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Minnesota Estate Tax
Cori Calhoun, Revenue Tax Supervisor
April Drube, Revenue Tax Specialist
Topics
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1. 2010 & 2011 Minnesota and IRS Estate Tax Comparisons
2. Qualified Small Business and Farm Property Exclusion
3. Estate Tax Common Mistakes
4. Fiduciary Tax Common Mistakes
5. Communication and System Changes at the Department
2010 & 2011 Estate Tax
Minnesota M706
• Exemption Amount of
$1,000,000
• Filing Requirement:
• Gross Estate Exceeds
$1,000,000 or
• Federal Filing Requirement
• Non-Residents with MN
situs property
Federal 706
• Exemption Amount of
$5,000,000
• Filing Requirement:
• Gross Estate, Plus Adjusted
Taxable Gifts & Specific
Exemption, Exceeds
$5,000,000
IRS “Opting Out” For 2010
Decedents who died in 2010 could either choose to have:
• A) Estate tax and a step-up in basis or
• B) No estate tax and a modified carryover basis
“Opting Out“ of Federal estate tax required
the timely filing of Form 8939 to the IRS
How “Opting-Out” Affected MN
• Federal Elections Are Not Allowed:
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Alternate Valuation
Special Use Valuation
Qualified Domestic Trust Election(QDOT)
Federal Qualified Terminal Interest Property(QTIP)
How “Opting-Out” Affected MN
• Federal modified basis adjustments controls for Minnesota
income tax purposes
• Minnesota Statutes, Chapter 290
• Minnesota individual income tax uses federal taxable income as
its starting point. Basis for Minnesota purposes is the same as
federal basis unless a Minnesota modification applies.
• (Minnesota Modifications M.S. 290.01, subd 19(a), subd 19(b), and
subd 19(f) )
• Unless a Minnesota Modification applies, basis for beneficiaries
on inherited assets is the same for Minnesota purposes as it is for
federal purposes. This is true regardless of whether a Minnesota
estate tax return is required or not.
When Gifts Make a Difference
• Gifts create MN estate tax when…
• 1. The taxable estate is under $1,000,000 but the gross estate is
over $1,000,000 (gift taxes paid on gifts made within 3 years of
death are included in the gross estate)
• 2. The gross estate is under $1,000,000 but the federal filing
requirement is triggered (gross estate plus lifetime taxable gifts
triggers the federal filing requirement)
• Certain gifts are ALWAYS taxable for MN purposes
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1. Transfers with retained life estate
2. Transfers taking effect at death
3. Revocable transfers
4. Life insurance proceeds
Qualified Small Business and
Farm Property Exclusion
• Topics:
• 1. Summary and Requirements
• 2. Commonly Asked Questions
• Fact sheet on our website
www.taxes.state.mn.us
Exclusion Summary
• Decedents dying after June 30, 2011
• Continuously owned qualified small business property
or qualified farm property for the three-year period
ending at decedent’s death
• Passed qualified property at death to a qualified heir
• Exclusion cannot exceed $4 million
• Pay recapture tax if the heirs default
Qualified Heirs &
Family Members
• A “qualified heir” is a “family member” who acquired
the property from the decedent.
• A “family member” is:
• the decedent’s ancestors (parent, grandparent, etc.);
• the decedent’s spouse;
• a lineal descendant (child, grandchild, etc.) of the decedent, of
the decedent’s spouse or of the decedent’s parents; or
• the spouse of any lineal descendant described above.
Qualified Small Business Property
Exclusion Requirements
• 1. The value of the property is included in the decedent’s federal adjusted
taxable estate (after deductions, including debts, expenses and bequests to
a surviving spouse)
• 2. The property consists of a trade or business property.
• 3. The decedent or spouse materially participated in the trade or business
during the taxable year that ended before the decedent’s death.
• 4. The trade or business had gross annual sales of $10 million or less during
the last taxable year that ended before the decedent’s death.
• 5. The property does not consist of cash or cash equivalents.
• 6. The estate and qualified heir agree to pay the recapture tax, if applicable.
Qualified Farm Property
Exclusion Requirements
• 1. The value of the property was included in the decedent’s federal adjusted
taxable estate, which is after deductions, including debts, expenses and
bequests to a surviving spouse.
• 2. The property consists of a farm meeting the requirements of M.S. 500.24.
• 3. The property was classified for property tax purposes as the homestead
of the decedent or spouse under M.S. 273.124.
• 4. The property was classified for property tax purposes as class 2a property
under M.S. 273.13, subd. 23.
• 5. The estate and qualified heir agree to pay the recapture tax, if applicable.
Recapture Tax is Imposed if…
• 1. The qualified heir disposes of any interest in the qualified
property (other than by a disposition to a family member), or
• 2. A family member ceases to use the qualified property in the
operation of the trade or business during the three years
following decedent’s death.
• The recapture tax equals 16% of the value excluded.
• The recapture tax must be paid to the Department within six
months after the date of disqualifying disposition or cessation
of use.
Signing the Recapture Agreement
• Question: Who has to sign the recapture agreement?
• Answer: The personal representative of the estate and the qualified heirs
that received the excluded property are required to sign the agreement.
Operating the Trade or Business
• Question: Will property qualify if it is received from the decedent by a
qualified heir but a family member other than the qualified heir uses the
property to operate the trade or business?
• Answer: Yes. The requirements include that a (1) qualified heir received
the property from the decedent and (2) family member continuously
uses the property in the operation of the trade or business for three
years after decedent’s death. There is no requirement that the qualified
heir be the same as the family member who operates the trade or
business.
$1 Million Exemption Amount
• Question: If decedent’s adjusted taxable estate includes $4.5 million in
qualified property and an additional $400,000 of personal assets, can the
estate exclude $4 million as qualified property and exclude the
remaining $900,000 using the $1 million applicable exemption amount?
• Answer: Yes, the decedent can exclude $4 million as qualified property.
After excluding $4 million, decedent’s adjusted taxable estate will be
$900,000. Because $900,000 is less than the applicable exemption
amount is $1 million, there is no Minnesota estate tax liability.
Types of Qualified Properties
• Question: If a farm worth $3 million consists of $1 million of cash, $1
million of farmland, and $1 million of equipment, can the entire $3
million be excluded?
• Answer: No, because cash cannot be excluded as either Qualified Small
Business Property or Qualified Farm Property, the most that could be
excluded is $2 million.
Inter Vivos Revocable Trusts
• Question: If decedent transferred property to an inter vivos
revocable trust, is the decedent eligible to exclude the value of
the property as qualified small business or qualified farm
property?
• Answer: Under current law, no, but the Department is seeking
legislation to correct this.
Life Estate
• Question: If during decedent’s life, decedent transferred a
remainder interest in property to a qualified heir, reserving a life
estate for herself, could the decedent exclude the property as
qualified small business or qualified farm property?
• Answer: Yes, so long as all the necessary requirements are met,
including that the value of the property is included in the
decedent’s gross estate (per IRC § 2036) and that decedent
continuously owned the property during the three-year period
prior to death (either through the life-estate or ownership in the
entirety).
Estate Tax Common Mistakes
• Topics:
• 1. Minnesota Situs Law
• 2. Charitable and Marital Deductions
• 3. Allowable Miscellaneous Deductions
• 4. Property Valuation
Minnesota Situs Laws
Minnesota Statute § 291.005(9):
"Situs of property" means, with respect to real property, the state or
country in which it is located; with respect to tangible personal
property, the state or country in which it was normally kept or
located at the time of the decedent's death; and with respect to
intangible personal property, the state or country in which the
decedent was domiciled at death.
Common Mistakes: Partnership or LLC Interests,
Sole Proprietorships
Charitable & Marital Deductions
• Documentary support of bequest in Will, Trust, Disclaimer
• Result of joint tenancy or beneficiary(payable on death)
• Statutes and Court Cases:
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Reg § 20.2055-1(a)
Estate of Marine v. Commissioner, 97 T.C. 368 (1991)
Bach v. McGinnes, 333 F.2d 979 (3d Cir. 1964)
Estate of Leone Engelman v. Commissioner, 121 TC 54 (2003)
• Common Mistakes: Charitable deduction by beneficiary
Allowable Misc. Deductions
• Reg. §20.2053-3(a):
Administration expenses of an estate are limited to expenses that
are “actually” and “necessarily” incurred in the administration of
the estate. “Necessarily” does not include expenses incurred for
the individual benefit of the heirs.
• IRC §2053(a)(2); Reg. §20.2053-3(d)(2):
“Expenses for selling property of the estate are deductible to the
extent permitted by §20.2053-1 if the sale is necessary in order to
pay the decedent’s debts, expenses of administration, or taxes, to
preserve the estate, or to effect distribution.”
• Common Mistakes: Repair and improvement expenses to sell
property, family traveling expenses
Property Valuation
• 1. Appraisal
• Performed by a certified appraiser as of date-of-death
• 2. Sales Price
• “Freely negotiated agreement made reasonably close to the
valuation date” (Estate of Shlensky v. Comm’r, TC Memo 1977148)
• Cannot be a forced sale
• Must be an arms-length transaction
• 3. County Property Tax Value
• In some cases may be persuasive (Estate of Singer V. Comm’r,
Minnesota Tax Court, September 16, 2011)
• Common Mistakes: Best valuation of property
Fiduciary Tax Common Mistakes
• Topics
• Reporting of Income Received After Death
• Residency Rules
• 1. Trusts
• 2. Estates
M2 Filing Requirements
• Estates and Trusts must file an income tax return if they
have either:
• A) $600 or more of gross income assignable to Minnesota
• i.e. $600 from Minnesota sources only, for example:
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MN apportioned Partnership/S-Corp income
Sale of Minnesota Real Property
Rental income from tangible property located in Minnesota
Sale of Minnesota apportioned partnership interest
Intangible income earned by a resident estate or trust
• B) A nonresident alien as a beneficiary
• Common Mistake: Not recognizing taxable income or not
reporting income received by the decedent after death
MN Trust & Estate
Residency Rules - Trusts
• For trusts that became irrevocable or were first administered
in Minnesota after December 31, 1995:
• A resident trust means a trust, except a grantor type trust, that
either:
• was created by a will of a decedent who at his or her death was a
Minnesota resident, or
• is an irrevocable trust, and at the time the trust became irrevocable,
the grantor was a Minnesota resident.
MN Trust & Estate
Residency Rules - Trusts
• For trusts that became irrevocable or were first administered
in Minnesota before January 1, 1996:
• A resident trust means any trust administered in Minnesota.
• To be considered a resident trust administered in Minnesota, you
must meet two of the following three criteria:
• A majority of the discretionary investment decisions are made in
Minnesota,
• The majority of discretionary distribution decisions are made in
Minnesota, and
• The trust’s official books and records are kept in Minnesota.
MN Trust & Estate
Residency Rules - Estates
• An estate is considered a Minnesota resident estate for
fiduciary tax purposes if either:
• Decedent was domiciled in Minnesota at the time of their death
• Personal representative or fiduciary was appointed by a
Minnesota court, or the court administration was performed in
Minnesota, in other than an ancillary proceeding
• Common Mistake: Misinterpreting the Minnesota trust
& estate residency rules
Communication & System Changes
• New integrated system (December 2010)
• Batch processing
• Minimal data entry
• No more “acknowledgement of receipt” letters
• Limitation on Time for Assessment of Tax
• Changed to 3 ½ years after a complete return is filed
• Notification within 9 months after filing date
• 1. Closing letter (accepted as filed)
• 2. Request for documentation letter
• 3. Tax order
Questions
Contact Information
• Email
[email protected]
[email protected]
• Phone
Cori: 651-556-6762
April: 651-556-3857
Estate & Fiduciary Tax: 651-556-3075
Individual Income Tax: 651-296-3781
• Fax
651-556-3108
• Website
www.taxes.state.mn.us