Minnesota Estate and Gift Tax Changes effective July 1, 2013

Minnesota Estate Tax and Gift Tax Change Alert

Without much attention from the media, Governor Dayton on May 20, 2013, signed into law some major changes to the Minnesota estate tax laws, and even more startling created a new Minnesota gift tax. The following is a brief overview of these estate and gift tax changes.

New Minnesota Gift Tax

Minnesota will soon be just the second state in the union to impose a state gift tax. It will be in effect for any gifts made after June 30, 2013. The gift tax applies to any gift of more than $14,000 (2013 annual gift tax exclusion) made to any Donee during a calendar year.

The gift tax rate is 10% of the amount in excess of the annual gift tax exclusion. However, there is a "lifetime gift tax credit" available to each Donor of $100,000, which in essence means that you can give up to $1,000,000 during your lifetime prior to the imposition of any Minnesota gift tax. The gift tax applies to both residents of Minnesota, as well as to gifts by non-residents of Minnesota real property and tangible personal property located in the State of Minnesota.

In addition to the annual gift tax exclusion, there are certain gifts that are not subject to the Minnesota gift tax such as gifts to a spouse and charitable gifts.

Major Changes to Minnesota Estate Tax

Two major changes have been made to the Minnesota estate tax law and they are RETROACTIVELY effective to January 1, 2013. These changes apply to Minnesota residents and to non-residents of Minnesota who own Minnesota real estate, or interests in "pass-through entities" such as limited liability companies, S-corporations or partnerships that own interests in Minnesota real estate or Minnesota-based tangible personal property.

First Change

Prior planning of removing Minnesota real estate from a non-resident's estate by having the Minnesota real estate held by a pass-through entity, is no longer an effective way of avoiding the Minnesota estate tax due to the fact that the State of Minnesota will now tax a non-resident's estate for Minnesota property held in pass-through entities.

Second Change

A second change to the Minnesota estate tax, along with the creation of the new gift tax, is that the State of Minnesota has now created a look-back period for any gifts made within three years of date of death. This change is effective for Minnesota residents who pass away after December 31, 2012, and applies RETROACTIVELY to gifts made after December 31, 2012. [There may be a constitutional argument against the enforceability of this law to the extent it is to be retroactively applied.]

Conclusion

If you are considering making a larger gift in 2013, you should consider making those gifts prior to July 1, 2013, in order to avoid the imposition of the Minnesota gift tax. Please contact our office as soon as possible if you would like to discuss.

THE IRS REQUIRES TAX ADVISORS TO MAKE THE FOLLOWING DISCLOSURE: IN ACCORDANCE WITH INTERNAL REVENUE SERVICE CIRCULAR 230, ANY TAX ADVICE INCLUDED IN THIS WRITTEN COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED BY THE TAXPAYER, FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED ON THE TAXPAYER BY ANY GOVERNMENTAL TAXING AUTHORITY OR AGENCY.