On March 21, 2014, Governor Dayton signed into law an Omnibus Tax Bill that alters the gift and estate tax landscape in Minnesota. Among the key provisions of the taxpayer-friendly legislation are the following:
1. Repeal of the Minnesota Gift Tax. The Minnesota gift tax, which was enacted last year and applied to certain gifts made after June 30, 2013, has been repealed retroactively to June 30, 2013. Accordingly, individuals who made taxable gifts in the second half of 2013 are no longer required to file a Minnesota gift tax return or pay Minnesota gift tax. Although Minnesota has eliminated its gift tax, gifts made within three years of death will continue to be included in a Minnesota resident’s Minnesota taxable estate. Under the laws that existed prior to July 1, 2013, it was possible to make lifetime gifts just moments before death that incurred no additional federal gift or estate tax liability and resulted in a substantially reduced Minnesota estate. We anticipate that clients who deferred making gifts after the passage of Minnesota’s gift tax last year may wish to reconsider their gifting strategies. We also anticipate that clients will consider making these gifts much sooner so as to avoid the three year look back.
2. Scaled Increase of the Minnesota Estate Tax Exemption. The Minnesota estate tax exemption increases to $1.2 million for decedents dying in 2014 and continues to increase $200,000 each year until the exemption reaches $2 million in 2018. For decedents dying in 2018 and beyond, the Minnesota estate tax exemption will remain constant at $2 million.
3. Changes in Estate Tax Rates. The legislation modifies the Minnesota estate tax brackets and eliminates the “bubble tax,” a marginal tax rate of 41 percent imposed on the first $100,000 of estate assets in excess of $1 million. For 2014, estate tax rates begin at 9 percent on estates exceeding $1.2 million and gradually increase to a top tax rate of 16 percent.
4. Establishment of a State QTIP Election. Personal representatives of Minnesota estates may now make a state QTIP election (in addition to a federal QTIP election) over assets passing to certain trusts for the benefit of a surviving spouse in order to qualify such assets for the marital deduction. Minnesota had previously allowed such an election only if a federal estate tax return was required to be filed. This provision provides more flexibility to estates that are not required to file a federal estate tax return.
5. Modification to Estate Taxation of Pass-Through Entities Owned by Non-Residents. In 2013, Minnesota enacted legislation that taxes the estates of non-residents to the extent they own an interest in a pass-through entity that, in turn, owns Minnesota real estate or Minnesota personal property. The new law somewhat reduces the burden on non-resident estates by offering a credit for estate taxes paid to another state with respect to such property and by excluding from Minnesota estate tax interests in certain pass-through entities whose ownership interests are publicly traded. However, most non-resident taxpayers will not be impacted by these changes and the taxation of pass-through entities owning Minnesota property will continue to be of concern for many of them. As always, we expect that clients will want to consider whether the type of entity they are using is appropriate for their business and overall tax exposure.
6. Income Tax Provisions. The new law introduces several new income tax deductions and credits; however, these deductions and credits have little impact for high net worth individuals. As such, we anticipate that many of our clients will continue to want to review their residency status for state income tax purposes. We recommend that Minnesota residents who desire to become residents of another state consult with us prior to moving, and that former Minnesota residents with continued Minnesota ties consult with us to put in place a plan to demonstrate their residency change.
We expect that many of our clients will want to revisit their estate plans to determine how to take advantage of these changes in the law, particularly with respect to family gifting programs. If you would like to discuss how the new Minnesota estate and gift tax laws affect you, please contact a member of Fredrikson & Byron’s Trusts and Estate Group.