Minnesota imposes a state-level estate tax on assets when a Minnesota resident, or a non-resident holding property located in MN, dies with assets in excess of the exemption amount. The exemption amount is currently $3.0M.
- No Minnesota Gift Tax. U.S. residents can make lifetime gifts of up to $11,580 million before paying a federal gift tax. There is no Minnesota gift tax, and therefore no such limitation at the Minnesota state level.
- Three-Year Look Back Rule For Lifetime Gifts. However, if an individual who will be subject to Minnesota estate taxes makes a “taxable gift” within three years of his or her death, the value of the gift will be considered for estate tax purposes as if the assets were owned b the individual as of his or her death. “Taxable gifts” are cumulative gifts in any one calendar year to any one individual in excess of $15,000 or to a married couple in excess of $30,000. In other words, gifts made within three years of death in excess of these limitations would be subject to estate taxes.
- Capital Gains Tax. As I have summarized here, the recipient of any lifetime gift receives a “carry over” income tax basis in the gifted assets. In contrast, if beneficiaries receive an asset following death, the family receives a cost basis “step up” for capital gains purposes.
To illustrate the impact of these new rules, consider the following basic case study. A Minnesota resident owns the following assets:
$ 2,500,000 Traditional IRA
$ 1,000,000 Taxable Investment Account
$ 500,000 Home
$ 4,000,000 Total
Resident gifts his entire taxable investment account (valued at $1.0 million) to his children on September 1, 2020. He dies on September 1, 2025. Following his death, the family would pay no gift or estate taxes. This is because the individual made the gift more than three years before his death. Of course, the family would receive only a “carry over” cost basis in the investment account, not a “step up” in cost basis.
Resident gifts his entire taxable investment account (valued at $1.0 million) to his children on September 1, 2020. He dies on September 1, 2021. In this case, the $1.0 million gift made in 2020 would be considered part his “estate” for Minnesota estate tax purposes because the gift was made within three years of his death. The approximate estate tax liability would therefore be approximately $160,000.