Thursday, June 20, 2013

Minnesota's Gift Tax: What You Need to Know

#1: We’re Here to Help 

Before going into the details about the new developments in gift and estate taxes, I want to let you know that your Wade Financial Group team is here to help sift through the new laws and their implications for you. There is still a great deal of uncertainty surrounding these new laws. We are expecting future clarifications and refinements. We will continue to monitor developments as they occur and consider implications for your personal situation.

If you have questions about your planned gifting, please call your Wealth Advocate. Your Wealth Advocate will guide you through your options and their tax impacts, so you can make an informed choice.

About the Law

This spring, Minnesota enacted a gift tax. Effective July 1, “taxable gifts” over a lifetime credit of $1 million per individual will be taxed at 10 percent. A taxable gift is a gift amount over the federally set exclusion amount, currently set at $14,000 for individual gifts.

Under this new law, individuals may continue to make nontaxable gifts of up to $14,000 per recipient, per year, without being subject to any tax or reporting requirements. Gifts made directly to spouses, charities, and medical and educational institutions remain not taxable. Spouses may continue to make joint gifts (known as gift splitting), and have a joint lifetime credit of up to $2 million in taxable gifts before they have to pay the Minnesota gift tax.

Minnesota estate tax laws have also changed. The new laws will be in effect for individuals dying after December 31, 2012. Adjusted taxable estates will now include taxable gifts made within three years of death. The legislature left unclear whether this means taxable gifts made on or after January 1, 2010, or those made after June 30, 2013. This question will likely be resolved by either future legislative or court action.

Further, the new estate tax extends to non-Minnesota residents who die while owning interests in “pass-through entities” (e.g., S-corporations, single-member limited liability companies, partnerships, and grantor trusts), which hold real estate or tangible personal property located in Minnesota. The non-residents will be deemed to own the property outright and will be required to file a Minnesota estate tax return.

Let’s look at some sample situations to clarify these complicated gift rules.

Example Scenarios

Scenario 1
In 2014, Tom and Rita wish to give their four adult children $10,000 each. What gift taxes will apply?

Answer: None. Each gift is under the $14,000 annual exclusion amount set by the federal government, so there is no “taxable gift” as determined by the federal government or Minnesota’s new gift tax law. This also means that these gifts will not be included in Tom and Rita’s taxable estates.

Scenario 2
In December 2014, Tom and Rita wish to give $1 million to each of their four adult children. Earlier that year, they had already made gifts of $28,000 to each child. What gift taxes would apply?

Answer: Since Tom and Rita already have used their $14,000 annual exclusion amounts for the year, the entire $4 million ($1 million per child) is considered “taxable gifts.” Tom and Rita will need to file federal and state gift tax returns and note they are splitting the gift—they have each made total taxable gifts of $2 million.

They are still within the $10.5 million joint federal estate and gift tax credit, so no federal gift tax is payable. However, with the $4 million taxable gifts, they have exceeded their $2 million joint lifetime credit for the Minnesota gift tax, triggering a 10 percent tax on the amount that is above the credit. They pay $200,000 to the state of Minnesota (10 percent of $4 million, minus $2 million credit).

Furthermore, should Tom and Rita pass away within three years of making the gift, the $4 million will be included as part of their Minnesota taxable estates for tax calculation purposes.

Scenario 3
Tom and Rita wish to pay for their grandchild’s college tuition, which totals over $44,000 yearly. What gift taxes would apply?

Answer: None. As long as Tom and Rita pay the college directly, this is not a taxable gift for federal or Minnesota purposes, and thus would not be subject to the gift tax or included as part of their taxable estates.
(Important notes: If they made the mistake of giving the grandchild the money and had the child pay the school, the amount over $14,000 would be considered a taxable gift. Also, the exclusion only applies to amounts paid for tuition, not room and board, or other fees.) 

Scenario 4
Rita wishes to make a large gift to her favorite charity, which is a registered nonprofit. What gift taxes would apply?

Answer: None. As long as Rita gives the gift directly to the charity, this would not be considered a taxable gift. It would not be subject to the gift tax or included as part of her taxable estate. One important note here is that the law has left unclear whether taxable gifts (e.g., over $14,000 in a calendar year) to political organizations would be subject to the gift tax.

Again, remember that we are here to help guide you through these laws and how they impact your estate plan. Call your Wealth Advocate if you’d like to discuss your personal gifting and how the new law might apply to you.

By Tammy Davis Cownie, J.D.
Manager, Estate Planning Services; Wealth Advocate

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