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In this video I discuss how MN state estate tax provisions do not allow for portability of the MN estate tax exemption from the estate of the first spouse to die to the surviving spouse’s estate.

So MN is one of only a handful of states that has their own estate tax. And for 2023, the MN estate tax exemption is $3M per individual or per estate, and the MN estate tax rates range from 13% to 16%. Now to address this issue of portability, let’s look at the federal estate tax and then come back to the MN estate tax.

Now to take a close look at the federal estate tax (which applies to estates of people who are domiciled all across America), we have to make some assumptions. Let’s say Mark and Minnie are a married couple in MN. They have a combined estate of $10M, and let’s say each of their estates is valued at $5M. Let’s say Mark dies in January 2026 when the federal estate tax exclusion amount is $7M (after all the inflation adjustments and sunset provisions apply). Mark leaves his entire $5M estate to Minnie. For federal estate tax purposes. Mark’s bequest of his $5M estate to Minnie qualifies for the federal estate tax marital deduction. So, for federal estate tax purposes, Mark has a gross estate of $5M but his estate gets a deduction for anything left to his spouse - he left the entire $5M estate to Minnie - so Mark’s net estate for federal estate tax purposes is zero and no federal estate tax is due. That may all sound fine and dandy, but now Minnie has a $10M estate, and if she dies with a $7M federal estate tax exclusion amount, that excess $3M will be subject to the 40% federal estate tax. Doesn’t sound too good does it. But under the federal estate tax law, after Mark died, Minnie could have made a portability election on Mark’s federal estate tax return (IRS Form 706), and that would have allowed Minnie to not only have her $7M estate tax exclusion amount, but she would also be able to utilize Mark’s $7M federal estate tax exclusion amount that his estate did not use. So Minnie dies a year later (say in 2027) with a $10M estate, but she will shield that from federal estate tax because she has $14M of exclusions thanks to the portability election.

Now let’s look at the MN estate tax provisions under the same fact pattern. Mark dies with a $5M estate that he leaves in its entirety to Minnie. No MN estate tax when Mark dies due to the marital deduction. But because MN does not allow for a portability election to be made after the first spouse’s death, Minnie now has a $10M estate and when she dies, she’ll only have her own $3M exemption amount to use, causing about $1M in MN estate tax to be due after Minnie dies. Because Mark lumped his entire estate into Minnie’s estate, Mark’s estate was not able to utilize any of its $3M MN state estate tax exemption, and the couple together was only able to shield $3M from the MN estate tax instead of $6M.

Now part of the solution involves arranging Mark’s and Minnie’s estates so that when the first spouse dies, the MN estate tax exemption amount goes into a trust for the surviving spouse in a way that those assets will not be lumped into the estate of the surviving spouse. Failing to set things up to make sure each spouse in MN uses their MN estate tax exemption amount of $3M can cost a family about $400,000 in unnecessary MN state estate tax.

Now, our national estate planning law firm called AEPL provides estate planning legal services to clients around the country through me and our in-house estate planning lawyers along with the co-counsel lawyer relationships that we have in more than 40 states. If you’d like, click the link in the description to set up your estate planning design meeting.

0:00 Minnesota Estate Tax and Portability
0:19 $3 Million Exemption
0:36 Portability and the Federal Estate Tax
3:04 Minnesota Estate Tax and Lack of Portability
4:03 The Solution
4:41 AEPL - The National Estate Planning Law Firm