While some states boast tourist destinations, Minnesota has 10,000 lakes and taxes. As of July 1, 2013, Minnesota will have its own decoupled state gift tax in addition to a farther-reaching decoupled state estate tax.
New Gift Tax
The new law creates a Minnesota gift tax on lifetime transfers of wealth that are in excess of the Minnesota $1 million lifetime exclusion amount.1 This new 10 percent tax will apply to lifetime gifts made on or after July 1, 2013. Minnesota is the second state in the nation to have its own gift tax, joining only Connecticut.
The law imposes a gift tax on the transfer of property by gift by a resident or nonresident. The donor is liable for the tax payment, but if the donor doesn’t make a timely payment, the law indicates the donor is personally liable for the tax to the extent of the value of the gift. The donor of a taxable gift must file a state gift tax return by April 15 following the close of the calendar year in which the gift was made or, if the donor died, in such calendar year, by the last date for filing the federal gift tax return.2 The Minnesota Department of Revenue hasn’t yet developed or released the Minnesota gift tax form. Information regarding the form and other logistical questions are yet to be addressed.
The new law indicates that federal elections and exemptions will apply, such that Minnesotans will be able to make annual exclusion gifts, just as the federal gift tax law allows, without having to file a Minnesota gift tax return, use exemption or pay any gift tax. Due to this new law, Minnesotans who want to make asset transfers in excess of $1 million must do so prior to July 1, 2013, for that transfer to be tax-free.
Minnesota also passed new legislation recognizing same-sex marriages as of Aug. 1, 2013. While this new law seems unrelated to the estate and gift tax provisions in Minnesota’s Omnibus Tax Bill, estate planners know the two laws impact each other. In particular, same- sex spouses will be able to make unlimited tax-free gifts to each other under the Minnesota Gift Tax law, but under current federal law the same sex spouses won’t receive the benefit of the unlimited marital deduction for federal gift tax purposes. Thus, gifts between those spouses would be subject to federal gift tax. Unless the pending Windsor ruling changes the availability of tax elections to same-sex spouse, this is another way that the Minnesota laws are further decoupled from the federal wealth transfer laws, and same sex spouses in Minnesota will have to track the use of their federal and state exemptions separately.
Minnesota has had and continues to have a $1 million state estate tax exemption. In addition to creating the gift tax, however, the new Minnesota tax law expands the estate tax to reach more assets than in the past for decedents who die after Dec. 31, 2012.
While Minnesota has subjected estates of nonresident decedents to Minnesota estate tax for property located in Minnesota, the new law expands the scope of assets covered by the estate
tax for nonresident decedents. Specifically, Minnesota will now assess state estate tax against real and tangible property that a nonresident decedent owns via a pass-through entity if the underlying assets are sitused in Minnesota.3 Such entities include, for example, property owned through partnerships, single-member limited liability companies, S corporations and trusts that are includible in the decedent’s federal gross estate. Situs of the property is determined as if the pass-through entity didn’t exist and, instead, as if the real or tangible personal property was personally owned by the decedent—or by the donor if the issue relates to a gift made within three years of death. If more than one person owns the entity, the ownership of the underlying property subject to taxation is attributed to the decedent in proportion to the decedent’s ownership of the entity. An estate of a nonresident decedent who’s subject to this new pass-through entity estate tax will receive a credit against the tax for the amount of estate tax paid to another state that’s attributable to the same property.4
In addition, the new Minnesota law provides that gifts made within three years prior to death will now be brought back into the decedent’s taxable estate for Minnesota estate tax purposes. The law specifically states that a Minnesota estate tax return must now be filed if a federal estate tax return is filed or if “the sum of the federal gross estate and federal adjusted taxable gifts made within three years of the date of the decedent’s death exceeds $1,000,000.” The law is effective for estate of decedents who die after Dec. 31, 2012.
1. Minn. Stat. Section 292.17.
2. Minn. Stat. Sections 292.18, 292.19.
3. See Minn. Stat. Section 291.005, Subd. 1.
4. Minn. Stat. Section 291.03, Subd. 1c.