MINNESOTA ESTATE AND PROBATE LAW UPDATE
New Laws That Are Likely To Affect Your Estate and Your Plan
By
Earl H. Cohen, Attorney
The Minnesota Legislature may have been deadlocked on a number of matters this session, however, a number of important laws were passed and signed into law that will affect a large number of estate plans. This article will focus on the new Minnesota QTIP (Qualified Terminable Interest Property trust) deduction, which may be better described as the Minnesota LMD, the Minnesota Limited Marital Deduction. Without careful attention to your plan, Minnesota Estate Tax on the first spouse's death may increase by nearly $230,000. And yes, you read that correctly, this law may result in unexpected estate tax on the first spouse's death.
As a matter of background, traditional estate planning for the last 40+ years has included the use of a marital and credit shelter or family trusts. The idea has been to make sure that each spouse's estate maximizes the use of the Federal Estate Tax Exemption. That federal exemption was raised to $1 million in 2001 and has been increased, ultimately, to $3.5 million in 2009. In 2001 Minnesota decoupled from the federal system and established its own estate tax with an exemption that finally topped out at $1 million. This meant that if your plan was drawn to maximize the federal exemption in 2009 of $3.5 million by funding the credit shelter or family trust by that amount, there would be Minnesota Estate Tax charged on the difference between the exemptions, namely $2.5 million. To avoid the tax, many estates provided for the trustee to exercise authority to make an additional gift to the surviving spouse of the $2.5 million to increase the marital deduction and avoid the tax. Usually this was done in the form of a QTIP trust which would provide that all income from the trust would be paid to (and only to) the surviving spouse and allowing the trustee to distribute principal to the surviving spouse but no one else. This preserved the principal for the family's children or grandchildren after the second spouse's death. Until January 1, 2010, Minnesota was willing to accept, as a marital deduction for state estate tax purposes, any amount of a marital gift that qualified for the federal estate tax marital deduction including any amounts that were placed in a QTIP trust for a surviving spouse. Effective January 1, 2010, the federal estate tax was repealed for one year.
Now Minnesota has enacted its own QTIP legislation that provides that "For estates of decedents dying after December 31, 2009, and before January 1, 2011, if no federal estate tax return is filed the executor may make a qualified terminable interest property election, as defined in section 2056(b)(7) of the Internal Revenue Code, for purposes of computing the tax under this chapter. The election may not reduce the taxable estate under this chapter below $3,500,000. The election must be made on the tax return under this chapter and is irrevocable."
So what is the problem? If your plan provides for a trust funding formula that funds the credit shelter or family trust first to the maximum federal estate tax exemption then the trust will be funded in excess of the Minnesota estate tax exemption. If your family expected that both the federal and state estate tax would be zeroed out by the use of a QTIP trust, and one spouse dies during 2010, the family will have a significant tax surprise. In addition, if the family's estate has shrunk during the last several years, the credit shelter or family trust may receive all of the assets of the estate and the marital share may not be funded at all.
What's the solution? The solution is straight forward. The trust or trusts must be amended to provide for a revised funding formula and for other tools to reduce the state estate tax to zero. Those tools can still involve trusts to preserve the principal of the estate for children and grandchildren. While the legislation initially affects those deaths occurring in 2010, we believe that the state, given the significant continuing budget deficit, will continue to address ways to increase the state estate tax paid by Minnesota taxpayers.
If you have questions on these or other issues regarding your estate plan, please feel free to contact Earl H. Cohen at 800-4016-194.
