Governor Dayton signed the 2013 Omnibus Tax Act into law on May 23, 2013. With the passage of the new law, Minnesota residents and non-residents owning property located in Minnesota should evaluate the law’s effect on their current estate plan.
Minnesota Gift Tax The new law creates a new state gift tax, making Minnesota the second state in the country to impose a tax on transfers of property by gift. Under the new law, many transfers of property by gift will now be subject to tax at a flat rate of 10%. Other key provisions of the new gift tax include:
- Effective Date The new Minnesota gift tax is effective for taxable gifts made after June 30, 2013. Thus, clients may wish to consult with their estate planning attorneys as to whether they may wish to make significant gifts before that date, since no Minnesota gift tax would be due on such gifts.
Definition of Taxable Gift The new law generally follows the federal definition of a “taxable gift”, which excludes the following transfers: 1) the federal annual exclusion amount made to any person by the donor during the year (for tax year 2013, $14,000 per person); 2) payments made on behalf of another person to an educational organization for qualified education expenses; 3) payments made on behalf of another person for qualified medical care expenses; 4) gifts made to charitable organizations; and 5) gifts to a spouse.
Under the new law, transfers of real property located outside of Minnesota, tangible personal property kept outside of Minnesota, and intangible personal property of non-Minnesota residents are specifically excluded from the definition of a taxable gift, since there would be constitutional issues if Minnesota attempted to extend the reach of this tax to property outside its boundaries.
- Gift Splitting The new law adopts the federal rules pertaining to “gift splitting” between spouses, thereby allowing a married couple to split a gift’s total value as if each spouse contributed one-half of the total amount.
- Gift Tax Lifetime Credit The new law allows a credit of $100,000 against gift tax imposed on taxable gifts during a person’s lifetime. In effect, a person may make up to $1 million in taxable gifts during his or her lifetime before a Minnesota gift tax would be owed. Any gifts made prior to June 30, 2013 will not reduce this Minnesota lifetime credit, but may be recaptured if the person dies within three years of making the gift (see Pullback for Gifts discussion below).
- Non-Unified Tax ProvisionsUnlike the federal taxes, the Minnesota gift tax is a separate tax which is not “unified” with the Minnesota estate tax. As such, tax results can vary depending on dates of gifts and dates of death, as well as the values of the gifts or assets in the estate.
Minnesota Estate Tax The new law makes several significant changes to the estate tax, however, there is some uncertainty as to the effective dates. For estates of decedents dying after December 31, 2012, the new law retroactively adopts the following provisions:
- Pullback for Gifts within Three Years of Death Under prior law, gifts made during lifetime were not included as assets of the decedent’s estate. Under the new law, taxable gifts made by a decedent within three years of decedent’s death are included in decedent’s estate for purposes of determining the Minnesota estate tax. This provision of the new law is effective for decedents dying after December 31, 2012 and may apply to decedents who died before enactment of the new law. It is possible that this provision may need to be phased in, beginning July 1, 2013, because the definition of “taxable gift” applies only to gifts made after June 30, 2013. Thus arguably, gifts made before that date are not taxable gifts, and should not be pulled back into the estate.
- Non-Minnesota Resident’s Ownership in a Pass-Through Entity The new law also affects non-Minnesota residents owning any interest in a “pass-through entity” with assets that include real or tangible personal property located in Minnesota. For purposes of this section, the pass-through entity includes electing S-corporations, entities taxed as partnerships, single member LLC’s or similar entities, and certain trusts. Under prior law, such entities were effective to exclude the value of the real property from the estates of non-Minnesota residents. Under the new law, non-Minnesota residents must now include in their gross estate for Minnesota estate tax purposes, the value of any real or tangible personal property located in Minnesota even if such property is owned by a pass-through entity.
- Qualified Farm/Small Business InterestsEffective July 1, 2010, the Minnesota estate tax added an up to $4 million deduction for qualified farm and small business interests, but due to various technical drafting issues, the law had a limited application. Technical changes were made to the qualified farm and small business interests, these changes are effective June 30, 2011. A separate memorandum will describe these technical changes in greater detail.
American Taxpayer Relief Act of 2012 The window of opportunity remains open until June 30, 2013 to make gifts without using any of the allowable Minnesota lifetime gift credit. The decision to make gifts will involve an analysis of several factors, including changes made to the federal estate, gift, and generation-skipping transfer (GST) tax laws in the American Taxpayer Relief Act of 2012 (ATRA). ATRA made the following permanent changes to federal estate, gift and GST tax laws:
- Federal Estate, Gift and GST Exemption Level The federal estate, gift and GST exemption amounts for 2013 and beyond remain at $5 million indexed for inflation. For tax year 2013, this amount is $5.25 million.
- Federal Estate, Gift and GST Tax Rate ATRA increased the top estate, gift and GST tax rate from 35% in 2012 to 40% in 2013 and beyond.
- Federal Portability ATRA continued the portability feature that allows any unused exclusion amount of the first spouse to die, to be portable to the surviving spouse for estate and gift tax purposes. Notably, portability is neither available for federal GST purposes nor for Minnesota estate or gift purposes.
Review Your Estate PlanPlease contact our estate planning attorneys to assist you in reviewing how the new laws affect your estate plan. Although every situation is unique, below are some general matters that you should review in connection with your estate plan:
- Consider whether making gifts prior to June 30, 2013 will result in overall tax savings.
- Non-Minnesota residents owning real or tangible personal property located in Minnesota should review gifting options.
- Review insurance trusts and consider whether planned annual gifts to pay premiums will trigger Minnesota gift tax.
- Review formula clauses and tax apportionment clauses in your current estate planning documents. Review how federal “portability” and other federal tax changes may affect your estate plan.