Minnesota Estate Tax Legislative Update – May 2017

Minnesota State Capitol and Quadriga

Minnesota Estate Tax

Governor Dayton has signed the 2017 tax bill which will increase the Minnesota estate tax exemption from its current level of $1.8 million to $2.1 million for individuals dying in 2017. The legislation also adjusts the estate tax exemption in subsequent years; increasing the exemption by $300,000 per year until 2020 at which point the exemption would reach $3 million.

The estate tax provision is part of the 2017 tax bill which was heavily negotiated between the legislature and the Governor’s office.  Although the bill has been signed by Governor Dayton, clients and estate planners cannot necessarily count on the increased exemption.  In an unusual move, the Governor exercised a line item veto, eliminating the bill’s funding for the legislature.  This was done in an attempt to gain leverage and further negotiate several provisions in the bill – including the estate tax exemption.  It appears likely that there will be litigation.

Ordinarilly, signed legislation would create certainty for estate planning.  Instead, estate planners and clients should expect a period of uncertainty while litigation or negotiations take place.

What This Means for You

Each Minnesota resident has a lifetime exemption from the Minnesota estate tax. The exemption is the amount of property that can be part of a person’s estate at death without being subject to the estate tax. Prior to passage of the tax bill, the Minnesota exemption was $1.8 million. The legislation increases the exemption to $3 million by 2020.

The State of Minnesota currently uses a separate estate tax exemption than the federal estate tax exemption. The current federal exemption amount is $5.49 million. The difference between the state and federal exemption has caused frustration for clients, who must plan for the Minnesota estate tax despite owning property well below the federal exemption amount.

Estate planning attorneys are able to work with the gap between the two exemption amounts in order to eliminate tax in many situations. However, the gap has caused many clients to have estate tax issues, who would not otherwise need to file a return or pay tax under the federal system. Many of these clients have estates in the range of $2 to $3 million. While the increase in the exemption amount to $3 million over time will reduce the number of Minnesotans who need to plan for the estate tax, it will not solve the estate tax exemption gap for others.

It is important to note that the Minnesota and federal estate taxes both include assets that most people would not consider part of their net worth. Specifically, many clients do not realize that life insurance is included in their gross estate for estate tax purposes. Clients with otherwise modest estates are subject to estate tax because of their life insurance policies. The news should help many of these clients by increasing the exemption.

No Portability

One problem that has not been addressed by the new legislation is commonly referred to as “portability.” Portability is where the unused exemption of a deceased spouse is allowed to pass to a surviving spouse at death. Portability is useful in cases where couples have neglected to plan for estate tax. The failure of the legislature to address the issue of portability underscores the importance of planning for residents of the State of Minnesota.

Big Benefits for Spouses Who Plan

Clients who do plan for the Minnesota estate tax can see dramatic benefits. First, by planning ahead, married couples can utilize both of their exemption amounts to double the amount of money they can pass at their death. Under the limits prior to passage, a married couple could pass a combined $3.6 million at death. Under the new legislation, the same couple could pass as much as $6 million in 2020 by planning ahead.

Uncertainty for Clients with Larger Estates

A common strategy for clients with assets in excess of the exemption amount is to use lifetime gifts to reduce the client’s gross estate. The State of Minnesota does not tax gift transactions as long as the client survives at least three years following the gift. This provides an opportunity for couples to reduce their total estate during their lifetime by making gifts.

Under the new legislation, it would not be necessary to begin using gifts until after the client’s estate exceeds $3 million dollars. However, the uncertainty surrounding the legislation leaves the starting point for this planning in doubt. Governor Dayton has targeted the estate tax exemption as one of several items that he wants to renegotiate. He is holding funding for the legislature until those issues are resolved. Until this is settled, estate planners and clients will need to make difficult decisions about when to begin gifting.

If you have questions about your estate plan or tax planning, please contact Cameron Kelly at 715.381.7112 / ckelly@lommen.com.

 

Cameron Kelly is an estate planning and business attorney with the Lommen Abdo Law Firm, practicing in Hudson, Minneapolis and Stillwater.  He enjoys providing high quality planning for individuals and businesses. His practice includes assisting clients with comprehensive estate planning, including wills, trusts, powers of attorney, health care directives, and living wills. He also has a special interest in the estate, gift, and income taxation of estates and trusts. In addition to estate planning, Cameron works with business owners from formation, to business succession.