What Are Federal and Minnesota Estate Taxes?

By Chris Tymchuck
Founding Attorney

Estate taxes are essentially a tax on the transfer of your assets to others after you pass away. Anything that is left in your estate when you pass will be taxed. However, estate taxes only “kick in” once you pass a certain threshold because assets below that amount are exempt entirely. 
There is a federal estate tax and some states, like Minnesota, impose their own state estate tax as well. This tax applies to property owned in Minnesota, regardless of whether you are considered a resident. Thankfully, there are steps you can take to minimize and even avoid the estate tax entirely if you use proper and careful estate planning.

What is Taxed?

Calculating your estate tax will depend on the value of your gross estate. Your gross estate is everything that you own when you pass away. It is based on the fair market value of the property at your time of death. It includes everything you own outright and everything in which you have an interest. It includes things like:

  • Real estate
  • Cash
  • Securities
  • Bonds
  • Life insurance proceeds
  • Annuity proceeds

There are only a few deductions permitted at the federal level to decrease the value of the estate. These include funeral expenses, payments to outstanding debts, the value of the property that will be donated at death, and amounts paid for state death taxes. 
Minnesota also taxes some gifts that have been given in the past three years before the decedent’s date of death. However, as long as the gifts are under $14,000, they will not be subject to Minnesota estate taxes.

Important Estate Tax Exemptions

The vast majority of United States citizens will not have to pay federal estate taxes because their estate is not large enough to go over the individual exemption amount. The individual federal exemption is $5.49 million for 2017. In addition, transfers to a surviving spouse are not taxed at the federal level. As such, taxpayers can often avoid the federal estate taxes altogether by using their individual exemption and then transferring their remaining property to their surviving spouse.
Minnesota’s individual exemption for 2017 is $1.8 million. That means that only estates that are larger than this amount will be taxed at the state level. In addition, Minnesota allows the spousal exemption to the extent it was used at the federal level as well. Nonetheless, because the exemption amount is lower at the state level, it is definitely possible that you will have to pay no federal estate tax, but you will still owe Minnesota estate tax.

Additional Minnesota Tax Exemptions

Minnesota also has some state-specific exemptions that can be extremely valuable for some taxpayers. These exemptions are particularly tailored to those who have small businesses and family farming operations. Both exemptions must meet particular requirements to qualify, but if they do, the exemption can be up to $5 million. 
The requirements for this specific exemption are complicated, so it important to seek the assistance of an experienced estate planning attorney. The team at Unique Estate Law can help you plan for the future to minimize and often eliminate your estate taxes. Contact us for more information or to schedule a free 15-minute consultation.

About the Author
As a Minneapolis Estate Planning and Probate attorney I help build and protect families through the adoption, estate planning, and probate processes. I also have experience working with families on issues related to their small businesses. I know how difficult it is to find time to plan for the future and I am here to help walk you through it.