Estate Planning Alert: Minnesota Legislature Adds New State Gift Tax And Expands Estate Tax Provisions For Nonresidents

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Just before midnight on May 20, 2013, the Minnesota Legislature passed the Omnibus Tax Bill. We expect that Governor Dayton will soon sign the bill into law. The tax bill includes significant changes that will have wide-ranging impact on Minnesota taxpayers.

New Gift Tax

Among the changes is a new tax: a Minnesota gift tax, effective July 1, 2013. Minnesota and Connecticut are now the only two states with a state gift tax.

The new law will impose a 10% tax on gifts in excess of a lifetime total of $1 million. Federal exclusions from gift tax that permit individuals to make gifts without gift tax will also apply to Minnesota gifts. The current exclusion from gifts ($14,000 per recipient) will apply to Minnesota gifts, as well as exclusions for charitable gifts, and gifts to a spouse (subject to the same federal rules and limitations).

Lifetime gifts will be taken into account on the death of Minnesota residents and nonresidents with Minnesota property. Under the new law, a Minnesota estate tax return will be required if the total of the decedent's estate and the decedent's taxable gifts exceeds $1 million. If you have made gifts in excess of $1 million in the past three years, the new law may impact your future estate and gift tax situation.

If you have been contemplating a gift, you should consult with your advisors as soon as possible as to the timing and tax consequences of the gift.

Expanded Estate Tax Provisions for Nonresidents

The Omnibus Tax Bill also contains an expansion of the Minnesota estate tax on estates of nonresidents. Minnesota will impose estate tax on nonresidents with real estate and personal property physically in the state even if owned in a "pass-through" type entity at death. These include single-member limited liability companies, S corporations, partnerships (and other entities taxed as partnerships) and certain trusts.

The new law will be retroactively effective for estates of decedents who died on or after January 1, 2013. If you own a pass-through entity that holds Minnesota property, this new law may impact your estate tax situation, even if your home state does not impose an estate tax.