by John L. Nelson   
Fredrikson & Byron, P.A.   
Minneapolis Office

March 8, 2005

In 2001, Congress enacted and President Bush signed into law changes to the federal estate and gift tax laws, which cause estate tax laws to materially change each year through 2010. These changes have a significant impact on individuals' estate planning.

One area of impact is the relationship between U.S. and Minnesota estate tax law. Previously, Minnesota estate tax equaled the credit decedents could take against their federal estate liability. This meant that Minnesota's estate tax did not increase overall estate taxes; it was simply an allocation of the total tax amount between the federal and Minnesota governments.

Beginning in 2005, the Minnesota estate tax is only allowed as a deduction against the federal estate tax, rather than the credit under previous law. This essentially means that the maximum Minnesota estate tax rate is about 8.5% in 2005. This change creates estate planning opportunities and requires that existing estate plans be reconsidered.

One opportunity involves planned giving. Unlike federal estate tax, which is imposed on transfers both during lifetime and at death, Minnesota estate tax is based only on transfers made at death. As a result, lifetime gifts can be made to eliminate this tax. These gifts can be made at any time, including right before death. While it can be a difficult subject to discuss, death-bed gifts can be made to mirror provisions in an estate plan. An individual's wishes are still carried out, while saving Minnesota estate taxes. For an estate of $5,000,000, this gifting opportunity can save several hundred thousand dollars.

Another affected area is planning for married couples. The changed law has resulted in different amounts that can be sheltered at the death of the first spouse. For example, in 2005, married couples can shelter $1,500,000 of assets from federal estate taxes at the death of the first spouse. However, only $950,000 of assets can be sheltered from Minnesota estate taxes at the first spouse's death. Over time, this discrepancy widens as the federal shelter amount increases at a much greater rate than Minnesota's. Because of this discrepancy, it is important to have a thoughtful plan for the estate of the first spouse to die. In some situations, it may be appropriate to pay some Minnesota estate tax at the death of the first spouse in order to save a much greater federal estate tax at the death of the second spouse.

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