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Limiting Your Minnesota Estate Tax Liability

Aaron Wenthold, CPA | Tax Manager | Boeckermann Grafstrom & Mayer

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A federal and or state estate tax liability may be due based on the amount of wealth the decedent accumulated over the decedent’s life. For 2020, a federal estate tax is due if accumulated wealth is over the federal exemption amount of $11.58 million per individual and the highest federal estate tax rate is 40%. The federal exemption amount of $11.58 million may be transferred, aka “portable”, between spouses. The reason many estates do not pay a federal estate tax liability is because the federal portability election allows a combined federal exemption of $23.16 million of wealth to be protected from the federal estate tax. However, even though the decedent’s accumulated wealth is under the federal exemption amount, the Minnesota exemption amount is a lot lower and a Minnesota estate tax liability still may be due!

The threshold for paying a Minnesota estate tax is when the decedent’s accumulated wealth is over the Minnesota exemption amount of $3 million for 2020. The Minnesota estate tax rate starts at 13% and goes up to 16% on estates over $10 million. Any wealth below the Minnesota exemption amount of $3 million is not taxed.

Unlike the federal estate tax, the Minnesota estate tax exemption cannot be transferred, or isn’t “portable”, between spouses, meaning you cannot combine both spouse’s Minnesota exemption to avoid paying the Minnesota estate tax. In other words, if one spouse passes away, and passes all their wealth to the surviving spouse, then the surviving spouse has all the wealth, but may only use a $3 million exemption.

For example, a couple has a home worth $500,000, investments worth $1.5 million, life insurance worth $1 million, and a business worth $2 million for total wealth of $5 million. Also, each spouse has an individual net worth of $2.5 million. If one spouse passes away, and leaves their $2.5 million to the surviving spouse, there would not be a Minnesota estate tax liability for the first decedent because their individual worth of $2.5 million is less than the $3 million exemption. When the surviving spouse passes away later, they have a net worth of $5 million which is above the $3 million exemption. As a result, the Minnesota estate tax liability on the $2 million would be approximately $260,000 due nine months after death of the surviving spouse.

Be aware that even though you may be in the clear from a federal estate tax liability, you may still have a Minnesota estate tax liability to settle with the Minnesota Department of Revenue. The good news is that both Minnesota and federal estate taxes may be avoided with proper estate tax planning.

Some tax planning ideas include:

  • Making tax free annual gifts;
  • Determining if your small business qualifies for the Minnesota Qualified Small Business Deduction; and/or
  • Forming various types of trusts.

To learn more, contact Aaron Wenthold at [email protected] and visit our Estate and Trust Services page: https://bgm-cpa.com/services/tax-services/estate-trust-services/

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