Minnesota Property Taxes – Planning for State-Stage Peculiarities

“Nothing in life is for certain besides demise and taxes.” However there’s extra nuance to this saying, particularly relating to property taxes, which differ considerably between federal and state ranges. Whereas federal property tax usually grabs headlines—significantly with potential modifications looming in 2025—state property taxes can influence many extra households. At this time, we’re specializing in Minnesota, one among 13 states/territories that impose an property tax.

To learn extra in regards to the federal property tax and 2025 planning methods, test this article out!

The Minnesota Property Tax – Variations from the Federal Property Tax

Minnesota’s property tax has a a lot decrease threshold than the federal property tax, with the state threshold set at $3,000,000 per particular person. That is considerably decrease than the present federal threshold of $13,610,000 per particular person in 2024. Whereas Minnesota’s threshold shouldn’t be listed for inflation, requiring legislative motion for modifications, it offsets the taxable quantity equally to the federal system. For instance, in case your property is value $4,000,000, you might be taxed solely on the $1,000,000 exceeding the $3,000,000 threshold.

Minnesota’s property tax charges vary from 13% to 16% throughout 5 brackets:

One other key distinction from the federal property tax is that Minnesota doesn’t permit the combining of exemptions for spouses. The federal system permits a surviving partner to mix their unused exemption with their very own by way of “portability,” however Minnesota doesn’t. It’s a use-it-or-lose-it state of affairs.

Nevertheless, in Minnesota, similar to on the federal degree, one partner can switch belongings to the surviving partner with out triggering any property tax problems – that is known as the “limitless marital deduction.” 

Minnesota presents particular deductions for certified small companies and household farms, as much as $2,000,000, which will be advantageous for eligible estates.

Planning Methods for the Minnesota Property Tax

There are a number of methods to successfully plan for the Minnesota property tax and restrict your potential future tax legal responsibility.  Listed here are some methods:

1. Threshold/Exemption Planning with Trusts
   As talked about, in contrast to the federal property tax exemption, the Minnesota exemption shouldn’t be a combinable tax credit score. Because of this for a married couple, the design of their property plan must be completely different to successfully use every of their potential $3,000,000 exemptions.

   For instance, say that Mary Tyler and Robert dwell in Minnesota and have all their life. They’ve 1 grownup baby to whom they want to go away their property. Mary Tyler and Robert have labored onerous, lived inside their means, and made sensible funding choices with their wealth administration staff. Their complete web value is $5,000,000, they usually’ve been accountable of their property planning. Their property plan leaves all their belongings to the surviving partner at first demise and the steadiness to their baby as soon as they’ve each handed. Nevertheless, this plan has a hidden hazard because it doesn’t embrace establishing a Credit score Shelter Belief on the first partner’s demise.

   In the future, Mary Tyler passes away. Her property is run as deliberate, and every part continues in Robert’s title. As a result of Mary Tyler left every part to her partner, no property tax has been triggered in Minnesota. Someday later, Robert passes away. As a result of Robert’s property is valued at $5,000,000, every part above his $3,000,000 exemption is taken into account for property tax functions. In line with the Minnesota Division of Income’s property tax calculator, Robert’s property would owe $260,000 in taxes. The remaining $4,740,000 was transferred to their baby.

   With further planning, Mary Tyler and Robert might have doubtlessly averted all of the state-level taxes. The outcomes look completely different if their plan known as for a Credit score Shelter Belief to be funded on the first demise. At Mary Tyler’s demise, $2,500,000 would go into this irrevocable belief for Robert’s profit, and he might proceed utilizing the belongings as wanted. This additionally would scale back Robert’s web value to $2,500,000. Then, at Robert’s demise, no tax can be due as he’s underneath the brink for his property being taxable. The opposite profit to this planning is that any appreciation contained in the belief is sheltered from the property tax.

   It’s necessary to notice that cautious planning consists of being conscious of beneficiary designations on accounts. Beneficiary designations can permit for a smoother transition of belongings at demise however also can undo any cautious threshold planning finished in revocable trusts. Beneficiary designations override something in a Belief or Will, so even when your plan requires establishing a Credit score Shelter Belief on the first demise, the beneficiary-designated belongings is not going to get picked up by that cautious planning.

2. Gifting
   Minnesota doesn’t have a present tax, although the federal reward limits apply. In 2024, the annual exclusion on the federal degree is $18,000 per recipient. When you reward greater than that, you have to file a federal reward tax return.

   Nevertheless, you may exceed this quantity in a couple of methods. For instance, funds on to suppliers for certified schooling bills and/or certified medical bills don’t depend towards that $18,000 determine. If you’re contemplating funding 529 plans, you may fund as much as 5 years’ value of annual exclusion with out utilizing any federal exemptions.

   Gifting can cut back your property’s worth over time and decrease future tax liabilities. Be aware that presents inside three years of demise are included within the property for tax calculations.

3. Altering Residence
   Relocating to a state with out an property tax, equivalent to Wisconsin or Indiana, may very well be an answer. Nevertheless, Minnesota’s guidelines for figuring out residency and taxing non-residents who personal property within the state complicate this technique.

   Merely leaving the state doesn’t rid you of potential property tax legal responsibility. Minnesota usually considers you a state resident in the event you preserve your domicile for 183 days or extra. They may even take a look at your actions and phrases when deciding. For residents, you pay property taxes in your complete taxable property. For non-residents, there’s a multi-step course of for figuring out your property tax legal responsibility. You sometimes see this come up when somebody leaves Minnesota however continues to personal actual property or a enterprise within the state.

   For non-residents, you’d first decide your property tax legal responsibility in the event you had been a resident. You then pro-rate that property tax legal responsibility by the proportion of your gross property in Minnesota to your complete worth. For instance, take Mary Tyler and Robert from above. Assume they moved to Wisconsin earlier than they handed however stored a $500,000 cabin in Minnesota. As soon as they each go, their property would calculate what their property tax legal responsibility can be in the event that they had been residents – on this case, $260,000. Then, they’d calculate the proportion of their property in Minnesota – $500,000 for the cabin out of $5,000,000 complete property or 10% of their complete property. Lastly, they’d multiply $260,000 instances that 10%, and the ensuing $26,000 can be their closing Minnesota property tax legal responsibility. 

4. Charitable Giving
   Charitable donations can considerably cut back property taxes, as bequests to charity are absolutely deductible from the property. There are not any limits to charitable giving past what you may successfully deduct in your revenue tax return and what your monetary plan can help.  Any charitable bequests produce a dollar-for-dollar offset to your property earlier than your tax legal responsibility is calculated at demise.

5. Life Insurance coverage
   Correctly structured life insurance coverage can present liquidity to cowl property taxes with out diminishing the property’s worth. There are particular guidelines round possession in order that the life insurance coverage proceeds aren’t included in your property. Nonetheless, if finished correctly, a life insurance coverage coverage could make your beneficiaries complete in case your property has a tax legal responsibility.

Minnesota Outlook

Minnesota residents ought to frequently assessment their property plans to account for state-specific tax implications. Correct planning can make sure that extra of your property advantages your heirs relatively than going to the Minnesota Division of Income.

At Mission Wealth, we’ll proceed to watch these proposed modifications and their potential impacts on our purchasers. When you have any questions, please contact our wealth advisory and technique staff immediately.

This text shouldn’t be supposed to supply any particular tax or property planning recommendation. Advisory companies are solely provided to purchasers or potential purchasers the place Mission Wealth and its representatives are correctly licensed or exempt from licensure. Seek the advice of a tax skilled or lawyer for particular recommendation.