Beyond Federal Tax Reform: A Guide for Minnesota Estate Tax Planning
While the Tax Cuts and Jobs Act of 2017 increased the federal exemption from estate tax to $11M per taxpayer, the requirements regarding Minnesota Estate Tax were changed in 2017 for the years 2017-2020. In this article, we take a closer look at the Minnesota changes, non-resident estate tax that has far-reaching implications, and gift tax details that can help you with effective wealth planning decisions.
While the Tax Cuts and Jobs Act of 2017 increased the federal exemption from estate tax to $11,000,000 per taxpayer, the requirements regarding Minnesota Estate Tax were changed in 2017 for the years 2017-2020. In the sections below, we take a closer look at the Minnesota changes, non-resident estate tax that has far-reaching implications, and gift tax details that can help you with effective wealth planning decisions. The following article is an outline, so be sure to consult your tax advisor before taking action.
Minnesota changes –
- Exemption – the exemption or exempt amount of Minnesota property in an estate free from taxation was $2.1 Million in 2017, $2.4 Million in 2018, $2.7 Million in 2019 and $3 Million in 2020 and subsequent years. The maximum combined qualified small business property and farm property decreases each year, but the exclusion combined along with that deduction remains at a $5 Million amount.
- Tax rate – for 2017 the rate ranges from 12% to 16% of the assets in excess of the exemption. For 2018 the rate ranges from 13% to 16% of the assets in excess of the exemption
- Resident and domicile definition – certain factors used to determine status as a resident are no longer allowed to be used in a claim against the taxpayer. These include where your lawyer, accountant or financial advisor are located.
Non-residents estate tax concerns
If one owns an interest in a pass-through entity that holds underlying real property in the State of Minnesota would make a non-resident subject to a potential ancillary probate or other proceeding. That means a non-resident of Minnesota could end up owing Minnesota estate taxes on a portion of their estate.
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, $2.1 million can be set aside because of the exemption. Now we’re looking at $2.9 million subject to Minnesota estate tax in 2017. The tax on this amount would be $348,000. So the state takes one-fifth of this number to get a roughly $69,600 tax bill.
Gift tax concerns
While Minnesota does not have a gift tax in place at the current time, federal taxable gifts that were made within three years of death are added back for a Minnesota estate. This fact may be a substantial factor is ascertaining making larger gifts while one is living, rather than to have transfers occurring at one’s death.
Planning is Key
It is important to continue to readdress one’s estate tax planning with their proper professionals such as their accountant, lawyer and financial advisors. The key is to get out ahead of the potential issues in order to preserve a greater amount of your wealth for members of your family. For more information or to discuss your specific questions, please contact Barry Divine.