Estate and Gift Tax Update for 2023

A new year, new estate tax exemptions! While not everyone gets super excited talking about estate taxes (or better yet – how to protect against estate taxes), we certainly do! Effectively navigating estate and gift tax rules is an essential component of every estate planning firm. Here in Minnesota, we need to keep our eye on both Minnesota and federal estate and gift tax exemptions, rates, and deductions.

Federal Exemptions for 2023

The good news for 2023 is that the federal estate tax exemption, which is tied to inflation, is increasing to the highest exemption ever. Individuals. The federal estate and gift tax exemption for 2023 is $12,920,000 per individual, or $25,840,000 for a married couple, (increased from $12,060,000 in 2022, or $24,120,000 for a married couple). The top marginal rate remains 40 percent.

The gift tax annual exclusion is also increasing in 2023. The federal annual gift tax exclusion amount is $17,000 per donee for 2023 (which means a married couple can gift up to $34,000 to any individual).

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 over $25 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).

If the estate tax exemption does revert to 2017, it would be a much small $5 million per individual, which would be adjusted for inflation from 2010. Individuals and married couples that do not have a taxable estate under today’s exemption rates but would if the exemptions roll back should take advantage of planning now that will allow them to use the tax rules as they exist today. Our attorneys have a number of tools ready to deploy for those in this situation.

Minnesota Exemptions for 2023

The Minnesota estate tax exemption remains the same. The Minnesota estate tax exemption for 2023 is $3,000,000 per individual, or $6,000,000 for a married couple. Tax rates range from 13 percent to 16 percent in 2023, 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 $3 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 2023, this deduction is capped at $2 million.

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.

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