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New Gift and Estate Tax Laws Take Effect in 2013
of 10%. This now potentially prevents people from gifting away assets prior to death to avoid paying Minnesota estate tax, which had been a common planning technique in light of the $5.25 million ($10.5 million for a married couple) federal estate and gift tax exemption that was generally sufficient to exempt the vast majority of people from federal taxes.
In addition to the new gift tax, Minnesota also made a significant change to its state estate tax rules to try capture more nonresidents. For North Dakota residents who owned Minnesota farmland or lake property, a common planning technique was to put that property into a partnership or LLC. This changed the ownership of the property from Minnesota real estate, which would be subject to Minnesota estate tax, to a North Dakota intangible personal property interest, which would be considered North Dakota property not subject to Minnesota estate tax. Under the new law, Minnesota will disregard such entities and consider the owner of the entity to have a direct ownership interest in the Minnesota real estate that will again be subject to Minnesota estate tax. Thus, this perceived “loophole” previously available to non-residents has now been closed.
However, North Dakota residents still have a way to avoid Minnesota estate tax through gifting. Under Minnesota’s new gift tax, the gift of a nontangible personal property interest, e.g., a partnership or LLC interest, by a non-resident is not considered a gift of Minnesota property. So, a North Dakota resident may still be able to create a partnership or LLC to hold Minnesota property, gift away the ownership interest in that entity, and not be subject to either the Minnesota gift or estate tax.
Before making gifts, however, people need to carefully consider the capital gain issues involved. Because any property that is gifted will not get a “stepped up” basis like inherited property does, one needs to consider the net tax effect of paying federal and state capital gain tax versus the Minnesota estate tax, which is often less. Always consult your attorney, accountant or other financial advisor before rushing into any gifting or estate planning decisions.
Tim Richard is a shareholder of the Serkland Law Firm in Fargo and has over 13 years of experience in estate planning, probate, real estate and business planning. Tim can be contacted at 701.232.8957, email at trichard@serklandlaw.com, or by visiting www.serklandlaw.com.
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