New Minnesota Estate Tax Legislation Increases Estate Tax Payable When Assets are Left to a QTIP Trust
June 17, 2010
Last month, Governor Pawlenty signed legislation that significantly alters the estate tax obligations of decedents who leave property for the benefit of their spouses in qualified terminable interest trusts (often referred to as QTIP Trusts). The legislation is currently applicable only to individuals who die in 2010, but may be extended to apply in future years to address budget shortfalls. Your estate will be subject to the provisions of this legislation if you (i) are married, (ii) have a taxable estate that is greater than $1 million, and (iii) have an estate plan that allocates assets to a QTIP Trust.
A common allocation of assets under estate plans leaves the largest amount than can pass free of Minnesota and federal estate taxes to a Family Trust for the benefit of the surviving spouse and descendants with the remainder of the assets passing to a QTIP Trust for the benefit of the surviving spouse. This allocation of assets previously resulted in no estate taxes being payable on the first spouse’s death because allocations to QTIP Trusts qualified for the estate tax marital deduction for both federal and state estate tax purposes. However, under the new legislation (which was enacted in response to the fact that there is no federal estate tax in 2010) such an arrangement will now trigger Minnesota estate taxes on the first spouse’s death.
The new Minnesota legislation increases Minnesota estate taxes by proscribing the estate tax marital deduction for allocations to QTIP Trusts on that portion of the decedent’s estate that is greater than $1 million (the Minnesota estate tax exemption amount) but less than $3.5 million (the federal estate tax exemption amount that was in effect in 2009). The result of this new legislation is that if a decedent dies in 2010 with a taxable estate of $3.5 million and has an estate plan that allocates the Minnesota estate tax exemption amount to a Family Trust with the balance of the estate passing to a QTIP Trust, a Minnesota estate tax of approximately $229,000 will be imposed on the $2.5 million that passes to the QTIP Trust. If the decedent died in 2009 or earlier and provided for the same allocation of assets, no Minnesota estate tax would have been payable on the first spouse’s death because a QTIP election could have been made to defer all of the tax that would otherwise have been due.
The allocation of assets to QTIP Trusts should be carefully reviewed in light of this new and unexpected legislation. In many estate plans, the primary motivation behind a QTIP Trust is to defer payment of estate taxes. In these cases, more tax efficient options may be available. In other estate plans, it may be prudent to retain the QTIP Trust to provide for enhanced control over the assets, to ensure that the trust remainder passes to descendants, or to remove assets from the surviving spouse’s estate for federal estate tax purposes if a death occurs in 2010.
Given this unforeseen change in Minnesota’s estate tax, we advise that you review your estate planning documents to see if this new law affects your estate plan. If your estate plan allocates assets to a QTIP Trust, you may want to consider more tax efficient alternatives. If you would like assistance reviewing your estate planning documents to determine whether or not this new legislation could affect your planning, we are on hand to consult with you.
*REQUIRED IRS DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any matters addressed herein.*