Recent Minnesota Tax Law Changes

Reprinted with permission from Cory Wessman, attorney and shareholder of Erickson & Wessman, P.A.
On May 23, 2013, Minnesota Governor Mark Dayton signed an Omnibus Tax Bill into law. Little has been written about the impact on high wage earners as well as for those Minnesotans who intend to make large lifetime gifts and for those Minnesota nonresidents who own significant property in Minnesota. However, the changes are potentially significant. The key points are as follows:

Basic Case Study

To illustrate the impact of these new rules, consider the following basic case study.[3] Mr. Taxpayer is a Minnesota resident and owns the following assets:

$ 500,000 Traditional IRA
$ 1,000,000 Taxable Investment Account
$ 500,000 Home
$2,000,000 Total

Scenario 1:
Mr. Taxpayer gifts his entire taxable investment account (valued at $1.0 million) to his children on September 1, 2013. He dies on September 1, 2018. Following his death, Mr. Taxpayer’s family would pay no gift or estate taxes. This is because the value of the 2013 gift does not exceed the $1.0 million state gift tax exemption amount, and the family would also be able to make full use of Mr. Taxpayer’s remaining $1.0 million Minnesota estate tax exemption.

Scenario 2:
Mr. Taxpayer gifts his entire taxable investment account (valued at $1.0 million) to his children on September 1, 2013. He dies on September 1, 2014. In this case, the $1.0 million gift made in 2013 would be considered part of the “taxable estate” for Minnesota estate tax purposes because the gift he made was within three years of his death. The approximate estate tax liability would therefore be approximately $100,000.

There are several technical issues related to this law that have not been summarized in this brief overview. Also, the Minnesota Revenue Department has yet to provide additional guidance on some of these technical issues, which may impact a recommendation for a particular individual’s situation. However, since the new law becomes effective on July 1, 2013, individuals who are in a position to do so may consider making substantial gifts before July 1. If you have questions or concerns about how the new tax law might impact you, please do not hesitate to contact us with specific questions or concerns.

Footnotes

[1] This three year “look back” rule is retroactive to January 1, 2013.
2 If the individual’s estate is subject to Minnesota estate taxes following death, then the value of the gifts made during lifetime will impact the total estate tax liability.
3 For this basic illustration, we will assume no change in asset value during the time periods reference and that current state and federal estate and gift tax laws remain intact.