Good News on Minnesota Estate Tax Law

The majority of these United States (32 of them) do not charge a state-level estate tax (or inheritance tax). Minnesota is currently one of 18 states that does levy an estate tax beyond the Federal estate taxes imposed upon citizens.

The Republican majority MN legislature pushed for and attained higher estate tax limits in this year's state tax bill. Governor Dayton reluctantly signed the tax bill into legislation at the end of May.

Here are the new limits (retroactive to 1/1/17):

mn estate tax law change.jpg

The most important caveat here is that Governor Dayton is battling the tax bill through the courts. While he did sign the bill, he thinks certain aspects of the broader tax bill should be revised -- that is, he does not like some of the tax cuts. He has specifically targeted these changes to the estate tax laws as being unfair.

To put this into context, the state of Minnesota will pull in about $40,000,000,000 of tax revenues this year (that's $40 billion). The proposed change to the state estate tax law is forecast to reduce estate taxes paid by $35 million per year for 2017 and 2018, then $75 million per year for 2019 and 2020. 

the math:
$35,000,000 / $40,000,000,000 = less than one-tenth of one percent (0.1%)
$75,000,000 / $40,000,000,000 = less than two-tenths of one percent (0.2%)

Furthermore, the cumulative tax cuts passed in this latest tax bill are projected to amount to $650 million over the next two years, or $325 million per year. Sounds like a huge number, right? Wrong. As a percentage of taxes paid by we the people of Minnesota, it's an annual reduction in our taxes of less than 1% (0.8%, to be exact).

As a reminder, any mythical "budget surplus" manages to evaporate each year through increased government spending. If the state can quickly fritter away a $2,000,000,000 surplus, why can't they just as easily absorb a much smaller $325,000,000 reduction in tax receipts?

The second most important caveat here is the MN estate tax exemption is not portable between spouses. Without proper estate planning (facilitated by an estate planning attorney) prior to the first spouse's death, that first spouse's estate tax exemption would be lost. That is, instead of a married couple having a cumulative state estate tax exemption of $4.2M in 2017, they would only have an exemption of $2.1M.

This recent law change is an example of why we revisit the estate planning discussion with our clients on a regular basis. We are in ongoing contact with a number of local estate planning attorneys, so we can efficiently set up a meeting for a client with an attorney, if their situation warrants it.

Sources:
1) https://mn.gov/mmb/assets/february-2017-forecast-adjustment-memo_tcm1059-284187.pdf

2) "Minnesota Weakens Estate Tax Retroactive to January 1", Forbes, May 31, 2017
3) "Tax cuts on the way for some Minnesotans", Star Tribune, June 26, 2017
4) "Estate tax changes spur Dayton court challenge", MPR News, July 24, 2017