Estate Planning and Tax Planning
If you're wondering about how estate taxes in Minnesota work, this simple guide will help.
Understanding how estate taxes work in Minnesota is critical for effective planning and part of our LifeWealth Plan process, this guide will help but reach out to our Wealth Managers for deeper discussions.
It’s important to note that his guide is only meant to give you a brief overview. You should work with an estate planning attorney and financial advisor when doing your estate planning in Minnesota.
In addition, estate planning is not a one-and-done affair. Your life circumstances will change, so it's important to review your estate plan annually.
Do You Need to File a Minnesota Estate Tax Return?
Determining whether you need to file a Minnesota estate tax return depends on the value of the deceased's estate.
As of 2023, if an estate's value exceeds $3 million, a return is required. This threshold includes all assets, such as real estate, bank accounts, investments, retirement accounts, life insurance policies, and personal property. It's a good idea to consult with an estate planning attorney and a tax professional to ensure all assets are accurately accounted for and to navigate the complexities of estate valuation.
What Is the Minnesota Estate Tax Rate?
Minnesota imposes a progressive estate tax rate ranging from 13% to 16%, depending on the value of the estate.
For estates just over the $3 million exemption, the lower rate of 13% applies, increasing incrementally to a maximum of 16% for larger estates.
Understanding these rates is crucial for making informed decisions about estate management and tax planning. According to the Minnesota Department of Revenue, “to correctly calculate the estate tax, you must complete the federal Form 706 and Minnesota Form M706.”
Filing Requirements
Estates with a gross value exceeding $3 million must file a Minnesota estate tax return using Form M706, along with the federal Form 706.
These forms must be submitted within nine months of the decedent's death. Essential documents, such as the death certificate, will, and records of all assets and liabilities, should be gathered promptly. Accurate and complete information is crucial to avoid potential penalties or delays. (+)
Strategies for Minimizing Estate Taxes
Minimizing estate taxes involves several strategies.
Charitable giving reduces the taxable estate, while lifetime gift strategies can also lower the estate's value. Establishing trusts, like irrevocable life insurance trusts (ILITs) or grantor retained annuity trusts (GRATs), may effectively remove assets from the taxable estate.
Family trusts may also be an option in some estate planning circumstances. If you are married and your estate is over $3M, then you should speak with an estate planning attorney, as you may be subject to an estate tax if planning is not done correctly. (+)
Consulting with an estate planning professional is always a good idea. However, for Minnesotans with a high net worth, seeking professional guidance is critical. Estate Planning is included in the 4 Pillars of Wealth within our LifeWealth Plan and should be reviewed regularly with your team.
Recent Gifts Might Also Be Subject to Estate Tax
Gifts made within three years of death may be subject to estate tax, impacting the overall tax calculation.
Known as the "three-year rule," this provision allows for the value of federally taxable gifts to be clawed back into the estate. Keeping detailed records of all significant gifts and understanding their potential tax implications is essential. Proper planning and documentation can mitigate surprises during the estate settlement process.
Qualified Small Business and Farm Property Deduction
Minnesota provides deductions for qualified small business and farm property to encourage the preservation of these enterprises.
To qualify, the property must meet specific criteria and continue operating as a business or farm. This deduction can significantly reduce the estate's taxable value, potentially lowering the overall tax liability. Maintaining detailed records and adhering to state requirements are essential for successfully claiming this deduction.
Tax Responsibilities for Personal Representatives
Personal representatives play a crucial role in managing and settling estate taxes.
Their responsibilities include valuing the estate, filing necessary tax returns, and paying any taxes due. They must also keep detailed records, communicate with beneficiaries, and ensure compliance with both state and federal laws. Understanding these duties is vital to effectively managing the estate and avoiding legal complications.
Federal Estate Tax vs. Minnesota Estate Tax
Federal and Minnesota estate taxes differ in exemption thresholds and rates.
As of this writing, the federal estate tax exemption is significantly higher, at $13.61 million per person for 2024, compared to Minnesota's $3 million.
However, in 2025, the federal exemption will be reduced to $5 million, adjusted for inflation. Additionally, the federal estate tax rate starts at 18% and can go up to 40%.
Understanding these differences is crucial for effective estate planning, as strategies may vary significantly based on the tax implications at both state and federal levels. Combining knowledge of both systems ensures comprehensive planning and optimal tax outcomes.
For the most up-to-date information, visit the IRS website’s page on Form 706.
If you're looking for guidance or wishing to discuss how this could impact you, consider scheduling a no-obligation 15 minute call with one of our advisors.
Estate Planning Strategies
Key estate planning strategies in Minnesota include the following:
Using the $3 million estate tax exemption to reduce the tax liability
Establishing trusts, such as irrevocable life insurance trusts (ILITs) or grantor retained annuity trusts (GRATs), could help remove assets from the taxable estate
Making lifetime gifts up to the annual exclusion amount could potentially lower the estate's value
Charitable giving to reduce the taxable estate
Leveraging deductions for qualified small businesses and farm properties
Consulting with an estate planning attorney ensures strategies align with individual needs and goals
Working with your financial advisor and wealth management team to ensure you have a holistic strategy
Ensuring clear communication between your financial planner, attorney, and accountant when utilizing estate planning strategies
Common Questions About Estate Taxes in MN
Are there Minnesota estate tax exemptions?
Yes, Minnesota offers exemptions for qualified small business and farm property and charitable contributions.
What is the inheritance tax in Minnesota?
Minnesota does not have a separate inheritance tax. Instead, it imposes an estate tax on the overall value of the deceased's estate.
Is there a death tax in Minnesota?
Minnesota imposes an estate tax on estates exceeding the $3 million exemption threshold.
Is there a Minnesota gift tax?
No, Minnesota does not have a separate gift tax; however, gifts made within three years of death may be included in the taxable estate.
What is the federal gift tax?
The federal lifetime gift tax applies to transfers of money or property exceeding $18,000 per recipient per year, with a lifetime exemption of $13.61 million as of 2024.
Make sure you speak with your accountant to get the most up-to-date information.
The gift tax exemption allows you to give a certain amount of money or assets to someone without having to pay federal gift tax.
There are two main components:
Annual Exclusion: As of 2024, you can give up to $18,000 per recipient per year without any gift tax implications. This amount is called the annual exclusion.
Lifetime Exemption: Over and above the annual exclusion, you have a lifetime gift tax exemption, which is $13.61 million in 2024. This means you can give away up to this amount over your lifetime without incurring gift taxes. However, gifts exceeding the annual exclusion reduce this lifetime exemption.
Example: As of 2024, if you gift $100,000 to a loved one, $18,000 is excluded from tax under the annual exclusion. The remaining $82,000 reduces your lifetime gift tax exemption from $13.61 million to $13,528,000.
Do you need to file an estate tax return?
If the estate's value exceeds $3 million, you must pay estate taxes and file an estate tax return in Minnesota.
How do I avoid estate tax in Minnesota, and can trusts help reduce estate taxes?
You may be able to avoid estate taxes using charitable giving, lifetime gifts, and trusts, which help reduce the taxable estate value through strategic asset allocation.
What estate tax deductions are available in Minnesota?
Deductions in Minnesota include qualified small business and farm property, charitable contributions, and certain administrative expenses, reducing the overall taxable estate.
How does residency affect estate taxes?
Minnesota residents' entire estate is subject to state taxes; non-residents are taxed only on property located within Minnesota's jurisdiction.
Does Minnesota offer estate tax portability?
Minnesota does not offer portability of the state estate tax exemption, meaning each spouse must plan separately for their $3 million exemption.
For effective planning, consult an estate planning attorney to navigate Minnesota's specific requirements and maximize estate tax benefits. For more details, visit the Minnesota Department of Revenue.
What is the process for paying estate taxes in MN?
File Form M706 within nine months of death, and if needed, arrange for installment payments to manage the estate tax liability.
What is a gross estate tax exemption?
A gross estate tax exemption is the threshold amount of an estate's total value that is exempt from estate taxes.
Any estate value above this amount is subject to taxation. In Minnesota, the gross estate tax exemption is $3 million. Estates valued above this amount are subject to Minnesota estate taxes.
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If you need a wealth management team to help you achieve your big-picture goals, we recommend scheduling a call with a financial advisor at 360 Financial. 360 Financial is one of Minnesota’s best independent wealth management firms. We work with clients in Minnesota and across the US. If you’d like to work with a team that always puts your best interests first and is committed to helping you create a lasting legacy, please get in touch.
About the Author
William Grant
Will Grant enjoys empowering people to make informed decisions and seeing the positive impact his guidance can have on their lives.
Prior to joining 360, he spent seven years serving hundreds of clients at a boutique RIA focused on healthcare executives with equity compensation and then at a large, independent RIA. He earned a Bachelor of Science degree in Finance from Miami University and holds his Series 7 and 63 licenses through LPL Financial and his 65 license through 360 Financial.
Will lives in Minneapolis with his fiancée, Melissa. In his free time, he enjoys competing in triathlons, golfing and is an active member of the Minnesota Leadership Council for the Chick Evans Scholarship Foundation, which he was a recipient of.
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Financial Planning and Estate Planning in Minnesota
If you need financial planning assistance and a wealth management team to help you achieve your big-picture goals, we recommend scheduling a call with a financial advisor at 360 Financial.
360 Financial is one of Minnesota’s best independent wealth management firms. We work with clients in Minnesota and across the US. If you’d like to work with a team that always puts your best interests first and is committed to helping you create a lasting legacy, please get in touch.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
