Monday, January 6, 2014
Minnesota is now one of only two states to have a state gift tax. (Connecticut is the other one.) As a result, gifts of more than $1 million worth of Minnesota property will require a payment of Minnesota gift tax. The tax is assessed on a sliding scale, and the maximum rate is 16%.
Gifts to a spouse or to charity do not count. Gifts with a value of less than $1 million are gift tax-free. However, once a person gives away more than $1 million of Minnesota property, either in one large gift or in a series of gift transfers, Minnesota will impose gift tax.
The tax applies to Minnesotans and non-Minnesotans alike. However, for Iowan residents, the Minnesota gift tax only applies to property located in Minnesota, like land, cabins and summer homes. It could even apply to a boat if the boat is located or registered in Minnesota. It doesn’t matter if the property is technically owned by a trust or a limited liability company (LLC). What matters is its actual physical location.
Despite Minnesota’s hunger for transfer taxes, it may make sense to give away your Minnesota real estate. That is because Minnesota has an estate tax too. Although the Minnesota estate tax exemption is also $1 million, the $1 million estate tax exemption applies to all of the decedent’s property, whether that property is located in Minnesota or not. Thus, a wealthy Iowa farmer with a $300,000 lake home in Minnesota will end up paying Minnesota estate tax, even though the bulk of his wealth is in Iowa farm land. Similarly, a retiree with a healthy stock portfolio will end up paying Minnesota estate tax, even if her Minnesota cabin is worth only $100,000.
In short, Minnesota’s gift tax is based solely on the value of the Minnesota property gifted, while the Minnesota estate tax formula includes non-Minnesota assets. As a result, it makes sense for any Iowa resident with more than $1 million of net worth to give away Minnesota property during life. We urge you to consider giving away your Minnesota property if your net worth exceeds $1 million. You can do it all at once, or split the gifts with your spouse – or even try to give away the property in annual exclusion increments of $14,000 per donee.
Minnesota also has the old (now repealed) estate tax rule, which taxes gifts made within three years of death, as if they were in the donor’s estate. As a result, you cannot avoid Minnesota estate tax by making deathbed gifts of Minnesota land. Instead, you have to time your gifts so that you live for at least three years after making the transfer. Obviously, that timing can be a little tricky, so it is wise to give away your Minnesota land, sooner rather than later.
For more information, you should consult your BrownWinick attorney if you already own land or plan to buy land in Minnesota. Unfortunately, this is one of those situations where what you don’t know can hurt you or your family.