The estate tax, sometimes referred to as the “death tax,” is levied on the total value of a deceased person’s assets before they are distributed to heirs. In Minnesota, it applies to estates valued over $3 million, with rates ranging from 13% to 16%. This contrasts sharply with the federal exemption threshold of $13.61 million, which means that you may need strategic financial planning to manage potential liabilities. You may want to consult with a financial advisor to help create a comprehensive estate plan to protect your assets.
What Is the Estate Tax in Minnesota?
Unlike an inheritance tax, which is paid by the recipients of the estate, the estate tax in Minnesota is levied on the total value of the estate before it is distributed to the beneficiaries. This form of taxation primarily targets larger estates and serves two purposes: generating revenue for the state and attempting to mitigate wealth disparities. State-level taxes such in Minnesota have varying exemption thresholds and rates, which require a thorough understanding by estate planners and beneficiaries to navigate these local specifics effectively.
The estate tax rates in Minnesota are structured progressively. They apply to estates that exceed a certain value threshold, beginning at 13% and potentially rising up to 16% for significantly large estates. For the year 2024, the exemption threshold is set at $3 million, meaning that estates valued below this figure are exempt from the estate tax. This threshold can change, depending on legislative and economic conditions. Therefore, you should keep updated with current policies to manage your tax liabilities effectively.
Who Is Subject to Estate Tax in Minnesota?
The estate tax in Minnesota applies to all state residents as well as non-residents who possess tangible property or assets within the state. The primary determinant of tax liability is the total value of the estate at the time of the owner’s death.
If this value exceeds the state’s exemption limit of $3 million, the estate is subject to taxation. The definition of residency for these purposes is based on your domicile—essentially, the place where a person has their permanent home and intends to return. This will determine your tax responsibilities and requires careful consideration when planning your estate.
Minnesota vs. Federal Estate Tax
The exemption differences between Minnesota’s estate tax and the federal estate tax are important. Federally, the estate tax exemption in 2024 is set at $13.61 million for individuals, meaning that estates valued below this threshold are not subject to federal estate taxes. The rates for taxable amounts above this exemption can go up to 40%.
By comparison, Minnesota’s estate tax exemption is considerably lower, with the threshold set at $3 million. The rates in Minnesota start at 13% and can go up to 16% for larger estates. High-net-worth residents in Minnesota, therefore, must take into consideration both levels of taxation, which can significantly impact estate planning strategies and the overall tax burden on the estate.
4 Ways to Avoid the Minnesota Estate Tax
Here are four common ways to help you lower or avoid your potential estate tax liability:
- Use a trust: In Minnesota, the use of irrevocable trusts is particularly advantageous as it removes assets from the estate’s taxable base, thereby reducing the overall estate tax liability. These trusts, once set, cannot be altered or revoked, thus offering a secure way to manage assets outside of the taxable estate.
- Gift more money: Gifting is another effective strategy to reduce the size of an estate and thus the associated tax burden. By strategically gifting assets within the legal limits, an individual can significantly decrease the taxable value of their estate over time.
- Donate more to charity: Charitable donations not only fulfill philanthropic goals but also provide a practical benefit in estate planning. Large charitable bequests can significantly reduce an estate’s taxable value, potentially bringing it below the taxable threshold and thus minimizing or eliminating estate tax liabilities.
- Buy real estate in another state: Geographic diversification of assets, particularly through the acquisition of real estate in states with lower or no estate taxes, is a strategic approach to reducing overall estate tax burdens. States like Florida and Texas, which do not impose a state estate tax, can offer attractive opportunities for property investment.
Bottom Line
Minnesota has a lower estate tax exemption threshold when compared with the federal level. Knowing the difference between those limits and who is subject to the estate tax, as well as common strategies that aim to avoid or lower taxes, can help you manage your estate effectively. These strategies can include creating a trust, gifting, making charitable donations and diversifying your assets in other tax-friendly states.
Tips for Estate Planning
- A financial advisor can help you optimize your estate to avoid or minimize taxes. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Consider an estate planning checklist when you start planning your estate.
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