Minnesota imposes an estate tax at death on the assets of anyone who, at the time of his or her death, either (i) was a Minnesota resident or (ii) owned real estate or business assets physically located in the State of Minnesota. The key points about Minnesota estate taxes are as follows:
- Unlimited Deductions: Certain assets do not trigger any Minnesota estate taxes. Any assets used to pay expenses or debts pass free of estate taxes. If assets pass to surviving spouse, such assets pass free of any estate taxes through the “unlimited marital deduction.” Likewise, assets passing to tax-exempt charities pass free of estate taxes through the “unlimited charitable deduction.”
- Exemption Amounts: While an unlimited amount of assets can be transferred to a surviving spouse or charity following death, Minnesota imposes an estate tax on the value of the assets passing to other family members in excess of one’s “exemption.” The “exemption” is the total amount of assets that can be transferred to family members regardless of the nature of the type of assets (e.g., real estate, life insurance, etc.) and the number of beneficiaries (e.g., two children or ten grandchildren). The relevant estate tax exemptions and tax rates for the year of death are as follows:
- The “Use It or Lose It” Attribute of the MN Exemption: Under federal estate tax rules, the Minnesota exemption amount for a married individual can be automatically transferred (called “ported”) to a surviving spouse for the surviving spouse’s subsequent use. In other words, federal estate tax rules essentially allow a married couple to double the exemption amounts. In contrast, the Minnesota estate tax exemption rules do not allow for the surviving spouse to automatically receive a deceased spouse’s exemption. It is therefore necessary to implement special planning in order to make use of both a husband’s exemption as well as a wife’s exemption.
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- Gifting Rules. There is no limit on the amount of lifetime gifts that can be made for Minnesota estate and gift tax law purposes. However, if a Minnesota resident dies within three years of making a gift, the value of the gift is considered part of the “estate” for purposes of determining a Minnesota estate tax liability. For more information, see my article on gift planning.