This legislative update raises the estate tax exclusion, clarifies taxable gift rules, and modifies the domicile test for residency.
On May 30, 2017, Governor Mark Dayton signed an omnibus tax bill that includes several updates to Minnesota’s estate tax. Minnesota is one of only 18 states (plus the District of Columbia) that still imposes its own estate or inheritance taxes.
Primary changes enacted by Minnesota
- Modifies the domicile test for residency for both individual income tax and estate tax purposes so that the location of the individual’s CPA, attorney, or financial adviser, and the place of business of the individual’s bank, is not considered.
- Clarifies that taxable gifts made within three years of death are subject to the Minnesota estate tax. Present law could be read to imply that they are taxable only if they are deducted in computing the federal taxable estate. But under federal law, they are never included in the federal estate because they were subject to the federal gift tax instead. Effective retroactively to the original date for the requirement to include these gifts in the Minnesota taxable estate (gifts after June 30, 2013).
- Increases the estate tax exclusion from $2 million to $3 million, phased in four steps and fully effective for estates of decedents dying in 2020. Minnesota estate tax applies if the federal gross estate, plus the federal adjusted gifts made within three years of the date of the decedent’s death, exceeds the following exemption amount:
Prior Law
| Exemption amount | Effective date (decedent death date) |
|---|---|
| $1.8 million | 2017 |
| $2.0 million | 2018 and thereafter |
New Law
| Exemption amount | Effective date (decedent death date) |
|---|---|
| $2.1 million | 2017 (retroactively effective January 1, 2017) |
| $2.4 million | 2018 |
| $2.7 million | 2019 |
| $3.0 million | 2020 and thereafter |
These new provisions do not affect Minnesota’s $5 million estate tax exemption for family farms and qualified small businesses.
Provisions considered but not enacted
In an earlier version of the omnibus tax bill, which Governor Dayton vetoed, both the Minnesota House and Senate would have enacted full conformity to the federal estate tax exclusion amount of $5.49 million.
Possible changes later this summer
While the tax bill and several budget bills were passed and signed into law, there was not a clean ending to the legislative session. There remains some controversy over specific provisions in the bills that may result in retroactive changes to the law.
In a letter to Minnesota’s legislative leadership, Governor Dayton opposed key provisions of the tax bill he enacted and explained that he had eliminated the Legislature’s funding via line-item veto as an incentive to prompt a second special session where some provisions would be repealed. One of these provisions is the retroactive increase in the estate tax exclusion from $2 million to $3 million.
On July 20, 2017, the court ruled the governor’s line-item veto violated the separation of powers clause of the Minnesota constitution and declared the veto “null and void.” The issue is not fully settled as Governor Dayton has indicated he will appeal the ruling to the Minnesota Supreme Court.
How we can help
CLA can help individuals navigate the impact of these state and local tax changes on their potential Minnesota estate tax liabilities.