During the 2014 Minnesota Legislative session, Minnesota laws relating to estate and gift taxes were changed significantly. Those changes represent improvement for many Minnesota taxpayers, in the form of increased exemptions and the state-only QTIP election, and in greater clarity on issues such as the treatment of art on loan to museums in Minnesota.
Repeal of Gift Tax
The Minnesota gift tax was retroactively repealed, effective back to the date it was first enacted. The Minnesota gift tax was adopted in 2013 and first applied to gifts made on or after July 1, 2013. As a result of the repeal, no state gift tax is owed to Minnesota for gifts made in 2013.
Despite the retroactive repeal of the Minnesota gift tax, gifts may not entirely escape taxation. Under the new law gifts made within three years of death, and on or after July 1, 2013, are subject to Minnesota estate tax.
Increased Estate Tax Exemption—Clearer Rates
The amount that can pass free of Minnesota estate tax increased from $1,000,000 to $1,200,000, effective for any death in 2014. In addition, the exemption amount will continue to increase by $200,000 annually, reaching $2,000,000 in 2018.
The estate tax rate was also clarified. Effective in 2014, the estate tax rates begin at 9% (10% in 2015) and increase to 16% of the value of the assets subject to Minnesota estate tax. Previously, the amount of tax due was determined based on a complex analysis requiring two calculations.
Minnesota QTIP Election—Now Available
An additional bit of good news is the availability of a Qualified Terminable Interest Property (QTIP) election which allows for property passing in trust for a surviving spouse to qualify for the Minnesota estate tax marital deduction.
Previously this election was only available when the value of the decedent’s estate necessitated the filing of a federal estate tax return. That constraint limited the planning options for Minnesota taxpayers who wished to create trusts for their spouses but whose assets are not at the level that would require the filing of a federal estate tax return ($5,340,000 in 2014). This new election opens up a number of potential estate tax planning strategies for Minnesota residents which were previously limited or unavailable and can be especially helpful for persons who are remarried or wish to use trusts for other reasons, such as protecting assets from creditors.
Art on Loan to Minnesota Museums
Beginning in 2013, a new law provided that property located in Minnesota which is owned by nonresidents is subject to Minnesota estate tax if it is held in a “pass-through” entity, such as a limited liability company, partnership or trust. In response to concerns raised by museums and educational institutions, a new exception treats “qualified works of art” that are on loan to a museum or educational institution in Minnesota and owned by a nonresident’s pass-through entity as exempt from Minnesota estate tax. This should alleviate concerns of many nonresidents who loan artwork to Minnesota institutions but were concerned about becoming subject to Minnesota estate tax.
These recent changes represent improvements for many Minnesota taxpayers: the gift tax has been abandoned; more assets may be passed without payment of Minnesota estate tax; and the state QTIP election will allow more Minnesotans to create estate plans that achieve their desired goals without compromising for tax reasons.
Additionally, these changes are part of a larger trend of changes that shift tax planning focus from estate and gift taxes to income tax. Many clients will continue to benefit from estate planning that incorporates state and federal estate tax planning strategies. Many clients will also benefit from increased attention to the income tax consequences of lifetime gifting strategies and estate plan design.
We Can Help
Please contact a member of Maslon’s Estate Planning Group if you have questions or would like to discuss how recent law changes affect your estate plan.