The Minnesota omnibus tax bill passed by the legislature on May 20 raises approximately $2 billion in revenue for the state. The bill creates a new top tax rate of 9.85% for individuals and includes numerous changes to income and sales tax. We’ll be sending out information on these changes in the near future.
An aspect of the bill which hasn’t received as much exposure is the creation of a new Minnesota gift tax. Minnesota has not previously had a gift tax and now becomes the second state in the U.S. to have a gift tax. The new Minnesota gift tax is effective for transfers made on or after July 1, 2013.
The new Minnesota gift is imposed at a flat rate of 10%. Individuals are allowed a lifetime credit of $100,000 against the MN gift tax, meaning the credit shelters $1 million of gifts over an individual’s lifetime. Any applicable gifts made in excess of $1 million over an individual’s lifetime will be subject to the new 10% Minnesota gift tax.
For Minnesota residents, the gift tax applies to all gifts, except the transfer of real and tangible personal property located outside of Minnesota is not subject to the gift tax.
For non-residents, gifts of real estate and tangible personal property located in Minnesota are subject to the new Minnesota gift tax. In addition, gifts ofinterests in pass through entities such as LLC’s and S Corporations will be subject to Minnesota gift tax if the entity holds property in Minnesota.
Minnesota has had an estate tax in effect for a number of years. The Minnesota estate tax exemption of $1 million per person at death is substantially lower than the current federal estate tax exemption of $5.25 million per person. Accordingly, decedents with a taxable estate of $5.25 million will generally be exempt from federal estate tax, but will be subject to Minnesota estate taxes if their taxable estate exceeds Minnesota’s lower $1 million exemption amount.
The omnibus bill includes a new provision that Minnesota estate taxes will now be computed to include any gifts made within three years of death. This provision is applicable for persons dying after December 31, 2012 and is intended to prevent any benefit from gifts made shortly before death.
Two major planning opportunities present themselves with the new gift tax laws. Being that the effective date of the new Minnesota gift tax is July 1, 2013, any gifts made before that date will not be subject to the Minnesota gift tax. Individuals who will be ultimately subject to Minnesota estate taxes should consider making gifts in June, 2013. Any gifts made in June, 2013 will not be subject to the new Minnesota gift tax. Anyone considering this approach should act right away.
Besides the window of opportunity in June, 2013, the new law effectively gives individuals $2 million of exempt transfers for Minnesota purposes- $1 million of lifetime gifts and the $1 million estate tax exemption. Prior to the passage of the new gift tax law, only the $1 million estate tax exemption was available to shelter assets from Minnesota. Keep in mind that the lifetime gifts must be made at least three years prior to death in order to keep the gifts from being included in the Minnesota taxable estate.
Anyone with Minnesota assets in excess of these exemptions should revisit their estate planning to minimize their ultimate Minnesota estate tax. Please contact us for help in reviewing the strategies you might wish to consider.