Federal and Minnesota Estate and Gift Tax
Estate planning basically amounts to a way to give gifts at the time of your death. When you hear about the possibility of estate tax, you may wonder if it is possible to give the gifts while you are still alive and avoid estate taxes. This strategy worked for several years after the federal estate tax was established in 1916. However, Congress enacted a gift tax to close this loophole. Minnesota currently enforces its own estate tax but the Minnesota legislature repealed the state gift tax in 2014. Here's the conclusion to my look at estate and gift tax and how it affects your ability to give tax-free gifts to your loved ones.
Minnesota and Federal Estate Taxes
Estate taxes in Minnesota are an issue for lots of families that will not have a federally taxable estate. Federal estate tax does not apply until your estate is valued at $5.45 million, so many people believe that estate tax will never be an issue for them. However, in Minnesota, state estate tax applies once you have assets exceeding $1.6 million (as of 2016).
There are various different ways that you can try to reduce the amount of estate tax that might apply. If you are married, your spouse has a $14,000 annual exclusion to use (both federally and in Minnesota), and you have your own exclusion. In total, as a couple you can give $28,000 to any number of gift recipients during the calendar year tax-free. In addition, you are steadily reducing the value of your estate for tax purposes as you give these tax-free gifts.
You don’t have to give direct cash gifts to use the exclusion. The gift could be shares in a family or farm business to ensure that it is transferred to the next generation tax-free. You could also put money or assets into an irrevocable trust for the benefit of someone else, such as a disabled child, over time without incurring any gift tax responsibility.
It is also important to note that Minnesota estate taxes have a three-year look-back period. Any gifts in excess of the $14,000 per person exempted amount made during the three years before you die are included in your Minnesota taxable estate. Although $28,000 per person, per year can seem like a relatively small amount of money to transfer tax-free, it can help many Minnesota families avoid paying estate taxes.