When a person dies, his or assets (known as the person’s “estate”) may be subject to tax if they exceed certain value limits. This type of tax is known as an “estate tax.” There is a federal estate tax that applies estates with a value over $5.49 million (the current value limit as of 2017). That means estates with a value of less than $5.49 million would pay no federal estate tax.
In addition to the federal estate tax, Minnesota is one of a handful of U.S. states impose their own estate taxes on its residents. Minnesota’s tax can apply to more estates than the federal tax, due to a lower value limit. At the beginning of 2017, that value limit was set at $1.8 million. For estates in Minnesota, however, there’s good news: the minimum threshold has been increased to $2.1 million for 2017 and will continue increasing over the next four years.
How estate tax works
Estate tax has two main features: a threshold and a rate. The threshold is the minimum size for an estate to qualify as taxable. In 2016, the threshold was $1.6 million.
Notably, a person might own assets totaling $1.6 million or more, but that doesn’t necessarily mean their estate has a corresponding value. Depending on what those assets are, they might not count as part of the estate. In addition, for estate tax purposes, a surviving spouse’s share of an estate can sometimes be subtracted, reducing the size of the estate.
The current estate tax rate in Minnesota for deaths in 2017 is 12-16%, depending on the size of the estate. Notably, the only amount of an estate that’s taxed is the amount that exceeds the threshold. If John Doe died in 2016 and his estate was worth $2 million, only $200,000 would be taxed ($0.2 million).
Value limit changes
In 2017, Minnesota passed legislation increasing the estate tax threshold as follows.
2017: $2.1 million
2018: $2.4 million
2019: $2.7 million
2020: $3 million
The year will correspond to the year of a decedent’s death. So if John Doe dies in 2017, the applicable threshold is $2.1 million, even though the tax return may not be filed until 2018 or later. In 2018, the range of the estate tax rate will narrow to 13-16%.