After Congress enacted permanent federal estate and gift tax laws at the beginning of this year, estate planners and their clients may have felt relief that they finally knew all the rules of the road. Not so fast, at least in Minnesota, because the Minnesota legislature has enacted new laws with important estate planning impact! First, the Omnibus Tax bill signed by Governor Dayton at the end of May gives Minnesota the distinction of having the fourth-highest top marginal income tax rate in the nation. Minnesota also joins an exclusive club of only two states, joining Connecticut, which have their own gift tax regime. Most states repealed their gift taxes upon analyzing that the cost of administration outweighed the revenue collections.
Gifts Over $1 Million. The new gift tax applies at a flat 10% rate to any gifts that are subject to the federal estate tax. That means gifts of less than $14,000 in 2013 to one person (the “annual exclusion”), gifts to a spouse or a charity, and direct payments of certain medical and educational expenses are entirely exempt from the state gift tax. Also, a lifetime credit of $100,000 is provided against the gift tax, which effectively exempts the first $1 million in lifetime gifts from tax. The new Minnesota exemption of $1 million is much lower than the federal gift tax exemption of $5.25 million. Also, note that the lifetime credit is not indexed for inflation, in contrast to the amounts exempt from the federal estate tax. The new gift tax applies to gifts made on or after July 1, 2013. Accordingly, there is a short window of opportunity to make large gifts without worrying about state gift tax. Remember, if you don’t want to gift to children directly, for instance, you may gift assets into a trust for their benefit which stretches their receipt of funds to later ages, or even keeps a portion of the assets in trust for their lifetimes to protect against divorce, bankruptcy and litigation.
3 Year Claw Back. Any gifts made in the three years just prior to your death, will be brought back into your estate.
Non Residents Owning Minnesota Real Estate. Non-tax residents, who own Minnesota real estate in a “pass-through” entity, may also now be taxed . This entity may be a partnership, a limited liability company, or an S corporation. Such entities will be ignored for estate tax calculations, effective the first of this year. The upshot of the new rule is to extend the reach of the Minnesota estate tax to more nonresidents. However, as of this writing, the new gift tax does not apply to gifts of these interests.
Retroactive Application. The new tax laws are retroactive for estate of decedents who died on or after Jan. 1, 2013.
Same-Sex Marriage Law. Beginning August 1, 2013, couples of the same sex may marry in Minnesota, and marriages of that genre, from other jurisdictions, will be recognized in Minnesota. Beyond the social implications, marriages may have significant income and estate tax benefits and/or consequences. The federal law is not yet settled in this area. Same-sex couples need to be fully informed about legal and financial consequences of marriage. We can provide counsel in this area as the case law in the US Supreme Court is being deliberated.