Managing Minnesota’s Low-Threshold, High Estate Tax with Life Insurance

For Minnesota residents, planning for retirement and late-life spending is a must. The state isn’t entirely tax friendly for retirees because it taxes most forms of pensions and retirement benefits. If you’re a wealthy resident of Minnesota, you probably already have a tax plan figured out.

But do you have one for your estate? Not only does Minnesota tax retirement benefits, the state also taxes estates and has an extremely low threshold. While Minnesota is a beautiful place to live, it’s an expensive place to grow older. Having an estate plan if you live or own property in Minnesota is imperative.

What You Need to Know About Minnesota Taxes

An estate is taxable in Minnesota if it’s worth more than $1.6 million after exemptions for businesses, farming property, and spousal inheritances. The exemption is going to continue to increase $200,000 a year through 2018 until it reaches $2 million.

There are some benefits that can be leveraged in Minnesota to reduce the overall size of your estate. First, the state offers an exemption for family businesses. That exemption can be worth up to $5 million, though some conditions apply. These conditions include:

  • The business can’t be publicly traded.
  • It can’t make more than $10 million in gross sales annually.
  • You or your spouse must have been an active participant in the business.
  • The business must be at least three years old at the time of your death.
  • The business must be left to a family member.

In addition to the exemption for businesses, any property you leave to a spouse passes on to them tax free. Once your exemptions are taken, your tax amount can vary from 10% to 16% of your estate’s value. Below is a table that lays out the brackets for estate tax in Minnesota.

Adjusted Gross Estate Tax
$0 to $1.6 million 10% of any amount over $1.6 million
$2,600,001 to $6.1 million $100,000 plus 12% of any amount over $2.6 million
$6,100,001 to $7.1 million $520,000 plus 12.8% of any amount over $6.1 million
$7,100,001 to $8.1 million $648,000 plus 13.6% of any amount over $7.1 million
$8,100,001 to $9.1 million $748,000 plus 14.4% of any amount over $8.1 million
$9,100,001 to $10.1 million $928,000 plus 15.2% of any amount over $9.1 million
$10,100,001 and up $1,080,000 plus 10% of any amount over $10.1 million

As you can see, the minimum you can expect to pay if you die wealthy in Minnesota is 10%. This estate tax may also apply to you if you own any tangible property in Minnesota. In either scenario, you may want to leverage an irrevocable life insurance trust (ILIT).

Tax Planning in Minnesota with ILITs

Minnesota allows for a lot of leverage in removing business holdings from your estate as a means of keeping small businesses in the family. Unfortunately, it doesn’t offer the same exemption for personal property, like homes, that you may want to keep in the family. If you have significant real estate holdings in the state, it might be necessary to use an ILIT as a means of creating a pool of funding for taxes.

ILITs offer the following benefits to Minnesota residents:

  • They’re a simple way to hold funds outside of your estate.
  • Life insurance policies can be used to create wealth for a number of beneficiaries.
  • When you have the trust buy the policy for you, you don’t have to worry about the IRS three-year rule.
  • Your annual gift tax exclusion of $14,000 can be used to fund the trust with no tax implications.
  • On your death, funds will be immediately available to pay taxes on property.

At Howard Kaye, we use ILITs for Minnesota residents mainly to protect their property from having to be liquidated at estate tax time. We also use ILITs to reduce the overall size of an estate and, in some instances, even help clients give their estates away twice. For more information on using one of Howard Kaye’s strategies, contact us at 800-DIE-RICH.