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As we welcome 2025, it’s time to revisit the ever-important topic of gift and estate taxes. With rising real estate values contributing significantly to increased net worth, estate and tax planning has become more critical than ever, especially when ensuring the smooth transition of a business or farm to the next generation. Proactively addressing the issues surrounding these transition plans can help families preserve their legacies and mitigate tax liabilities.
Being that Minnesota has its own estate tax, we must monitor both Minnesota and federal estate and gift tax exemptions, rates, and deductions. As we approach the sunset of the current federal exemptions at the end of this year (absent action by Congress), now may be the best time to take advantage of higher exemption limits before these opportunities disappear.
The good news for 2025 is that the federal estate tax exemption, which is tied to inflation, has increased to a new high. The federal estate and gift tax exemption for 2025 is $13,990,000 per individual, or $27,980,000 for a married couple (up from $13,610,000 per individual, or $27,220,000 for a married couple, in 2024). The top marginal rate remains 40 percent.
The gift tax annual exclusion is also increasing in 2025. The federal annual gift tax exclusion amount is $19,000.00 per donee (allowing a married couple to gift up to $38,000 to any individual).
The federal estate tax still includes provisions for “portability,” allowing couples to double their exclusion amount upon the first spouse’s death. This enables married couples to protect nearly $2 million without federal estate tax liability, provided they make this election in a timely manner. We recommend that this election be specifically described in our clients’ revocable trusts. Unless Congress acts sooner, the current exemption amounts will revert back to 2017 levels – adjusted for inflation – in 2026.
If the estate tax exemption reverts to 2017 levels, it would drop to $5 million per individual (adjusted for inflation from 2010). Individuals and married couples who do not currently have a taxable estate but would if exemptions roll back should consider planning now to utilize today’s tax rules. For example, a farming couple with a $15 million estate would avoid federal estate tax under current exemptions, provided their estate plan is properly structured. However, if the exemptions revert, their estate could face significant federal estate tax exposure, subject to the 40% federal estate tax rate.
With careful planning, we can take proactive steps to protect estates and take advantage of existing laws. Our attorneys are ready to guide clients through these scenarios with effective strategies.
The Minnesota estate tax exemption remains unchanged for 2025. The exemption is $3,000,000 per individual, or $6,000,000 for a married couple. Tax rates range from 13 percent to 16 percent, with the top rate applied to the taxable estate value over $10.1 million.
Unlike federal estate tax, Minnesota does not allow for portability. Married couples in Minnesota must use credit shelter trusts to maximize their estate tax protection. For estates exceeding $6 million, additional planning is required to minimize tax exposure. For instance, a farming couple with a $15 million estate could protect $6 million using credit shelter trusts but would still have $9 million exposed to Minnesota estate tax without more advanced planning.
Minnesota still has no gift tax. However, gifts exceeding the federal gift tax annual exclusion amount made within three years of death are included in the Minnesota taxable estate.
Minnesota farmers and small business owners can benefit from the qualified family farmland and qualified family business deduction. For 2025, this deduction is capped at $2 million. To qualify for the farmland deduction, the decedent or their spouse must have owned the property for three years before death, and heirs must own the land and maintain its agricultural classification for property tax purposes for three years post-death. Failure to comply triggers a recapture tax of 16 percent of the property’s value.
Estate planning is a complex but vital process, especially with changing exemptions and tax laws. Our firm is here to help clients navigate these challenges and secure their legacies for future generations.
To learn more about estate planning, keep an eye on our Events page located at: https://www.wagnerlegalmn.com/events/.
If you’re ready to start being proactive about your estate plan, contact us to get started.
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