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Minnesota residents: beware of the estate tax on your assets

There is nothing certain in life but death and taxes, as the saying goes. For some Minnesota residents, this saying may be particularly true if an estate tax or inheritance tax is imposed upon a person's death.

Estate taxes and inheritance taxes can be a complicated matter if St. Paul residents do not understand how to approach their estate plan. An estate tax, as the name implies, taxes the deceased person's estate before the person's assets are distributed to heirs. An inheritance tax, on the other hand, is one that is paid by the heirs.

The federal estate tax kicks in for those estates worth over $5.34 million, although there are rules for portability that allow spouses to double this exempt amount. However, certain states have lower thresholds for estate tax exemptions, and, therefore, even if the estate may not be subject to the federal estate tax, the state's estate tax may apply.

Minnesota is one of these states, as estates larger than $1.2 million are subject to the state's estate tax in 2014. While this amount increases to $2 million by 2018, it is still significantly lower than the federal estate tax exemption. Accordingly, individuals should be aware of this discrepancy, and how they can take steps to lower the value of their taxable estate. For instance, by making gifts, individuals can reduce the value of their estate, which effectively distributes their assets to others, while decreasing the amount of tax imposed on the estate.

Fortunately, Minnesota repealed its gift tax recently. Therefore, individuals no longer need to worry about planning around this particular tax. However, with the other tax issues still remaining, as discussed above, individuals should ensure they take appropriate steps to minimize the tax consequences on their estate.

Source: Kiplinger, "Retirees, watch out for the state tax bite," Rachel L. Sheedy, Oct. 2014

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