Tax Liabilities in Minnesota Estate Planning
When planning your estate in Minnesota, it’s important to understand the state and federal tax rules that may affect how much of your estate actually passes to your beneficiaries. Here are the key tax considerations:
1. Minnesota Estate Tax (Yes — Minnesota Has One)
Minnesota is one of the few states that imposes its own estate tax, separate from the federal estate tax.
Minnesota Estate Tax Threshold (2025):
Estates valued over $3 million may be subject to Minnesota estate tax.
Estates under $3 million typically owe no estate tax.
Tax Rate:
Minnesota estate tax rates range from 13% to 16%, depending on the size of the estate.
Important Notes:
The Minnesota exemption is not portable between spouses.
This means spouses must plan carefully—often using trusts—to ensure they don’t lose one partner’s $3 million exemption.
2. Federal Estate Tax
Most Minnesotans are not affected by the federal estate tax.
Federal Estate Tax Threshold (2025):
The federal exemption is over $13 million per person.
Only extremely large estates face this tax, which can reach up to 40%.
Because of the high federal exemption, federal estate tax planning is generally only needed for high-net-worth individuals.
3. Income Taxes for Beneficiaries
Minnesota does not impose a “inheritance tax” (some states do), and beneficiaries typically do not pay income tax on what they inherit.
However, some assets are taxable when sold or withdrawn, including:
Traditional IRAs / 401(k)s → beneficiaries pay income tax on distributions
Appreciated property → beneficiaries may pay capital gains tax if they sell it later (though they benefit from a step-up in basis at death)
4. Capital Gains Tax & Step-Up in Basis
When someone dies, most assets receive a step-up in basis to fair market value at the date of death.
This reduces capital gains tax if the beneficiaries later sell the property.
Example:
If Mom bought a cabin for $200,000 and it’s worth $400,000 when she passes away, the beneficiary’s new basis is $400,000. Selling it for $420,000 would mean only $20,000 of gain—not $220,000.
5. Gift Tax (Federal) & Lifetime Gifting
Minnesota has no state gift tax, but the federal gift tax rules apply.
Key points:
You can give up to $18,000 per person per year (2025) without filing a gift tax return.
Gifts above that amount reduce your lifetime federal exemption (but still no tax unless you exceed $13M+).
Gifting can reduce the size of your estate, but it also affects tax basis—so it must be planned carefully.
6. Trust Taxes (When Relevant)
Certain trusts may trigger their own tax reporting requirements, such as:
Irrevocable trusts → may pay their own income taxes
Grantor trusts → income flows through to the grantor’s personal tax return
Trusts often help reduce or avoid Minnesota estate tax, but they require proper tax planning.
Bottom Line
Estate planning in Minnesota isn’t just about distributing assets—it’s also about minimizing taxes so more of your estate passes to the people you choose. With Minnesota’s relatively low estate tax exemption, many middle-class families may face estate tax exposure without proper planning.
