Minnesota Estate Tax Planning: Understanding Residency, Domicile Rules, and the $3 Million Exemption

The One Big Beautiful Bill increased the federal estate tax exemption to $15 million per person, or $30 million for a married couple. However, this exemption applies only to federal estate taxes. Minnesota is one of a dozen states that impose their own state-level estate tax, and the Minnesota exemption is significantly lower, currently just $3 million per person. As a result, Minnesota residents must consider state residency rules in addition to traditional estate planning strategies.

If you currently live in Minnesota and are considering changing your residency, two rules matter:

1. Physical Presence Test:  Minnesota will treat you as a resident for income tax purposes if you spend 183 days or more in the state. However, this rule does not apply to estate tax residency.

2. Domicile Test :Domicile is what determines residency for both income and estate tax. If Minnesota is considered your permanent home, you are treated as a resident. Factors include:

• Where you spend most of your time
• Family and community ties
• Business and professional relationships
• Location of your home(s)
• Statements and legal declarations of residency

Even if you avoid Minnesota residency under the domicile test, your estate may still owe Minnesota estate tax on property located in the state. Minnesota’s $3 million exemption is prorated for nonresidents.

Example:
If you have a $4 million estate that includes $1 million of Minnesota real estate or tangible property, Minnesota applies the $3 million exemption and calculates tax on $1 million. Under current law, this results in a tentative tax of $130,000. Since 25% of your estate is in Minnesota, the prorated tax would be 25% of $130,000, or $32,500.

Ultimately, the only way to fully avoid Minnesota estate tax on estates over $3 million is to establish domicile in another state and avoid owning real estate or other tangible assets in Minnesota.

For guidance on Minnesota estate tax planning and residency considerations, contact Greg Carlson.