When is your estate subject to estate tax? Minnesota is one of a handful of states that assess a tax on your estate when you pass away if certain limits are met. This type of tax is often referred to as a death tax and is assessed against the entire value of your estate. In contrast other states assess an inheritance tax, which is imposed on an individual beneficiary receiving an interest in an estate. Minnesota does not have an inheritance tax, so the people that inherit your estate will not pay this type of tax just because they received the inheritance. However, keep in mind that your heir/beneficiary may still have to pay income tax if you inherit an IRA/annuity type asset from your estate that includes pre-tax dollars.
The overall trend for states throughout the U.S. has been to either eliminate these taxes altogether or to increase the state limit to match the federal estate tax exemption amount, which is currently at $5,490,000 for 2017.
Currently, under Minnesota law an estate tax may be assessed if your total estate is over $2,100,000. Governor Mark Dayton eventually signed a tax bill in 2017 that increased Minnesota’s estate tax exemption to $2,100,000 effective January 1, 2017, with increases to $2,400,000 in 2018, $2,700,000 in 2019 and $3,000,000 for 2020 and later.
So based on Minnesota’s current limits, a married couple can pass up to $4,200,000 tax free to their heirs. Under federal limits, a married couple can pass up to almost $11,000,000 upon their death without having to pay any federal estate tax. Although not triggering federal tax, that family with $11,000,000 would still pay Minnesota estate tax based on the current limits that are lower than the federal limits.
What does all of this mean for you? If you have an estate that is valued at $2,100,000 or more you should give some consideration to estate tax planning options. Final values are determined as of your date of death, for example they are calculated based on bank/investment statements and with an independent real estate appraisal for all real property you own. Note, not only does this estate tax apply to Minnesota residents but it can also apply to non-residents who own real estate and/or tangible personal property and/or business interests located in Minnesota. Even when your Minnesota property is owned by a LLC, S corporation, partnership or trust, the law “looks through” the entity and treats the member, shareholder, partner or beneficiary as the owner which may then subject the estate to Minnesota estate tax.
Many families that have estates over the estate tax limit will set up a trust based estate plan to minimize estate tax concerns. Trusts can be a very beneficial tool in this situation to ensure that each spouse is able to take advantage of the Minnesota estate tax exemption in place at the time of their death.
Another option for families to help in minimizing their exposure to estate tax is to make lifetime gifts of their estate to their children, church or favorite charity. An individual may make gifts of up to $14,000/person on an annual basis without triggering the need for a gift tax return.
Sometimes it is hard for families to make these lifetime gifts with the unknown of what future care costs could be for themselves or their family members. In that case, families may choose to make bequests to charities or other organizations at their death. These bequests can result in a large tax benefit by reducing the size their estate that is subject to estate tax.
Even though families may not have estates that reach the level of the Minnesota estate tax limit, it still important to complete an estate plan. Seek input of your attorney, accountant and financial advisor to make the decision that best fits for you and your family.
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