Although the primary focus on your estate plan may be the distribution of your estate assets after you pass away, there are a multitude of other factors that should be considered and incorporated into a comprehensive estate plan. Preserving the value of the estate you pass along, for example, should be an important goal when you are planning your estate. To achieve that goal, you need to understand how estate taxes will impact your estate plan. Toward that end, a Grand Forks attorney at Thompson Law explains what you need to know about taxes and Minnesota estate planning.
Federal Gift and Estate Taxes
In the United States, the federal government collects a gift and estate tax, essentially a levy on wealth transfer. Every taxpayer is obligated to pay this tax, if their estate qualifies, which is calculated based on the total value of the decedent’s estate and the qualifying lifetime gifts (most gifts qualify). To illustrate, if your estate is valued at $20 million upon death and you’ve made lifetime gifts worth $5 million, your taxable estate for federal gift and estate tax purposes would be $25 million, with a 40 percent tax rate applied. Without any adjustments, your estate would owe a whopping $10 million to Uncle Sam. The good news is that the “lifetime exemption” plays a crucial role in mitigating federal gift and estate taxes. For 2024, the lifetime exemption was set at $13.61 million. Applying this exemption reduces the taxable estate from $25 million to $11.39 million, consequently lowering the estate’s tax liability from $10 million to just over $4.5 million.
Is There a Minnesota Estate Tax?
While the federal gift and estate tax applies to every taxpayer, each individual state also has the ability to impose a state level estate tax. As of 2024, 12 states and the District of Columbia do collect a state level estate tax. Minnesota is among the states that impose a state level estate tax. Consequently, your estate could owe taxes to both the United States and to the State of Minnesota after you pass away.
One difference between the Minnesota estate tax and the federal estate tax is that Minnesota does not include gifts in your taxable estate whereas the federal government does. Minnesota does allow each taxpayer to make use of an exemption, similar to the federal lifetime exemption, but the Minnesota exemption is only $3 million as of 20244. Another difference between Minnesota and the U.S. federal government is that while the federal tax rate is a flat 40 percent, Minnesota imposes a tax rate from 13 to 16 percent.
Does Minnesota Impose an Inheritance Tax?
Taxes can be extremely confusing as can the terminology used to refer to the different ways in which the government can impose a tax. Consequently, people often get “inheritance” and “estate” taxes confused and/or think they can be used interchangeably. Although both taxes relate to assets transferred after the death of the owner, they are two distinct types of tax obligation. An estate tax is imposed on the estate of a decedent, meaning the tax is calculated prior to assets being distributed and must be paid by the estate itself. An inheritance tax, on the other hand, is imposed on the person inheriting assets and is paid by that beneficiary or heir. Few states (six as of 2024) impose an inheritance tax and Minnesota is not one of them. While that means that you do not have to worry about a Minnesota beneficiary owing estate taxes based on the inheritance you leave them, you may need to factor in the impact of inheritance taxes if a beneficiary lives in a state that does collect inheritance taxes.
How Can I Avoid Estate Taxes in Minnesota?
As you can see, the value of the assets ultimately passed down to loved ones can be significantly diminished by estate tax obligations if you fail to plan accordingly. Fortunately, however, there are numerous estate planning tools and strategies that can help your estate reduce, if not entirely avoid, any state or federal estate tax obligations. Along with making use of the federal and state exemptions, common tax avoidance strategies involve:
- The annual exclusion. The annual exclusion allows each taxpayer to make annual gifts valued at up to $19,000 for 2025 to an unlimited number of beneficiaries without those gifts counting toward your federal lifetime exemption. If you are married, you can combine your annual exclusion with that of your spouse, allowing you to make gifts valued at up to $38,000. You can transfer a significant amount of assets using the annual exclusion if you start early. In just 10 years, you could transfer almost $1.5 million tax-free to four beneficiaries if you combined your exclusion with your spouse.
- Lifetime gifting. Transferring as much wealth as possible during your lifetime is a simple, yet effective, way to limit your estate’s exposure to taxes. Minnesota does not impose taxes on gifts made during your lifetime. Although the federal government does impose a tax on gifts, an experienced estate planning attorney can help you make lifetime gifts that reduce or eliminate taxes.
- Asset protection trust. There is a trust tailored to fulfill nearly any estate planning objective, including safeguarding assets. Asset protection trusts are irrevocable trusts because the assets within such trusts are legally considered to be property owned by the trust once the transfer occurs. As a result, these assets are excluded from your estate when calculating federal gift and estate taxes.
Do You Have Questions about Taxes and Your Minnesota Estate Planning Efforts?
Please view one of our On-Demand webinars to receive a free consultation. If you have additional questions about Minnesota estate planning and taxes, contact a Grand Forks estate planning attorney at Thompson Law by calling 605-362-9100 to schedule an appointment.
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