Understanding the Minnesota Estate Tax
Many people believe that the Estate Tax only affects the very wealthy. With a 2016 Federal Estate Tax Exemption of $5,450,000 (increasing to $5,490,000 for 2017) and the opportunity to carryover any unused exemption to a surviving spouse (under a DSUE election) allowing a married couple to shelter up to $10,900,000 ($10,980,000 for 2017), it may seem that this is the case.
However, if you are a resident of Minnesota or you are a nonresident of Minnesota with property located in the state, you have a much lower filing threshold. For taxpayers passing away in 2016 with gross assets of $1.6 million or more (increasing to $1.8 million in 2017 and $2.0 million in 2018+), their Estates will be required to file an Estate Tax Return with Minnesota Revenue.
REACHING THE FILING REQUIREMENTS
To determine whether an Estate would meet the filing requirements, depends on whether the decedent was a resident or nonresident of Minnesota at the time of his/her passing.
Minnesota Residents – must file if his/her Federal Gross Estate (before netting of any debts, liabilities or administrative expenses) plus Federal Adjusted Taxable Gifts made within 3 years of the date of death exceeds $1.6 million ($1.8 million in 2017 and $2.0 million in 2018+) or if the Estate is required to file a Federal Estate Tax Return.
Non-Minnesota Residents – must file if he/she owned real (real estate) or tangible personal property located in the state of Minnesota and the Estate meets the requirements of a Minnesota Resident listed above.
CALCULATING THE TAX
To calculate if an Estate would owe Minnesota Estate Tax, the tax rate is a graduated rate starting at 10% going up to a top rate of 16% on taxable estates over $10.1 million.
First calculate the net taxable estate (gross assets less liabilities) and adding in gifts made within 3 years of death (made after 6/30/2013) and subtracting the value of qualified small business property and the value of qualified farm property, then the net taxable estate is multiplied by the marginal tax rate (ranging from 10-16%) to arrive at the Minnesota Estate Tax.
For Non-Minnesota Residents, the Minnesota Estate Tax is then multiplied by the ratio of Minnesota Gross Assets plus gifts of Minnesota property made within 3 years of death (made after 6/30/2013) over Federal Gross Assets plus all gifts made within 3 years of death (made after 6/30/2013).
Below are a couple examples to help illustrate.
MN Resident passes away with no surviving spouse in 2016 owning a home worth $800,000 (with a $300,000 mortgage), a $500,000 life insurance policy, a $350,000 retirement plan and a savings account worth $50,000.
In this situation, the decedent’s Gross Estate is $1.7 million, causing a Minnesota Estate Tax filing requirement. While there would be no tax due since tax is calculated net of the mortgage (Net Estate of $1.4 million), a Minnesota Estate Tax Return must still be filed.
FL Resident passes away without a surviving spouse in 2016 owning a FL home worth $600,000 (with a mortgage of $200,000), $700,000 life insurance policy, $300,000 retirement plan, $100,000 brokerage account and a family cabin in Northern Minnesota worth $300,000.
While the decedent is not a resident of Minnesota and her Minnesota assets are well under $1.6 million (2016), her Estate still meets the MN filing requirement because her Federal Gross Assets ($2.0 million) exceed $1.6 million and she owned real estate located in Minnesota.
In this situation, not only would there be an Estate Tax Return filing requirement, but her Estate would owe Minnesota Estate Tax.
Following the rules discussed above, we start with a net taxable estate of $1.8 million ($2.0 million gross less the $200,000 mortgage), subtract the $1.6 million exclusion (2016) and multiply the resulting $200,000 by the applicable tax rate of 10% to arrive at $20,000 of Minnesota Estate Tax.
Since the decedent was a non-Minnesota Resident, we must then multiply the $20,000 by the ratio of Minnesota Gross Assets ($300,000 Cabin) over Total Gross Assets ($2.0 million) or 15% to arrive at a Minnesota Estate Tax of $3,000.
Ownership of Pass-Through Entities – In addition to the 3 year look-back on gifts (effecting both the filing requirements and potential estate tax due), Minnesota also has a “look-through” rule affecting non-Minnesota Residents that own pass-through entities (including S corporations, entities taxed as partnerships, trusts and single member LLCs) that own property located within Minnesota.
Without this “look-through” rule, the decedent’s Estate in Example 2 above could have avoided not only the Minnesota Estate Tax, but could have avoided filing all together in Minnesota if the family cabin was owned by an LLC. However, this “look-through” rule treats the pass-through entity as if it did not exist and the situs of the real and/or tangible personal property owned by the pass-through entity is considered personally owned by the decedent.
Therefore, non-Minnesota Residents should be careful when owning pass-through entities that own property in Minnesota as this may create unanticipated Minnesota Estate Tax consequences.
If you’d like more information about this topic, please contact Pete at (952)476-7110 or Pete_Finch@copelandbuhl.com.