If you’re a Minnesota resident (or own a lot of property there), the state may impose its own estate tax on the assets you leave at death, if the assets have a total value of more than $1.4 million.
The Individual Exemption
Minnesota provides an estate tax exemption for individual estates. In 2015, this individual exemption is $1.4 million, so only estates larger than $1.4 million will owe tax. The individual exemption will rise by $200,000 a year until it reaches $2 million in 2018.
The individual exemption for federal estate taxes is $5.43 million for deaths in 2015. That means that even if your estate isn’t large enough to owe federal estate tax, it may still owe the separate Minnesota estate tax.
The $5 Million Business and Farm Exemption
Some small businesses and farms qualify for a $5 million exemption from Minnesota estate tax. (Although the individual exemption will rise over the next few years, the exemption for businesses and farms remains capped at $5 million.)
To qualify, a business must meet several requirements, including:
- It must be closely held (not publicly traded)
- It can have no more than $10 million in annual gross sales
- You or your spouse must have been participating in the business
- You must have owned the business for at least the three years before your death
- You must leave the business to a family member
- The relative who inherits the business must participate significantly in its management for three years after your death
Many of the requirements are the same for a farm, but there are some additional hurdles to clear. The farm must also be your "agricultural homestead," and it will be classified as a family farm only if you meet detailed rules about ownership. Talk to an experienced estate planning lawyer if you think your farm or business could qualify for this special estate tax exemption; this is complicated stuff.
Recent Gifts Also Subject to Tax
Some gifts made within three years of death are also subject to estate tax. This law aims capture estate tax from those who try to reduce their estate tax liability by giving away their property shortly before they die. However, this gift tax only applies to gifts that are taxable under federal law -- that is, gifts larger than $14,000 per recipient per year. So gifts less than $14,000 (per recipient, per year) would not be subject to Minnesota estate tax.
Although this law makes giving large gifts less attractive, it still leaves plenty of room for reducing the size of an estate through tax-free gifting. For example, if a couple leaves each of their three children and their spouses $14,000 per year, after five years, they will have reduced their estate by $420,000.
The Minnesota Estate Tax Return
Executors must file estate tax returns for estates that exceed Minnesota's individual estate tax exemption (see above). But filing a return doesn’t mean the estate will necessarily owe tax. Property left to a surviving spouse is exempt from state estate tax, no matter what the amount. Some expenses can be subtracted from the gross estate, lowering the value of the taxable estate. If the taxable estate’s value is less than $1.4 million (or more if the farm and business exemption applies), no tax will be due.
Nonresidents may owe Minnesota estate tax, too. The state taxes nonresidents’ assets that are physically in the state. So if you don’t live in Minnesota but own valuable real estate there or keep other tangible assets in the state, your estate might have to file a Minnesota estate tax return.
The Minnesota tax return starts with your gross estate, as it's calculated on a federal estate tax return. It includes whatever you own at your death:
- Real estate
- Bank accounts
- Investment accounts and securities
- Vehicles and other tangible items
- Proceeds from life insurance policies on your life, unless you didn’t own the policy
- Retirement account funds
- Your interest in a small business (sole proprietorship, limited liability company, or small corporation)
It may also include:
- Taxable gifts you made during life (more than the annual exclusion amount from federal gift tax, which is currently $14,000 per year per recipient),
- Life insurance proceeds, if you transferred the policy to an irrevocable life insurance trust within three years of your death.
Assets are included in your estate, for tax purposes, even if you held them in a living trust. The taxing authorities don’t care whether or not the assets go through probate.
If a Minnesota return is necessary, the executor must file it 15 months after the date of death (nine months after the death plus an automatic six-month extension). A federal estate tax return must be prepared and attached, even if it doesn’t have to be filed with the IRS. Professional help (someone experienced with estate tax, not just regular income tax) will be necessary to prepare these extremely complicated tax returns.
The estimated tax must be paid nine months after the death. Penalties and interest accrue on the unpaid amount. The state may accept installment payments if the estate is also paying federal estate tax in installments. If the IRS grants the estate an extension to pay federal tax, the estate won’t have to pay a late payment penalty on any tax due Minnesota that’s not paid by the regular due date.
The Minnesota Revenue Department provides information and downloadable forms and instructions.