Minnesota is one of 18 states that have an inheritance or estate tax. With a relatively low exemption value, this tax could affect you more significantly than you think—even if you don’t reside in the state. Here are four things you should know about it.
The tax, which can range from 10 to 16 percent, kicks in for any estate valued at more than $1.8 million ($3.6 million for married couples). As it stands, the exemption value will increase by $200,000 each year until 2018. For comparison, the federal estate tax exemption value is $5.49 million per individual.
Because of Minnesota’s relatively low exemption value, the estate tax hits many single individuals who have accumulated a certain amount of assets over their lifetime, as well as widows and widowers whose spouses used up the exemption when they passed.
In light of election results, many are wondering about the fate of Minnesota’s estate tax. It is possible that things may change, but, at the moment, Minnesota is still going to tax inheritances or estates that are being passed to others.
Just because you’ve moved your residency out of Minnesota doesn’t mean your estate is in the clear. This is because of a law passed in 2013 (amended in 2014) that regards non-residents owning an interest in a pass-through entity. If you own—or have owned—a Minnesota company, your estate could end up owing something for Minnesota estate taxes, even if you reside in a state that doesn’t have an inheritance or estate tax.
Here’s an example: Say a person lives in California and owns part of an LLC that holds a shopping center in Minnesota. The total estate is worth $5 million, and one-fifth of that is made up of Minnesota assets. Per Minnesota statutes, the state can tax this estate as if everything were in Minnesota, multiplying it by the appropriate tax rate and then take the percentage represented by Minnesota assets. Out of the $5 million, $1.8 million can be set aside because of the exemption. Now we’re looking at $3.2 million subject to Minnesota estate tax. The tax on this amount would be $364,000. So the state takes one-fifth of this number to get a roughly $72,800 tax bill.
Exploring how Minnesota’s estate tax laws may affect your estate is not a one-and-done affair. Because laws and families change, it’s important to revisit your situation with your tax advisors, including your attorney, on a regular basis. Addressing estate tax planning early on, of course, can help you be better prepared for what lies ahead.