2013 marks a year of significant tax changes, particularly for all Minnesota residents, and non-residents (who own real estate located in this state). The new Minnesota tax bill signed on May 23, 2013 by Governor Dayton makes Minnesota the second state in the union to impose its own gift tax law - beat only by Connecticut. Furthermore, Minnesota now ranks fourth in the nation for the highest top marginal income tax rate. Before diving into the specifics of the new gift tax law, here is a primer of the current status of estate tax rules in general: $5.25 million is exempt from Federal estate taxes ($10.5 for a married couple). This same amount can be gifted during the individual’s lifetime without incurring additional gift tax. By contrast, only $1 million is exempt from Minnesota estate tax. Furthermore, Minnesota has not adopted automatic portability for married couples; therefore, the exemption is only $1 million per couple, unless the appropriate tax planning is implemented into a couple’s estate plan.
New Minnesota Gift Tax. Minnesota enacted the new gift tax law, at the last minute, despite the fact that other states have given up their own gift tax regime. Other state who previously repealed their state gift tax programs, did so upon finding that the costs to implement a state gift tax program actually outweighed the revenue generated (Louisiana repealed state gift tax laws in 2007, North Carolina in 2008 and Tennessee in 2012). In view of their lack of success, other states have steered away from adopting a state gift tax regime. Minnesota’s new gift tax applies a flat 10% rate to any gifts over $1 million during an individual’s lifetime. This applies to any gifts made on or after July 1, 2013 and the $1 million exemption will not be indexed for inflation. In addition to the $1 million lifetime credit, individuals may still gift the annual exclusion amount of $14,000 per donor and donee. Other exempt gifts not subject to the gift tax are direct payments of certain medical and educational expenses, within limits. Payments must be made directly to the service provider, and in the case of educational expenses, only tuition fees are exempt.
3 Year Look-Back. The new law introduces a look-back feature to penalize “death bed” gifting. In other words, if the value of a decedent’s estate on the date of death, plus the value of any gifts made within the prior three years of death, equals $1 million, an estate gift tax return will be required. The gifts will be invalidated and the estate will be taxed as if those gifts were never made. Minnesota’s effective estate tax rates can range from approximately 9-23% of the value of the assets the estate. This law was made retroactive to deaths occurring after January 1, 2013, and will apply to any gifts made starting the last half of 2013 or later.
Non-Residents Owning Minnesota Real Estate. Historically, individuals who did not claim Minnesota as their tax domicile and owned Minnesota real estate in a “pass-through” entity (e.g. LLC, S Corp., Partnership, etc.) were not taxed on the real estate and tangible personal property. The new law disregards this entity and taxes non-residents for the proportionate share which represents the overall estate, as if the decedent was a Minnesota state resident at death. Administratively, this is extremely burdensome because if the overall estate happens to exceed $1 million, estate administrators must prepare a Federal IRS Form 706 and Minnesota estate tax form M706. The 706 is highly detailed and expensive to prepare depending on the character of your asset base. This entity may be an LLC, S Corp., or Partnership. Such entities will be ignored for estate tax calculations, effective the first of this year. The result of the new rule is to extend the reach of the Minnesota estate tax to more non-residents. However, as of this writing, the new gift tax does not apply to gifts of these interests. Again, this law was made retroactive to deaths occurring after January 1, 2013.
What can Minnesota residents and real estate owners do? Last minute gifts are a thing of the past and frankly have never been the best way to preserve wealth. The decrease in the Minnesota exemption, imposition of flat tax, and long arm attempts to tax Minnesota real estate owners, makes long term wealth transition plans very important in order to utilize the annual gift exclusion gifts over a longer period of time. We can help you and your family achieve wealth preservation in a way that is consistent with your overall goals and lifestyle. But Minnesota’s lower exemptions require that you engage our services earlier rather than later to give you the longer time frame needed to accomplish your goals.