New Minnesota gift tax goes into effect next week

Published 3:12 pm Saturday, June 29, 2013

ST. PAUL — A state gift tax is set to take effect Monday that imposes a tax of about 10 percent on gifts worth more than $14,000 to a single recipient in a single year.

However, the tax only kicks in after people give gifts worth more than $1 million, meaning most residents probably won’t notice the new tax, the St. Paul Pioneer Press reported.

Those who are most likely to be affected are those who transfer items such as lake homes and family businesses to relatives. But gifts between spouses are exempted from the tax, as are charitable contributions and certain direct payments made on medical bills or educational expenses.

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The law closes a loophole in Minnesota’s estate-tax law, said Susan Von Mosch, deputy assistant commissioner of tax policy. Until now, wealthy residents hoping to avoid the estate tax could simply distribute their assets as gifts to relatives before they died, instead of as an inheritance.

“It really is going to limit this sort of last-minute deathbed planning,” said Cameron Seybolt, an estate lawyer in Minneapolis.

The estate tax varies based on the size of the estate. Seybolt said it averages out to about 10 percent after the $1 million exemption, but for larger estates the rate can be 16 percent.

The state Department of Revenue predicts the new tax will generate about $13.5 million next year.

The tax was part of the omnibus tax bill the state Legislature passed during its 2013 session. Lawmakers also approved two other changes to the estate tax.

The first also applies the estate tax to non-residents who own property in Minnesota through an entity such as a limited-liability company or a partnership. The second retroactively expands the estate tax to any taxable gifts given by the deceased in the three years before the person died, dating back to Jan. 1.

It’s not just the super-rich who will be affected by the changes in the law, Seybolt said. Business owners hoping to pass their companies to their children before they die will now have to pay a gift tax if the business is valued at more than $1 million.

Those developments don’t sit well with Brad Weber, a financial adviser in Minneapolis whose client base includes many people with a high net worth.

“My whole client list, frankly, will eventually be impacted,” Weber said. “They feel like it’s just being piled on.”

Weber said many of his clients are scrambling to set up trusts in their children’s names before Monday, to avoid having to pay the gift tax or estate tax later. A few are even considering moving into Wisconsin, which has neither an estate tax nor a gift tax, he said.

Weber said he and his clients felt blindsided by the changes to the law, particularly the gift tax.

“This gift tax kind of came out of nowhere,” he said. “It wasn’t hotly debated at the Capitol. It left a lot of people wondering if it wasn’t very well thought out.”