Many Minnesotans believe that estate taxes are only for families with exorbitant wealth. In reality, the state may still take a significant cut of a loved one’s estate even if it falls well below the federal tax threshold. The state also has one of the lowest estate tax exemptions in the country.
If you are currently creating or updating your estate plan, it is vital to understand what assets are included in your taxable estate. Learning this can help you review the available planning strategies that can help reduce the burden for your loved ones.
The numbers: Federal vs. Minnesota
In 2026, the federal estate tax exemption is currently at $15 million per person, which means the vast majority of Americans will not owe any federal estate tax. Minnesota, however, has a much lower exemption limit of $3 million.
For example, an estate valued at $5 million could owe nothing to the Internal Revenue Service (IRS) but still face a substantial tax bill. The family could potentially owe hundreds of thousands of dollars to the Minnesota Department of Revenue.
What can count toward a person’s estate
A common misconception is that estate taxes only apply to cash sitting in a bank account. However, Minnesota taxes the gross estate, which includes much more than cash and can significantly increase an estate’s taxable value, such as:
- The fair market value of a home and any other real estate
- Life insurance proceeds
- Retirement accounts
- Business interests and farm property
Minnesota also uses a three-year lookback rule, which can pull certain taxable gifts made within three years of death back into the estate. This can catch families off guard if they assumed earlier gifts would no longer count.
Strategies for estate planning
For married couples, trust planning strategies such as disclaimer trusts or ABC trusts can help maximize available exemptions and reduce potential estate tax exposure. Lifetime gifting can also be an effective way to reduce the size of a taxable estate. However, it is important to remember Minnesota’s three-year lookback rule when making gifts.
Minnesota also offers special deductions for certain family farms and closely held businesses. This can help increase the effective exemption and provide valuable tax relief for qualifying families.
Helping preserve more of your legacy
Thoughtful and effective estate planning involves using the right tools to help reduce the tax burden on your Minnesota estate. A lawyer can help you tailor your plan to your unique situation and goals.
