Alert: Estate Planning After the Minnesota 2014 Changes

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March 27, 2014

During its just-concluded session this year, the legislature enacted significant changes to the estate and gift tax laws. Minnesota residents and non-residents owning property located in Minnesota should evaluate the law’s effect on their current estate plan.

Minnesota Gift Tax. The new law REPEALS the state gift tax which was enacted in May 2013 and applied to gifts made after June 30, 2013. The repeal is made retroactive to inception of the gift tax. As a result, donors who made a taxable gift after June 30, 2013 will NOT have to file a Minnesota gift tax return (which would otherwise have been due on April 15, 2014). If a donor has already filed a return and paid Minnesota gift tax, the Minnesota Department of Revenue will presumably create a procedure for refunds.

Minnesota Estate Tax. The new law makes several significant changes to the Minnesota estate tax, which lower estate taxes, and simplify estate tax calculation.

Effective date. The estate tax changes are effective RETROACTIVELY for estates of decedents dying in 2014, even those who died before enactment of the law

Phased Increase in Minnesota Estate Tax Exemption. Minnesota’s estate tax filing threshold has been $1 million since 2006. For technical reasons, it was not a true “exemption”. The new law creates a true estate tax exemption which gradually increases over a five year period as follows:

  • 2014          $1.2 million
  • 2015          $1.4 million
  • 2016          $1.6 million
  • 2017          $1.8 million
  • 2018 and thereafter        $2.0 million

There continues to be a significant “gap” between Minnesota’s estate tax exemption and the federal estate tax exemption. The federal estate tax exemption is $5 million, indexed for inflation, so that the 2014 federal exemption equivalent amount is $5,340,000. Most of the estate tax savings from these changes will accrue to estates under $3 million;  larger estates will receive very little Minnesota estate tax reduction.

Pullback for Gifts within 3 Years of Death. In 2013, Minnesota amended its estate tax law to provide that taxable gifts made by a decedent within three years of the decedent’s death are included in the decedent’s estate for purposes of determining the Minnesota estate tax. This provision is continued in the new law; a technical provision made late in the session makes clear that it only applies to taxable gifts made after June 30, 2013. A very technical change is that non-residents who died in 2013, but who had made significant gifts after June 30, 2013, may need to recalculate their estate taxes (which taxes may be lower as such gifts are not pulled back into the calculation).

New Simplified Tax Calculation Method. Calculating Minnesota estate tax under the old law required two separate tax calculations, one of which was based on federal estate tax laws that were repealed in 2001. The new Minnesota law creates a new method which “stands alone” and does not require use of the old federal provisions. The law also eliminates the possibility that some smaller estates would pay substantially higher marginal rates of tax than larger estates.

New Minnesota “QTIP” Marital Deduction Election. Within limited exceptions, Minnesota did not previously allow an estate to make a QTIP marital deduction for Minnesota estate tax purposes unless a comparable election was made on a filed federal estate tax return. Thus, under the old law, to make a QTIP marital election, Minnesota estates with assets under the federal exemption amount ($5 million, inflation indexed), which would not otherwise have needed to file federal estate tax returns, were required to file such returns.

The 2014 law now authorizes a QTIP marital deduction election to be made for Minnesota estate tax purposes regardless of whether the election is made for federal estate tax purposes. This new election may be helpful to some taxpayers. Technical corrections late in the session helped to clarify how estate tax will be calculated when the surviving spouse, for whose benefit the QTIPed property was held, passes away.

Estates with real or tangible assets in multiple states. The tax calculation is becoming increasingly complicated for Minnesota residents who own real property or tangible personal property assets in other states, or non-residents who own real or tangible personal property assets in Minnesota (including such assets held in partnerships, LLC’s, S corporations or trusts).

Minnesota residents should confer with their estate planning attorney to ensure that the method of ownership of these assets does not cause them to be taxable in Minnesota, when they might not be subject to such taxes if held outright.

Non-Minnesota Resident’s Ownership in a Pass-Through Entity (New Exclusion for Publicly Traded Interests). The tax calculation is becoming increasingly complicated for Minnesota residents who own real property or tangible personal property assets in other states, or non-residents who own real or tangible personal property assets in Minnesota. In 2013, the legislature added a provision affecting non-Minnesota residents owning any interest in a “pass-through entity” owning assets that include real or tangible personal property located in Minnesota. For purposes of this provision, the pass-through entity included electing S-corporations, entities taxed as partnerships, single member LLC’s or similar entities, and certain trusts. Under this provision, non-Minnesota residents must include in their gross estate for Minnesota estate tax purposes, the value of any real or tangible personal property located in Minnesota, even if such property is owned by a pass-through entity.

The 2014 legislation created a new exclusion, so that the Minnesota property held within a company sold on a regulated public exchange will not be pulled back into a non-Minnesota resident’s estate in Minnesota. This provision applies to estates of decedents dying after December 31, 2013.

Works of art owned by non-residents and loaned/donated to Minnesota charities. Non-residents generally may owe estate tax on tangible personal property located in Minnesota. New provisions have been added that qualified works of art that are loaned by a non-resident to a public charity in Minnesota, and located there at the non-resident’s death, will be treated as located outside Minnesota, and therefore, not subject to Minnesota estate tax. Minnesota law already makes clear that if a non-resident makes a charitable contribution to a Minnesota charity, this is not a factor that could be considered in determining the donor’s residency status.

Qualified Farm/Small Business Interests. Effective July 1, 2010, the Minnesota estate tax added an up-to-$4,000,000 deduction for qualified farm and small business interests. The new legislation now caps the amount of the deduction at “$5 million minus the Minnesota estate tax exemption amount.” In other words, for 2014 this deduction will be $3.8 million.

An Item Not Changed: Portability. Federal estate tax law contains provisions for “portability,” a feature that allows any unused exclusion amount of the first spouse to die, to be used by the surviving spouse for estate and gift tax purposes. Minnesota estate tax law has not contained any provisions for portability of the Minnesota estate tax exemption, and this rule is not changed by the new legislation. However, the existence of the federal portability rules could mean that many taxpayers may find it more advantageous to use portability, rather than the new Minnesota QTIP election, to simplify their estate plans and reduce overall estate taxes.

Review Estate Plans. Although every situation is unique, below are some general matters which should be reviewed in connection with estate plans:

  • Review formula clauses and tax apportionment clauses in current estate planning documents, recognizing that in the next five years the exemption gradually increases from $1.2 million to $2 million. This change could significantly shift not only the amount of assets transferred by a formula, but also the relative proportions of assets given to various beneficiaries or trusts.
  • Consider whether documents should be changed to add or permit a “Minnesota QTIP” election.
  • Consider how an estate plan may be affected by the federal portability rules.
  • Review options for gifting or selling real or tangible personal property located in Minnesota but owned by non-Minnesota residents.

Terry Slye and Jennifer Lammers will be speaking for Minnesota CLE on these topics in a plenary session of the 2014 Probate and Trust Annual Conference on June 3, 2014.