Minnesota Estate Tax Explained

If you have a significant amount of assets that you want to pass on to heirs and are a Minnesota resident, you may wonder how much your heirs will lose to the estate tax. Unfortunately, estate tax laws can be complex and vary from state to state. Therefore, understanding how these apply to your location and impact your estate is crucial.

So, let’s dive in!

What is the Estate Tax? 

Before diving into the state-specific Minnesota estate tax and how it works, let’s get into the estate tax basics.

The estate tax is a tax on the transfer of assets between generations, i.e., from parents to their heirs. It is generally imposed on the estate’s total value and any gifts made before the person passes away above a pre-determined exempt amount that varies by state. Starting in 2023, individuals can transfer up to $12.92 million, during life or at death, without triggering the federal estate-tax bill, up from the 2022 exemption amount of $12.06 million.

However, each state has its own state-specific estate tax rules. Some states may not impose an estate tax, while others, such as Minnesota, have a high tax rate. Moreover, the tax rate varies depending on the value of the gifted assets; typically, the more assets you pass on, the higher the tax rate you will lose to the estate tax.

These taxes are intended to reduce the wealth concentrated in a single estate by increasing the taxes on inherited wealth. Still, they can be minimized or completely avoided through estate planning. But how?

Estate Planning Overview

Estate-tax planning comes into play when you want to pass assets to the next generation. With estate-tax planning, you can arrange your affairs to reduce the amount of federal and state estate taxes you and your heirs or recipients will face and maximize how much you pass on to the next generation.

Importantly, estate tax planning can significantly impact how much you pass on to heirs because of how high federal and state estate taxes are.

Federal Estate Tax

The Federal Estate Tax is a tax on assets transferred from a person who passed away to their heirs. It is paid by the dead person’s estate and is due nine months after death. Federal estate taxes range from 18% to 40%. This means that if you are giving away $1 million, over and above the federal estate tax exemption, you would owe $400,000 in federal estate taxes and only leave $600,000 behind for your beneficiaries. And that’s even before accounting for any state estate tax liability!

Federal Estate Tax Rates

Taxable Estate Above $12.92 Million	Base Taxes Paid	Marginal Rate
$12,920,000 – $12,930,000	$0	18%
$12,930,000 – $12,940,000	$1,800	20%
$12,940,000 – $12,960,000	$3,800	22%
$12,960,000 – $12,980,000	$8,200	24%
$12,980,000 – $13,000,000	$13,000	26%
$13,000,000 – $13,020,000	$18,200	28%
$13,020,000 – $13,070,000	$23,800	30%
$13,070,000 – $13,170,000	$38,800	32%
$13,170,000 – $13,420,000	$70,800	34%
$13,420,000 – $13,670,000	$155,800	37%
$13,670,000 – $13,920,000	$248,300	39%
Over $13,920,000	$345,800	40%

What Is the federal estate tax exemption?

Each individual has a lifetime estate tax exemption — a gift tax exemption or the basic exclusion amount. This exemption is the value of assets you can give away, throughout your life and after your death, without being subject to the federal estate taxes described previously.

For 2023, this exemption is $12.92 million/per person. Because the exemption is per person, married couples can give away double that amount. In addition, as of 2023, you have an annual gift exclusion which allows you to give up to $17,000 per person/year that doesn’t count towards the gift tax exemption.

However, it’s essential to know the federal estate tax exemption level is scheduled to reduce by about 50% to $6.6 million when the Tax Cuts and Jobs Act sunsets in 2026, which is why it’s essential to get started with estate planning sooner rather than later.

So, how do all of these apply in the state of Minnesota?

Minnesota Estate Tax Exemption

The Minnesota estate tax exemption, like the federal exemption, is a tax exemption that reduces the amount of estate taxes that must be paid. At the state level, the exemption is $3,000,000; in other words, you will pay no Minnesota estate tax on estate transfers up to that value.

Minnesota Estate Tax: How much Is It?

Like most U.S. tax rates, the estate tax rate in Minnesota is progressive, based on the estate’s value. Estates valued at over $3 million are subject to marginal estate tax rates between 13% and 16%.

This table gives an overview of the Minnesota estate tax rates based on the size of the taxable estate and shows the minimum taxes paid and the marginal tax rate for each bracket, up to a maximum of 16%.

Taxable Estate	Minimum Taxes Paid	Marginal Rate
$3,000,000 – $10,100,000	$0	13%
$10,100,000 – $11,100,000	$50,000	13.6%
$11,100,000 – $12,100,000	$152,500	14.4%
$12,100,000 – $13,100,000	$602,500	15.2%
Over $13,100,000	$1,022,500	16%

Minnesota Estate Tax Example

Let’s say your total taxable estate is $8 million. That exceeds the minimum to avoid Minnesota estate taxes. Therefore, all your estate is taxable in Minnesota, this case’s tax will be $650,000. Since $8m is in the $3m-$10.1m taxable estate category (column 1) that means there is a minimum estate tax of $0(column 2) plus 13% of every dollar (column 3) above $3m.

However, you can avoid Federal Estate taxes due to the amount of taxable estate (since the minimum to pay Federal estate taxes is $12.92 million). That means a Minnesota resident trying to pass on their $8 million estate would end up passing $7,350,000 to their children.

Tax planning ideas to reduce your estate taxes in Minnesota

Different tax planning strategies can help you reduce your taxes in Minnesota. Here are the five we consider key to consider:

1. Use trusts: Establishing a trust can help reduce an estate’s taxable value and the estate taxes due. Three commonly used options are:
   • Spousal Lifetime Access Trusts (SLAT): With a SLAT, you can place assets into the trust, your spouse (and, in practice, you) can access the assets during your lifetime, and any appreciation will pass to your spouse free of the estate tax. Your children and other descendants can also be named as beneficiaries. Often, the trust is structured so that the children only become primary beneficiaries after your spouse’s death.
   • Grantor Retained Annuity Trust (GRAT): 99 of the 100 wealthiest Americans use a trust structure to pass assets on to future generations. With a GRAT, you can place assets into the trust, any appreciation above a set percentage will pass to your beneficiary’s estate tax-free, and you won’t use up any of your lifetime gift exemption. As a result, you can substantially reduce the size of your taxable estate while passing on assets to your heirs if you are willing to give some assets away to beneficiaries during your lifetime.
   • Dynasty Trusts: Designed to help individuals and families preserve their wealth, reduce or avoid estate taxes, and ensure that assets are managed and distributed according to their wishes over multiple generations.
2. Utilize gifting: By gifting assets before death, you can take advantage of your annual and lifetime gift exemptions to reduce your estate’s taxable value and allow future appreciation on your investments to take place outside of your estate and free of the estate tax.
3. Use marital deductions: Married couples can use the unlimited marital deduction to transfer assets to a surviving spouse without incurring any estate taxes. The marital deduction is a tax provision that allows an individual to transfer an unlimited amount of assets to a surviving spouse without paying any federal gift or estate taxes. This means that the surviving spouse will not have to pay taxes on the assets they receive. The deduction also applies to property jointly owned by the couple, such as a home. When one spouse dies, the surviving spouse can keep the property without paying taxes. The marital deduction is essential for married couples to reduce the estate taxes they will have to pay.
4. Invest in life insurance: Life insurance can be used to pay estate taxes, is generally exempt from income tax, and can be structured to avoid the estate tax by being put in an Irrevocable Life Insurance Trust (ILIT).
5. Create your will: This will allow you to designate how your assets will be distributed after your death. A will can help you decide who will receive your assets and in what proportions, which can help to minimize the probate fees owed from your estate to the government. A will might also encourage you to take advantage of certain tax deductions and credits available in Minnesota. This includes deductions for specific charitable contributions, medical expenses, and funeral expenses.

Conclusion

The Federal and Minnesota estate tax can significantly reduce the assets your family receives when you pass away. Fortunately, there are several strategies available to minimize the applicable tax. You can read more here, use our Guided Planner tool to find helpful solutions, or schedule a time to talk with our expert team.

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