On May 23, 2013, Governor Dayton signed an Omnibus Tax Bill that makes some significant changes to current Minnesota estate and gift tax laws. The new provisions create a separate Minnesota gift tax, expand estate taxes on non-residents through taxation of pass-through entities, and revise the definitions of qualified small business property and qualified farm property.

New Minnesota Gift Tax

Effective July 1, 2013, Minnesota will impose a 10% tax on lifetime gifts in excess of $1 million and require the filing of a separate Minnesota gift tax return each year a taxpayer makes gifts in excess of the federal annual exclusion amount ($14,000 in 2013).

In addition, the Minnesota estate tax return will now look back three years and require that the value of all gifts made within three years of date of death be included in the decedent's taxable estate. This estate tax change applies retroactively to all persons dying after December 31, 2012.

These are significant changes as Minnesota is only the second state after Connecticut to enact a separate gift tax and because current federal gift tax laws provide individuals with a much larger $5.25 million lifetime exemption indexed for inflation (compared to Minnesota's $1 million lifetime exemption, which is not indexed for inflation). Clients who are considering making a significant lifetime gift may wish to take action prior to the new Minnesota gift tax laws going into effect on July 1, 2013. In addition, any clients making gifts to persons in excess of the federal annual exclusion amount will want to consult with their estate planning attorney regarding the possible Minnesota gift tax implications.

Expanded Tax on Non-Residents

The Omnibus Tax Bill also changed Minnesota's estate tax provisions as they apply to pass-through entities (trusts, partnerships, LLC's, and S corporations). The new provisions extend Minnesota estate tax on non-residents to include all Minnesota property (real property and tangible personal property) held in pass-through entities. In addition, the new three-year look-back provision on gifts will apply to non-residents for estate tax purposes.

Currently the Minnesota laws have not been extended to apply Minnesota gift tax to non-residents who make gifts of Minnesota property held in pass-through entities. Thus, presently, non-residents may still make gifts of their Minnesota property held in a pass-through entity without being subject to Minnesota gift tax.

New Definitions

The Omnibus Tax Bill also expands the definitions of both Qualified Small Business Property and Qualified Farm Property to reflect that property held in trust may still qualify for the favorable tax treatment afforded to assets that fit within these definitions. This aspect of the new tax laws is beneficial for small business and farm owners as there will be additional estate planning options available to them and more opportunities to fit within the new expanded definition of qualified small business property and qualified farm property exclusions under Minnesota law.