With a new year come new estate tax exemption rates. Although estate and gift taxes are sometimes thought of as taxes that do not change that much, that has definitely not been the case in recent memory. In fact, there have been fairly significant changes to either Minnesota or federal estate and gift tax exemptions, rates, and deductions every year for the past several years. We are not expecting any major changes in 2019, but that remains to be seen. What we do have with 2019 are new exemption amounts.
The federal estate tax exemption will be increase with inflation for 2019. The federal estate and gift tax exemption for 2019 is $11,400,000 (increased from $11,180,000 in 2018). The top marginal rate remains 40 percent. The gift tax annual exclusion is still $15,000 per donee.
The federal estate tax still also includes provisions for “portability,” which allows couples to double their exclusion amount of the first spouse to die. This allows married couples to protect up to $22.8 million without worrying about federal estate tax liability. These exemption amounts are scheduled to increase with inflation each year until the year 2025 when the amounts are scheduled to revert back to 2017 levels (unless Congress acts sooner).
The Minnesota estate tax exemptions amounts are still being phased in to the $3 million exemption amount. This means that for this year, the Minnesota exemption amount is $2.7 million per individual. Tax rates range from 13 percent to 16 percent in 2018, with the top rate being applied to the amount of the taxable estate over $10.1 million.
Unlike the federal estate tax, Minnesota does not allow for portability. This means that a married couple in Minnesota will not get to double their exemption amount to the eventual $6 million amount. Instead, Minnesota couples with estates larger than $2.7 million (or close to it) will need to carefully plan their estates and utilize credit shelter trusts to maximize their estate tax protection!
Minnesota still has no gift tax. However, any gifts in excess of the federal gift tax annual exclusion amount made within three years of death are included in the Minnesota estate.
Minnesota farmers and small business owners still benefit from the qualified family farm land and qualified family business deduction. In 2019, this deduction is capped at $2.3 million. This deduction is revised each year so that it equals the difference between $5 million and the Minnesota estate tax exemption in the year of death. Though the amount of the deduction gradually decreases as we approach the year 2020 when the deduction will be set at $2 million, an overall higher exemption amount means Minnesota farmers and small business owners have more flexibility in their estate plans.
To qualify for the farm land deduction, the decedent or the decedent’s spouse must have owned the qualifying property for three years before the date of death, and the heirs must own the land – and the land must continue to be classified as agricultural property for property tax purposes – for a period of three years after death. A failure to follow these rules will result in a recapture tax equal to 16 percent of the value of the property. See our blog post, Minnesota Farm Land Deduction Offers Estate Planning Opportunities for Farmers for more information.
To learn more, register for our Estate Planning Seminar being held on February 26, 2018, a 7:00 p.m. at the Rochester Area Foundation. To register, click here. This seminar is free and open to the public.
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