What Types of Taxes Are Imposed on Minnesota Estates, Beneficiaries, and Gift Donors?

Minnesota Estate Tax

There is no inheritance tax in Minnesota, as stated by the Department of Revenue. Beneficiaries of an estate are not required to pay taxes on what they inherit. However, Minnesota does impose an estate tax, which is a tax on the assets of a deceased person before they are distributed to the beneficiaries. The estate tax rate follows a graduated schedule, ranging from 13% to 16%. It is imposed on the taxable estate – generally, the estate’s fair market value on the date of death, fewer certain deductions, and an exemption. For 2024, the exemption amount is $3 million.

Federal Estate Tax

Many estates are not required to pay federal estate taxes. The filing threshold is $13,610,000 for year of death 2024, as reported by the IRS. There is no federal inheritance tax.

Federal Gift Tax Tax

The gift tax is a federal tax. A gift is defined by the IRS as a transfer of property by one person to another while receiving nothing or less than full value in return. It applies to the transfer of any type of property, whether it was intended to be a gift or not. This may include selling something at less than full value or making an interest-free or low-interest loan. Gift tax rates range from 18% to 40%. However, it is only imposed on amounts that exceed the lifetime exclusion, which is $13.61 million in 2024.

What Types of Estate Planning Strategies Can Minimize Tax Liability?

Estate planning should involve careful consideration of strategies to protect and maximize transferred assets while minimizing tax liability. The following may be employed in navigating tax implications:

• Gifting strategies: Gifting can be an effective strategy to reduce the size of the taxable estate and take advantage of the gift tax exclusion. Gifts made in Minnesota during the donor’s lifetime are not subject to estate tax if less than the annual exclusion amount, which is $18,000 in 2024. Strategic gifting is a tax-efficient way to transfer wealth during your lifetime while reducing the amount of your taxable estate.
• : Donating money to a charity you care about reduces your taxable estate and helps minimize estate taxes. Charitable contributions may also be deductible for income tax purposes. Typically, the amount of cash contributions that can be used as an itemized deduction on an income tax return is limited to a certain percentage (usually 60%) of a taxpayer’s adjusted gross income. However, the IRS announced a temporary suspension of limits on charitable contributions, making 100% of qualified contributions made by individuals deductible.
• Holding assets in trust: Transferring assets into an irrevocable trust removes those assets from your taxable estate. Charitable remainder trusts (CRTs), grantor-retained annuity trusts (GRATs), and irrevocable life insurance trusts (ILITs) can be effective estate planning tools to minimize tax liability.
• Establishing a QPRT: A qualified personal residence trust (QPRT) is a special type of irrevocable trust designed to transfer ownership of a residence to heirs. Grantors retain the right to live in the residence for a term specified in the trust (for example, 10, 15, or 20 years) before ownership is transferred to the beneficiaries at a discounted value for gift tax purposes. If the grantor survives the term of the QPRT, the residence is removed from the grantor’s estate, thereby reducing estate taxes.
• Business succession planning: If you own a business, this is a critical part of the estate planning process. Buy-sell agreements, employee stock ownership plans (ESOPs), valuation discounts, and other business succession strategies are essential for preserving wealth and reducing tax liability.
• Using the generation-skipping transfer tax exemption: The federal generation-skipping transfer tax (GSTT) is an additional tax imposed on the transfer of property that skips a generation, for example, from a grandparent to a grandchild. For 2024, the generation-skipping transfer tax exemption is $13.61 million.
• Electing portability: The Deceased Spouse Unused Election (DSUE), also known as portability, is a federal provision that allows a surviving spouse to capture the unused portion of the estate tax exemption of their deceased spouse. This can potentially double the federal estate tax exemption, which is $13.61 million per individual in 2024. Particularly if the value of the state is expected to appreciate, electing portability can mean significant tax savings and preservation of wealth for heirs. However, married couples who use the generation-skipping tax transfer exemption will not be eligible to elect portability.
• Purchasing life insurance: Life insurance death benefits may or may not be subject to estate taxes in Minnesota. If the total value of the estate, including life insurance proceeds, exceeds the threshold amount, a tax is imposed on the taxable value of the estate. One way to avoid this is to set up an irrevocable life insurance trust (ILIT). Upon your death, the proceeds of the policy do not have to go through probate, and the premiums paid during your lifetime can reduce the taxable value of your estate. To meet the requirements, the ILIT must both purchase and be named as the beneficiary of the policy. In setting up the trust, you may direct the trustee to use the proceeds for the benefit of your heirs.

Crafting an estate plan, including strategies to reduce tax liability, can be a complicated process. It is in your best interests to consult with an experienced tax planning and estate planning lawyer. At Sandahl & Damhof, we have more than 60 years of combined experience and a thorough understanding of tax consequences in estate planning. We understand there is no one-size-fits-all solution. Contact us at 612-448-3898 to schedule a consultation.