President Trump signed the new tax bill into law on Friday, December 22, 2017, making for some big changes in federal estate tax planning. Under the new law, the federal estate tax exemption will be substantially increased for tax years starting in 2018. Instead of exempting $5.6 million per individual for 2018 ($11.2 million per couple), the federal estate and gift tax exemption is now $11.2 million per individual (up from $5.49 million in 2017). The federal estate tax still also includes provisions for “portability,” which allows couples to double their exclusion amount of the first spouse to die. This allows married couples to protect up to $22.4 million without worrying about federal estate tax liability. These exemption amounts are scheduled to increase with inflation each year until the year 2025 when the amounts are scheduled to revert back to 2017 levels.
While Minnesota has no gift tax (though gifts made within three years of death can be included in the gross estate), we saw changes to the Minnesota estate tax exemptions in 2017. This new legislation increased the exemption to $2.1 million per individual in 2017 and $2.4 million per individual in 2018. The exemption amount is set to increased by $300,000 per year until 2020, when the exemption will reach $3 million. The exemption limit is the amount an individual can leave to heirs without paying estate or gift tax. Tax rates range from 13 percent to 16 percent in 2018, with the top rate being applied to the amount of the taxable estate over $10.1 million.
The Minnesota qualified farm land deduction is $2.6 million in 2018. This deduction is revised each year so that it equals the difference between $5 million and the Minnesota estate tax exemption in the year of death. Though the amount of the deduction gradually decreases as we approach the year 2020 when the deduction will be set at $2 million, an overall higher exemption amount means Minnesota farmers have more flexibility in their estate plans. To qualify for this deduction, the decedent or the decedent’s spouse must have owned the qualifying property for three years before the date of death, and the heirs must own the land – and the land must continue to be classified as agricultural property for property tax purposes – for a period of three years after death. A failure to follow these rules will result in a recapture tax equal to 16 percent of the value of the property. See our blog post, Minnesota Farm Land Deduction Offers Estate Planning Opportunities for Farmers for more information.
The federal annual exclusion for gifts has also increased from $14,000 in 2017 to $15,000 in 2018. For calendar year 2018, gifts of up to $15,000 to any person are not included in the total amount of taxable gifts for that year. This means that no gift tax return will be required for the gift and the gift will not be pulled back into the estate. Married couples can double the annual exclusion amount, meaning that they can gift up to $30,000 to any person without worrying about gift taxes.
To learn more, register for our Estate Planning and Tax Update Seminar being held on February 7, 2018, a 7:00 p.m. at the Rochester Area Foundation. To register, email Mary Lynn Schiltz at email@example.com or call the office and let us know how many will be coming. This seminar is free and open to the public.
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