Minnesota Estate Taxes – Planning for State-Level Peculiarities

“Nothing in life is certain except death and taxes.” But there’s more nuance to this saying, especially regarding estate taxes, which vary significantly between federal and state levels. While federal estate tax often grabs headlines—particularly with potential changes looming in 2025—state estate taxes can impact many more families. Today, we’re focusing on Minnesota, one of 13 states/territories that impose an estate tax.

To read more about the federal estate tax and 2025 planning strategies, check this article out!

The Minnesota Estate Tax – Differences from the Federal Estate Tax

Minnesota’s estate tax has a much lower threshold than the federal estate tax, with the state threshold set at $3,000,000 per person. This is significantly lower than the current federal threshold of $13,610,000 per person in 2024. While Minnesota’s threshold is not indexed for inflation, requiring legislative action for changes, it offsets the taxable amount similarly to the federal system. For example, if your estate is worth $4,000,000, you are taxed only on the $1,000,000 exceeding the $3,000,000 threshold.

Minnesota’s estate tax rates range from 13% to 16% across five brackets:

Another key difference from the federal estate tax is that Minnesota does not allow the combining of exemptions for spouses. The federal system allows a surviving spouse to combine their unused exemption with their own via “portability,” but Minnesota does not. It’s a use-it-or-lose-it situation.

However, in Minnesota, just like at the federal level, one spouse can transfer assets to the surviving spouse without triggering any estate tax complications – this is called the “unlimited marital deduction.” 

Minnesota offers specific deductions for qualified small businesses and family farms, up to $2,000,000, which can be advantageous for eligible estates.

Planning Strategies for the Minnesota Estate Tax

There are several ways to effectively plan for the Minnesota estate tax and limit your potential future tax liability.  Here are some strategies:

1. Threshold/Exemption Planning with Trusts
   As mentioned, unlike the federal estate tax exemption, the Minnesota exemption is not a combinable tax credit. This means that for a married couple, the design of their estate plan needs to be different to effectively use each of their potential $3,000,000 exemptions.

   For example, say that Mary Tyler and Robert live in Minnesota and have all their life. They have 1 adult child to whom they would like to leave their estate. Mary Tyler and Robert have worked hard, lived within their means, and made smart investment decisions with their wealth management team. Their total net worth is $5,000,000, and they’ve been responsible in their estate planning. Their estate plan leaves all their assets to the surviving spouse at first death and the balance to their child once they’ve both passed. However, this plan has a hidden danger as it does not include setting up a Credit Shelter Trust at the first spouse’s death.

   One day, Mary Tyler passes away. Her estate is administered as planned, and everything continues in Robert’s name. Because Mary Tyler left everything to her spouse, no estate tax has been triggered in Minnesota. Sometime later, Robert passes away. Because Robert’s estate is valued at $5,000,000, everything above his $3,000,000 exemption is considered for estate tax purposes. According to the Minnesota Department of Revenue’s estate tax calculator, Robert’s estate would owe $260,000 in taxes. The remaining $4,740,000 was transferred to their child.

   With additional planning, Mary Tyler and Robert could have potentially avoided all the state-level taxes. The results look different if their plan called for a Credit Shelter Trust to be funded at the first death. At Mary Tyler’s death, $2,500,000 would go into this irrevocable trust for Robert’s benefit, and he could continue using the assets as needed. This also would reduce Robert’s net worth to $2,500,000. Then, at Robert’s death, no tax would be due as he is under the threshold for his estate being taxable. The other benefit to this planning is that any appreciation inside the trust is sheltered from the estate tax.

   It’s important to note that careful planning includes being aware of beneficiary designations on accounts. Beneficiary designations can allow for a smoother transition of assets at death but can also undo any careful threshold planning done in revocable trusts. Beneficiary designations override anything in a Trust or Will, so even if your plan calls for setting up a Credit Shelter Trust at the first death, the beneficiary-designated assets will not get picked up by that careful planning.

2. Gifting
   Minnesota does not have a gift tax, though the federal gift limits apply. In 2024, the annual exclusion at the federal level is $18,000 per recipient. If you gift more than that, you must file a federal gift tax return.

   However, you can exceed this amount in a few ways. For example, payments directly to providers for qualified education expenses and/or qualified medical expenses do not count toward that $18,000 figure. If you are considering funding 529 plans, you can fund up to 5 years’ worth of annual exclusion without using any federal exemptions.

   Gifting can reduce your estate’s value over time and minimize future tax liabilities. Be mindful that gifts within three years of death are included in the estate for tax calculations.

3. Changing Residence
   Relocating to a state without an estate tax, such as Wisconsin or Indiana, could be a solution. However, Minnesota’s rules for determining residency and taxing non-residents who own property in the state complicate this strategy.

   Simply leaving the state does not rid you of potential estate tax liability. Minnesota generally considers you a state resident if you maintain your domicile for 183 days or more. They will also look at your actions and words when deciding. For residents, you pay estate taxes on your whole taxable estate. For non-residents, there is a multi-step process for determining your estate tax liability. You typically see this come up when someone leaves Minnesota but continues to own real property or a business in the state.

   For non-residents, you’d first determine your estate tax liability if you were a resident. You then pro-rate that estate tax liability by the proportion of your gross estate in Minnesota to your total value. For example, take Mary Tyler and Robert from above. Assume they moved to Wisconsin before they passed but kept a $500,000 cabin in Minnesota. Once they both pass, their estate would calculate what their estate tax liability would be if they were residents – in this case, $260,000. Then, they would calculate the proportion of their estate in Minnesota – $500,000 for the cabin out of $5,000,000 total estate or 10% of their total estate. Finally, they’d multiply $260,000 times that 10%, and the resulting $26,000 would be their final Minnesota estate tax liability. 

4. Charitable Giving
   Charitable donations can significantly reduce estate taxes, as bequests to charity are fully deductible from the estate. There are no limits to charitable giving beyond what you can effectively deduct on your income tax return and what your financial plan can support.  Any charitable bequests produce a dollar-for-dollar offset to your estate before your tax liability is calculated at death.

5. Life Insurance
   Properly structured life insurance can provide liquidity to cover estate taxes without diminishing the estate’s value. There are specific rules around ownership so that the life insurance proceeds aren’t included in your estate. Still, if done properly, a life insurance policy can make your beneficiaries whole if your estate has a tax liability.

Minnesota Outlook

Minnesota residents should regularly review their estate plans to account for state-specific tax implications. Proper planning can ensure that more of your estate benefits your heirs rather than going to the Minnesota Department of Revenue.

At Mission Wealth, we’ll continue to monitor these proposed changes and their potential impacts on our clients. If you have any questions, please contact our wealth advisory and strategy team today.

This article is not intended to provide any specific tax or estate planning advice. Advisory services are only offered to clients or prospective clients where Mission Wealth and its representatives are properly licensed or exempt from licensure. Consult a tax professional or attorney for specific advice.