Minnesota Inheritance Tax: What Residents Need to Know
Why Understanding Inheritance Tax Matters in Minnesota
Will you need to pay taxes on an inheritance as Minnesota resident? The answer depends on the state both the beneficiary and the decedent live in, the type of asset that will be inherited and its value. This can make it particularly confusing for folks who are simply trying to understand whether an inheritance may be subject to Minnesota or federal taxes. The terms “inheritance tax,” “estate tax,” and “capital gains tax” often come up when discussing tax implications of an inheritance and can be easy to confuse.
Does Minnesota Have an Inheritance Tax?
Clarifying What an Inheritance Tax Is
So, what is an inheritance tax? An inheritance tax is a tax paid by individuals (known as beneficiaries) who receive assets from a deceased person’s (known as a decedent’s) estate. These assets can include real estate, retirement accounts, taxable brokerage accounts, and more. An inheritance tax is paid by the beneficiary rather than the estate of the decedent. This differs from estate tax, which is paid by the estate of the decedent itself before any distributions are made to beneficiaries. Although the estate is paying the tax in this case, the value of the assets in the estate would be reduced for any estate tax due. Whether or not a beneficiary is subject to an inheritance tax is determined by state tax law and the relationship of the beneficiary to the decedent.
Minnesota’s Position on Inheritance Tax
Minnesota does not have a state-level inheritance tax and there is no federal inheritance tax. There are currently 5 states who do impose an inheritance tax on beneficiaries that have rates ranging from 0% - 16% depending on the relationship to the decedent and size of the inheritance. For residents of Minnesota who are inheriting assets from other residents of Minnesota, no inheritance tax will be assessed. However, there is a Minnesota estate tax that is separate and in addition to the federal estate tax. The estate of a Minnesota resident may have tax implications if the estate value is over the tax exemption amount.
Why This Still Affects Beneficiaries
Although Minnesota does not impose an inheritance tax, beneficiaries may still owe other types of tax ranging from income tax to estate tax to capital gains tax. For example, beneficiaries who inherit retirement accounts will be subject to income tax on the distributions from these accounts. Minnesota does have a progressive state income tax with rates ranging from 5.35% to 9.85%, so some of the value of these inherited accounts will be lost to the state as well as federal income taxes. It is important to fully understand the type and value of assets that you are inheriting to determine which potential tax rules may apply.
Understanding the Minnesota Estate Tax
How It Works and Who Pays It
Minnesota does impose an estate tax on estates that exceed a specific tax exemption amount, which is set at $3 million as of 2025. The federal government also imposes an estate tax in addition to any state level estate taxes. The federal tax exemption amount is significantly higher as it is set at $13.99 million as of 2025.
- For example, if a Minnesota resident dies with an estate valued at $5 million, the estate will owe taxes in Minnesota on the $2 million above the $3 million exemption. However, the estate will not owe any federal estate taxes as $5 million is well below the $13.99 million exemption amount.
One key difference with estate vs. inheritance taxes is that for estate taxes the estate is responsible for paying the tax before assets are passed to beneficiaries. Paying any estate taxes does reduce the value of the assets held in the estate, which would then impact beneficiaries with a reduced inheritance.
Key Differences from Federal Estate Tax Rules
Although both the federal and Minnesota state governments impose estate taxes, there are some key differences.
- Tax Exemption Amounts- The federal estate tax truly only applies to very large estates given the $13.99 million exemption, whereas Minnesota’s lower threshold exemption means more residents are affected and will experience tax implications.
- Tax Rates- The Minnesota estate tax imposes a progressive rate ranging from 13% to 16% depending on the value of the estate, while the federal government rates range from 18% to 40%.
- Portability- This is a provision that allows spouses to use each other’s unused lifetime estate tax exemptions. Effectively, this allows a married couple to have double the exemption amount. The federal estate tax is portable, which means that the surviving spouse in a couple may have up to a $27.98 million exemption amount. Minnesota does not allow for portability, which makes it crucial for residents with estates exceeding $3 million to engage in estate planning. Financial advisors and estate attorneys can help you consider the coordination between state and federal exemptions as you work on multi-generational tax planning.
Impact on Families and Heirs
Although estate taxes are imposed on an estate rather than a beneficiary, these taxes can ultimately reduce what beneficiaries receive. This is because the estate will need to pay for any federal or Minnesota tax liability with assets before distributing those assets to beneficiaries. Given that the estate must pay this tax, liquidity issues can arise when significant portions of the estate are tied up in relatively illiquid assets such as real estate or business interests. Due to the much lower tax exemption amount for Minnesota and the lack of portability to a surviving spouse, many more residents are likely to experience estate tax implications than in other states with no estate tax who are only subject to the federal exemption amount.
Federal Estate Tax Considerations for Minnesota Residents
When Federal Estate Tax Applies
As noted previously, it is much less likely for an estate to be subject to federal estate tax than to Minnesota estate tax. The federal estate tax only applies to estates exceeding the $13.99 million exemption amount and with portability this can potentially be up to $27.98 million for a surviving spouse. The small percentage of estates that are above the threshold must file a federal estate tax return known as IRS Form 706. This form will determine the total tax for the estate using the progressive rates ranging from 18% to 40% for any value above the remaining exemption.
These current very high federal exemption amounts were a part of the 2018 Tax Cuts and Jobs Act. They are set to expire by the end of 2025 unless Congress agrees to extend them, which is a part of the budget and reconciliation negotiations happening currently. If the provisions are not extended or made permanent, the federal estate tax exemption amount would revert to $5 million adjusted for inflation. This significant lowering would bring it more in line with the Minnesota exemption amount and lead to more people owing federal estate tax.
How Minnesota Estates May Be Affected
For residents of Minnesota, it is possible their estate will incur no estate tax, only Minnesota estate tax or both Minnesota and federal estate tax depending on the size of their estate. Residents who die with an estate less than $3 million will not be subject to any estate tax. Those who die with between $3 million and $13.99 million will likely be subject to Minnesota estate tax only. For those residents who die with over $13.99 million, it is possible they will be subject to Minnesota and federal estate taxes depending on portability to a surviving spouse. Reaching this threshold is more likely for estates with valuable real estate, investments, or closely held businesses. Given the dual impact of both Minnesota and federal estate tax, it is important for those with a higher net worth to engage in careful estate and tax planning with an eye towards reducing future potential estate tax owed.
Tax Issues Related to Inherited Assets in Minnesota
Inherited assets are not always tax-free. While Minnesota has no inheritance tax, how assets are handled can still trigger taxes.
Capital Gains Tax and Stepped-Up Basis
Capital gains tax is a term commonly used to refer to the tax incurred on the sale of appreciated assets, which is known as realizing capital gains. If these realized capital gains are considered long-term (generally assets held for at least one year before sale), they will receive the more favorable federal rate ranging from 0% - 20%.
Currently, beneficiaries receive what is known as a stepped-up cost basis upon inheriting. This means the value of the asset they inherit is reset to its fair market value at the time of the decedent’s death. If the asset is then sold soon after inheritance, there may be very minimal realized capital gains and therefore, very minimal taxes due.
- For example, if the decedent invested $10,000 in Apple stock and it had grown in value to $100,000, they would have realized a capital gain of $90,000 if they had sold the stock during their own lifetime. If a beneficiary were to inherit that Apple stock, their new cost basis would be considered $100,000 and selling the stock at around that price could result in no realized gain or tax implications.
However, any future appreciation in the asset after the inheritance date could be subject to capital gains tax when the asset is sold.
- In the prior example if the beneficiary holds onto the Apple stock for a few years and the value grows to $150,000, selling the stock would result in a $50,000 realized capital gain and some potential income taxes due upon filing.
Property Tax Implications
When beneficiaries inherit real estate, they will receive a step up in cost basis. This allows them to turn around and sell this real estate, if desired, and create very little realized capital gains income to be included for tax purposes. If a beneficiary decides not to sell the real estate, then the inheritance will trigger reassessment for property tax purposes. The property may be taxed at a higher rate if exclusions or homestead classifications no longer apply.
Income Tax on Inherited Accounts
Traditional pre-tax retirement accounts such as IRAs and 401(k)s are not taxed at inheritance but will be counted as taxable income upon distribution. These types of accounts have special rules depending on the relationship of the beneficiary to the decedent and most beneficiaries must take out some level of required distributions over time.
Due to the passage of the original Secure Act 2.0 in 2020, there were significant tax law changes for how beneficiaries must take their required distributions. Surviving spouses are still allowed to either rollover the deceased spouse’s IRA into their own IRA or to take distributions from the inherited IRA over their own lifetime (also known as a stretch IRA). The majority of non-spousal beneficiaries will be required to take out annual required distributions and completely empty the account by the end of 10 years. These distributions are subject to taxes in Minnesota and at the federal level. If the beneficiary is still working, this can lead to these required distributions being taxed at top rates which reduces the value of the inherited asset available to them.
Out-of-State Complications
Even though Minnesota does not impose an inheritance tax, it is possible a Minnesota resident will still be required to pay inheritance tax. If assets are located in a state that does impose inheritance tax, or the decedent lived in one, tax obligations may still arise. Beneficiaries in Minnesota could be impacted if they inherit property from another state with its own rules. This would subject them to tax rates ranging from 0% to 16% depending on their relationship to the decedent.
Inheritance Planning Strategies for Minnesota Families
Why Planning Is Still Necessary Without an Inheritance Tax
Even without an inheritance tax, Minnesota residents are still open to potential tax liabilities as have been covered in previous sections. Estate tax, income tax and taxes on realized capital gains can all play a role in reducing what beneficiaries actually inherit. Engaging in tax planning can help manage or reduce the impact of these taxes. We will cover some of the most common approaches below, but working with a financial advisor can help you be sure you’re not missing out on an important approach to reduce taxes on your inheritance.
Common Planning Tools and Approaches
Estate Planning Through Trusts
- Given the Minnesota estate tax exemption is much lower than the federal and non-portable, many more taxpayers will be subject to potential tax liability. Estate attorneys can help you determine whether the use of a revocable or irrevocable trust may be a good strategy to help you avoid estate tax.
- For example, many couples who have over $3 million net worth will establish a revocable living trust with a disclaimer provision. This allows a surviving spouse to disclaim, or give up ownership, of a portion of his or her inheritance into the trust to help use up some of the deceased spouse’s estate tax exemption amount.
Lifetime Gifting
- Another strategy to help avoid estate tax liability is to consider making gifts during your lifetime. You are allowed to make gifts up to the annual gift tax exclusion without using up any of your federal or Minnesota estate and gift tax lifetime exemption amount. The annual gift tax exclusion in 2025 is $19,000 per recipient. Keep in mind that couples can double that amount to $38,000 if they are each giving a gift. There is also an unlimited gift tax exclusion for gifts made directly to help pay for education or medical expenses. Lifetime gifting through the annual gift tax exclusion can help reduce the taxable estate over time.
Charitable Giving
- There are several charitable giving strategies, including donor-advised funds and Qualified Charitable Distributions (QCDs), that can help you to reduce your taxable estate while supporting your philanthropic goals.
- Donor-advised funds- these funds are a great way to save on taxes during your lifetime by allowing you to itemize your deductions as well as donate appreciated securities without selling them and incurring capital gains taxes.
- Qualified Charitable Distributions- QCDs currently allow those over the age of 70.5 to make donations directly to qualified charities from their IRA. This will not only help you save on income taxes now by reducing your taxable required distribution but can help reduce the value of your IRA for beneficiaries. IRAs are one of the least tax friendly assets to inherit as discussed above given the required distributions that are subject to income tax.
For more on how charitable giving relates to your taxes, check out our past blog post Why Doesn’t My Charitable Giving Increase My Tax Deduction?
Succession Planning
- Succession planning for family business can help heirs manage liquidity and prevent forced sales. This involves creating plans for transitioning ownership of the business during your lifetime, rather than waiting for a death to force a potentially unfavorable transition. Working with a business and/or estate attorney can help you to ensure that you create a solid succession plan to help avoid unwanted tax consequences.
Inheritance Tax FAQs for Minnesota Residents
1. What states do have an inheritance tax?
Currently, Iowa (through 2024), Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania impose an inheritance tax. These states have inheritance tax rates ranging from 0% to 16% generally depending on the relationship between the decedent and the beneficiary and the size of the inherited assets. These taxes may apply to assets or beneficiaries based on the location of the decedent or the property.
2. If I inherit something from someone in another state, do I owe inheritance tax?
It is possible depending on where the decedent lived or where the asset is located. If the answer is in one of the 4 states listed above with a current inheritance tax, then you might. In all states with an inheritance tax, surviving spouses are exempt from paying any tax. For other beneficiaries, the rate typically ranges depending on how close your relationship is to the decedent. Beneficiaries should research or consult a tax professional if they inherit from someone in a state with an inheritance tax.
3. Do I pay capital gains tax when I inherit property?
Not right away. Any property you inherit will receive a step-up in cost basis that adjusts the property’s value to what it was at the date of death. Therefore, if you sell the property right away, you are likely to have limited to no realized capital gains. Taxes may apply if you later sell the asset for more than its value at the time of inheritance.
4. Do I owe taxes on inherited retirement accounts?
In most cases, yes. Distributions from inherited pre-tax retirement accounts are typically taxed as income. The timing and amounts of required distributions depend on your relationship to the original account holder. However, if you inherit a Roth retirement account, distributions from these accounts will not be taxed.
We Can Help You Further
Key Takeaways
Minnesota does not impose an inheritance tax, but its estate tax and other tax laws still affect how much beneficiaries receive. A combination of Federal estate tax, Minnesota estate tax and income tax may apply depending on the value and asset types being inherited. It is important to understand how different tax laws will impact your estate to help protect and transfer your wealth more efficiently.
Encouragement to Act
Working with a financial advisor can help ensure you are creating a personalized plan to meet your estate goals. Schedule an initial call with us to better understand how inheritance tax rules and related tax issues apply to your situation.
Sources:
https://www.nolo.com/legal-encyclopedia/state-inheritance-taxes.html
https://taxfoundation.org/data/all/state/estate-inheritance-taxes/
https://www.labergelegacylaw.com/using-disclaimer-trusts-in-minnesota
Liz Alf is the Principal of Clerestory Advisors and fee-only CERTIFIED FINANCIAL PLANNERTM located in Minneapolis, MN. She is a member of the National Association of Personal Financial Advisors (NAPFA), the Fee Only Network and Wealthtender. She enjoys serving clients with on-going financial planning and investment management services.