Minnesota Estate Tax Conformity Overview

2008 session update

Conforming Minnesota’s estate tax to the federal estate tax remains on the MNCPA legislative agenda.

Compliance with the federal structure will simplify the tax system and ease the administrative burden for taxpayers. If not addressed, it could encourage Baby Boomers to move their official residence to states with more favorable estate tax laws, negatively impacting Minnesota’s finances.

The impact of the estate tax is difficult to measure because the negative effects come from financial decisions made by individuals. For example, an individual might choose to invest in real estate outside of Minnesota due to lower estate taxes. 

 At this point, the estate tax issue receives less attention from the legislature because of the revenue it currently creates.  However, if nothing is done, this revenue source will decrease and Minnesota could lose big investors.

What is the Minnesota estate tax?

The Minnesota estate tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the time of death.

Minnesota has been a "pick-up" state, meaning that the state tax equaled the allowable federal tax credit. Example: If the federal estate tax credit was $30,000, Minnesota would charge $30,000. The federal estate tax was reduced dollar for dollar. The estate paid no additional total tax as a result of the Minnesota tax.

The Economic Growth and Tax Relief Reconciliation Act of 2001 reduced the state death tax credit:

• 25% in 2002
• 50% in 2003
• 75% in 2004

In 2005, no state death tax credit will be allowed. It will be replaced with a deduction for death taxes actually paid to any state.

Exemption amounts

The tax law now requires a MN estate tax return if:

1. The Gross Estate is over $700,00, -or-
2. A federal return must be filed

Why should you care?

• The repeal of the federal estate tax credit makes the state tax a "real tax" that reduces the amount of money and other property left to heirs.
• The repeal of the Federal credit encourages wealthy individuals to move to other states to avoid paying potentially multi-million state estate tax liabilities. This action takes money out of Minnesota.
• Compliance with the federal system will simplify the tax system and ease the administrative burden on our clients and the Minnesota Department of Revenue (DOR).

Pros and cons of possible solutions

• Possible solution: Adopt the federal position
  • Will cost the state revenue dollars.
  • Will simplify the tax system and ease the administrative burden on the Minnesota Department of Revenue.
  • May avoid the problem of uninformed taxpayers missing a required Minnesota return when no federal return is required.
  • Does not encourage individuals, particularly wealthy and retired persons, to move to a state that is in compliance with the federal.
     
• Possible solution: Partially adopt the federal position
  • The perception and fact that it is not a fair tax will lead to misunderstanding and evasion, and will force people into making poor planning decisions.
  • The additional cost of collection and auditing will lose any benefit of the revenue raised.
  • The state needs a plan and not a short-term solution.

MNCPA position

Minnesota should adopt the federal position to simplify the tax system and encourage residents (and their tax dollars) to stay in Minnesota.

» Join the Estate Tax Task Force