Understanding the Minnesota Estate Tax
Much of the talk about estate taxes these days centers on whether the incoming Trump Administration will extend the high federal exemption ($13.99 million for 2025), which is currently scheduled to sunset at the end of 2025 to its pre-2018 baseline of roughly $7 million. Thanks to the portability election, married couples can shelter up to $27.98 million from federal estate tax in 2025. Since only a tiny percentage of people fall into this category, it’s understandable that many people believe the estate tax only affects the very wealthy.
But in fact, a number of states have far lower estate tax filing thresholds. If you live or own property in Minnesota, for example, and you have a net worth of $3 million, your estate could become subject to the complicated and confusing Minnesota estate tax laws.
Minnesota Estate Tax Filing Requirements
Filing requirements differ depending on whether the decedent was a resident or nonresident of Minnesota at the time of their passing.
- Minnesota residents must file if their federal gross estate (before subtracting any debts, liabilities, or administrative expenses) plus federal adjusted taxable gifts made within 3 years of the date of death exceeds $3 million or if the estate is required to file a federal estate tax return.
- Non-Minnesota residents must file if they own real estate or tangible personal property located in the state of Minnesota and the estate meets the requirements of a Minnesota resident listed above.
Calculating the Tax
The Minnesota estate tax rate is graduated, from 13% up to a top rate of 16%. The top rate applies to taxable estates over $10.1 million.
To calculate if an estate will owe Minnesota estate tax:
- First, calculate the net taxable estate (gross assets less liabilities) and add in gifts made within 3 years of death.
- Next, subtract the value of qualified small business property/qualified farm property (if applicable) and subtract the $3 million Minnesota exclusion to arrive at the Minnesota net taxable estate.
- Calculate the Minnesota estate tax utilizing the graduated rate table (ranging from 13% to 16%).
- For Minnesota residents with property outside the state or non-Minnesota residents with Minnesota property, divide Minnesota gross assets plus gifts of Minnesota property made within 3 years of death by federal gross assets plus all gifts made within 3 years of death. Then multiply that total by the Minnesota estate tax.
Example 1:
A Minnesota resident passes away with no surviving spouse in 2024 owning a home worth $2.8 million (with a $1.3 million mortgage), a $500,000 life insurance policy, a $350,000 retirement plan, and a savings account worth $50,000.
In this situation, the decedent’s gross estate is $3.7 million, causing a Minnesota estate tax filing requirement. While there would be no tax due since tax is calculated net of the mortgage (net estate of $2.4 million), a Minnesota estate tax return must still be filed.
Example 2:
A Minnesota resident passes away without a surviving spouse in 2024 owning a Minnesota home worth $1.6 million (with a mortgage of $600,000), a $700,000 life insurance policy, a $1 million retirement plan, a $100,000 brokerage account, and a condo in Florida worth $600,000.
The decedent meets the filing requirement in Minnesota because their federal gross assets ($4 million) exceed $3 million and the decedent is a resident of Minnesota.
To calculate the tax, we start with a net taxable estate of $3.4 million ($4.0 million gross less the $600,000 mortgage), subtract the $3 million exclusion, and multiply the resulting $400,000 by the applicable tax rate of 13% to arrive at $52,000 of Minnesota Estate Tax.
Since the decedent owned non-Minnesota real estate, we must then multiply the $52,000 by the ratio of Minnesota gross assets (total gross assets of $4 million less Florida condo value of $600,000 equaling $3.4 million) over total gross assets ($4 million) or 85% to arrive at Minnesota estate tax of $44,200.
Example 3:
A Florida resident passes away without a surviving spouse in 2024 owning a Florida home worth $1,600,000 (with a mortgage of $600,000), a $700,000 life insurance policy, a $1 million retirement plan, a $100,000 brokerage account, and a family cabin in Northern Minnesota worth $600,000.
While the decedent is not a resident of Minnesota and their Minnesota assets are well under $3 million (2024), the estate still meets the Minnesota filing requirement because their federal gross assets ($4 million) exceed $3 million and the decedent-owned real estate located in Minnesota.
In this situation, not only would there be an estate tax return filing requirement, but the estate would owe Minnesota estate tax.
Following the rules discussed above, we start with a net taxable estate of $3.4 million ($4 million gross less the $600,000 mortgage), subtract the $3 million exclusion, and multiply the resulting $400,000 by the applicable tax rate of 13% to arrive at $52,000 of Minnesota Estate Tax.
Since the decedent was a non-Minnesota Resident, we must then multiply the $52,000 by the ratio of Minnesota gross assets ($600,000 cabin) over total gross assets ($4 million) or 15% to arrive at a Minnesota estate tax of $7,800.
‘Look-Through’ Rule for Ownership of Pass-Through Entities
In addition to the three-year look-back on gifts (affecting both the filing requirements and potential estate tax due), Minnesota also has a “look-through” rule affecting non-Minnesota residents that own pass-through entities (including S corporations, entities taxed as partnerships, trusts, and single-member LLCs) that own property located within Minnesota.
Without this “look-through” rule, the decedent’s estate in Example 3 above could have avoided not only the Minnesota estate tax but could have avoided filing altogether in Minnesota if the family cabin was owned by an LLC. However, this “look-through” rule treats the pass-through entity as if it did not exist, and any real or tangible personal property owned by the pass-through entity is considered personally owned by the decedent.
Therefore, non-Minnesota residents should be careful when owning pass-through entities that own property in Minnesota as this may create unanticipated Minnesota estate tax consequences.