Understanding Minnesota Estate Taxes
Estate taxes can seem complicated, but this guide will break down what you need to know about Minnesota’s estate tax, how it works, and what steps you can take to minimize your tax burden.
What is an Estate Tax?
An estate tax is a tax on the value of a person’s estate (all the property, money, and assets they owned) after they pass away. In Minnesota, if your estate is large enough, part of its value might be subject to this tax before it is passed on to your heirs.
When Do Minnesota Estate Taxes Apply?
As of 2024, if your estate is worth more than $3 million, it may be subject to Minnesota estate taxes. This means that if everything you own—your home, savings, investments, life insurance, etc.—adds up to more than $3 million when you pass away, your estate could owe tax to the state before your beneficiaries receive their inheritance.
Example:
Let’s say your total estate is valued at $4 million. The first $3 million is exempt, but the remaining $1 million is taxed by the state.
What Are the Tax Rates?
Minnesota’s estate tax is progressive, meaning the tax rate increases as the size of the taxable portion of your estate increases. The rates range from 13% to 16% on the value of the estate above $3 million.
Example:
Estate worth $3.5 million: Only $500,000 is subject to tax.
If your estate is valued at $4.5 million, $1.5 million is taxable at rates starting at 13% and going up from there.
How Can You Minimize Estate Taxes?
There are several ways to reduce or even eliminate the amount of estate tax your beneficiaries may owe. Here are a few strategies:
Gifting During Your Lifetime: Minnesota doesn’t have a gift tax, so you can give money or assets to your heirs during your lifetime without facing state taxes. This reduces the size of your taxable estate.
Use of Trusts: A properly structured Revocable Living Trust or Irrevocable Trust can help manage how your assets are distributed and reduce the estate tax burden. Trusts can also ensure privacy and allow for a more seamless transfer of assets.
Marital Deduction: Minnesota allows for a 100% marital deduction, meaning that assets you leave to your spouse won’t be taxed when you pass away. However, these assets will be included in your spouse’s estate when they pass, so it’s important to plan accordingly.
Qualified Charitable Donations: Gifts made to qualified charities reduce the size of your estate, potentially bringing it below the $3 million threshold.
When Should Estate Taxes Be a Concern?
If your estate approaches or exceeds the $3 million threshold, it’s worth considering how estate taxes might affect your heirs. Even if you think your estate won’t reach that level today, future growth in property values, investments, and other assets could push it over the limit. Planning early is key.
Next Steps
If you think estate taxes might affect you or your loved ones, now is the time to act. Let’s work together to create a plan that gives you peace of mind and preserves as much wealth as possible for future generations.
Feel free to reach out if you’d like to discuss your options!