In the last days of Minnesota’s 2017 legislative session, new tax laws were passed by lawmakers and signed by Gov. Mark Dayton. Some of the new legislation included some changes to the Minnesota estate tax. Here are several updates:
Estate tax rate
Minnesota has an estate tax which is calculated pursuant to Minnesota Statute 291.016. For a decedent dying in 2017, a tax rate of 12% to 16% will be applied to the decedent’s Minnesota taxable estate. The Minnesota taxable estate is determined after applying all applicable exclusions.
Minnesota exclusion amounts
Though the Minnesota exclusion amount is still less than the 2017 federal estate tax exemption of $5.49 million, the Minnesota exclusion amount has increased. The Minnesota estate tax exclusion amount for decedents dying in:
• 2017 is $2.1 million
• 2018 is $2.4 million
• 2019 is $2.7 million
• 2020 and beyond is $3 million
Essentially, this means decedents dying in 2017 can transfer up to $2.1 million in assets to their heirs without paying a Minnesota estate tax.
Qualified business property, qualified farm property exclusions
In addition to the Minnesota exclusion amount, there are also exclusions for qualified small business property and qualified farm property. If the decedent owns these types of assets and their circumstances meet the qualified requirements, the value of these assets will be excluded from their estate up to the applicable limits.
The amount of the qualified small business property and qualified farm property exclusion is limited. These exclusions cannot exceed an amount that, when added to the Minnesota exclusion amount, the total excluded amount exceeds $5 million. For example in 2017, since a decedent has a $2.1 million Minnesota exclusion amount, the maximum qualified small business property and/or qualified farm property exclusion amount is $2.9 million, for a total exclusion of $5 million.
To qualify for the Minnesota qualified small business property and qualified farm property exclusions, the following requirements must be met:
1. The decedent’s Minnesota estate tax return includes an election claiming the qualifying deduction.
2. The property was included in the decedent’s federal adjusted taxable estate.
3. The property was owned by the decedent for three years prior to death.
4. The property passes to a qualified heir (family member), which include the decedent’s parent, grandparent, spouse, child or grandchild; or a trust whose current beneficiaries are all family members.
5. The heirs (family members) agree not to sell the property for three years after the decedent’s death or agree to pay a 16% recapture tax.
6. The heirs file two informational returns after the decedent’s death to confirm no recapture tax is due.
In addition, the qualified small business property exclusion requires the following:
• The property consists of assets of a trade or business or shares of stock or other ownership interest that are not publically traded.
• The decedent or the decedent’s spouse has actively participated in the trade or business.
• The property does not include any cash, cash equivalents or publically traded securities, or any assets not used in the trade or business.
• The gross annual sales of the trade or business were $10 million or less.
• A family member actively participates in the trade or business for three years following the decedent’s death or the heirs agree to pay a 16% recapture tax.
In addition, the qualified farm property exclusion requires the following:
• The property consists of agricultural land that is owned by a person or entity that is either not subject to or is in compliance with the corporate farming act.
• In the year of the decedent’s death, the property is classified as 2a agricultural land; and is classified as agricultural homestead, agricultural relative homestead or special agricultural homestead property.
• A family member maintains the 2a property classification for three years after the decedent’s death.
When planning to use the qualified business or qualified farm exclusions, it is important to consult with your tax professional and estate planner to make sure your circumstances will meet the requirements for these exclusions.
No portability of the Minnesota exclusion amount
There is no portability of the Minnesota estate tax exclusion amount. Under federal law, a surviving spouse is allowed to carry over the unused portion of his or her deceased spouse’s federal estate tax exemption amount by making a portability election on the deceased spouse’s federal estate tax return. Under Minnesota law, decedents must use their Minnesota exclusion amount or it will be lost.
It is important to make sure your estate plan protects the use of both your and your spouse’s Minnesota exclusion amount. In particular, it is important to watch out for the use of an “I love you”-type estate plan, where all your assets are transferred to your spouse. This type of plan might result in an unnecessary tax liability after the death of the surviving spouse.
Proper estate planning and administration of your and your spouse’s estate will ensure that you maximize the use of both your Minnesota and federal exclusions and avoid any unnecessary estate taxes.
Balzarini is an associate attorney with Miller Legal Strategic Planning Centers P.A., Rochester. Contact him at [email protected].