates are among the highest in the U.S. The rates are graduated, with rates from 5.35% to 9.85%.
- Property tax rates average 1.2%, which is consistent with the national average.
- Sales tax starts at 6.875% and go to 8.375%.
