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Information on Estate Planning, Estate and Trust Administration and Unique Asset Planning

“Dad, it’s so cold outside. Why can’t we live in a warmer state like Grandma and Grandpa?”

This past week, a few of my clients called me from their winter residences in Florida and Arizona.  In addition to their own estate planning matters, we discussed the significant temperature differential between our respective locations.  On a somewhat related note, Governor Walz recently announced his proposals for state estate tax and income tax changes.  In this month’s advisory update, I summarize a few of the Governor’s proposals and provide a brief comments as an estate planning practitioner.

Governor Walz Proposal:

The following points from Governor Walz’s budget proposal are noteworthy for estate planning purposes.

  • Minnesota Estate Tax Exemption: First, Governor Walz proposes to reduce the Minnesota estate tax exemption from $3.0 million, for a death occurring in 2020, to $2.7 million, for a death occurring in 2021 and thereafter. While no comment was made as to whether the Minnesota estate tax exemption would be “portable” as between spouses, the press release notes the retention of the $5.0 million qualified family farm and family business deduction.
  • New (5th Tier) Income Tax Bracket: Second, the Governor would create a new top (5th) marginal income tax bracket. The new tax bracket would be applicable for married filing jointly households at $1.0 million in annual income and for single filers at $500,000 in annual income.
  • New State-Level Capital Gains Surtax: Third and finally, Governor Walz would create a new state-level capital gains surtax of 1.5% on all capital gains and dividend income for “taxpayers” (individuals, estate and trusts) who earn between $500,000 and $1.0 million, and a capital gains surtax of 4% on all such capital gains and dividend income for taxpayers with income in excess of $1.0 million.

Cory’s Commentary from the Trenches:

I offer the following comments regarding these proposals:

  • Lack of Portability: The single most significant and misunderstood estate tax planning issue for Minnesota residents is the lack of “portability” of a deceased spouse’s unused Minnesota estate tax exemption. In the absence of the implementation of a “tax savings trust” made part of an estate plan before the first death between a married couple, a Minnesota married couple has the right to pass only $2.7 million ($3.0 million currently) free of Minnesota estate taxes at the death of the surviving spouse, not twice that amount. This tax savings trust planning structure continues to be a critical component for Minnesota married clients.
  • The Narrow Applicability of the Qualified Family Farm and Family Business Deduction. While Governor Walz’s press release mentions the continued retention of the qualified family farm and family business deduction, this deduction has very limited applicability by reason of the stringent qualification requirements.  Among other requirements, the decedent must have “materially participated” in the business or farm operation as of his or her death.  Only business property used directly in the business is eligible for the business deduction.  Likewise, only farm property classified as “homestead agricultural” for property tax purposes is eligible for the farm deduction.
  • Irrevocable Trusts Located Outside Minnesota. Some of our wealthiest clients have already created one or more irrevocable trusts to hold assets “outside” of the State of Minnesota in order to avoid Minnesota state income taxes.  By reason of the additional top tier income tax rate and capital gains tax rate, I anticipate that these budget proposals will only further increase the number of our clients utilizing South Dakota irrevocable trusts.
  • The Lack of A Minnesota State-Level Gift Tax. The most significant “planning opportunity” for wealthy Minnesota residents (or, as some might say, “tax loophole”) is the opportunity presented by the fact that there is no state-level gift tax.  Only “taxable gifts” made within the three year period ending on the date of death are taken into account in determining a Minnesota estate tax liability.  Therefore, wealthy Minnesota should continue to minimize estate tax exposure by making lifetime gifts, as they are able.

A Note About “Sun Country Sojourners”

I represent some married clients whom you might call “Sun Country Sojourners.”  While currently residents elsewhere, they plan to re-establish Minnesota residency at some point in the future.  They may “return” to Minnesota for a second phase of retirement, a downturn in health, or upon the death of a spouse. Married Sun Country Sojourners should plan for Minnesota estate taxes by including a tax-savings trust within their estate plan.  They might also make significant taxable gifts as residents of other states.  Even if Sojourners re-establish Minnesota residency in the year following a lifetime gift, no Minnesota estate taxes would be imposed on such gifts so long as the Sojourner was a resident elsewhere at the time of the gift.  The Sojourners could make gifts either directly to children or to an irrevocable “spousal lifetime access trust.

This past week, I reminded myself and my kids of the many benefits of living in our great state.  “Kids, remember that day two summers ago at Target Field?  Remember those beautiful days on golf course last summer?”  Now is the time to remind ourselves of the many benefits of living in Minnesota—our schools, associations, churches, and communities.  Now is also the time to remember that Memorial Day weekend is only three months away!