Estate Taxes
Will I Have to Pay Estate Taxes?
Estate taxes are often misunderstood and commonly lead to some anxiety among my clients. Many of my estate planning meetings will begin with questions from clients about whether they will have to pay an estate tax, and how much. These concerns are certainly understandable. Most people work hard throughout their lives and save money with the goal of leaving an inheritance for their families. The good news is that, for most of my clients, there is little to worry about.
The purpose of this post is to explain in broad, general terms, what an estate tax is, and to whom they may apply. This is intended to briefly summarize the law, which is often complicated. As with most legal matters, the devil is in the details. If you have questions, please reach out so we can look at the specifics of your situation.
That disclaimer aside, an “estate tax” is described by the IRS as “a tax on your right to transfer property at your death.” The estate tax is generally paid by the decedent’s estate, not by their heirs. Whether an estate will owe an estate tax, and how much, is determined by the size of the decedent’s estate, but also by where the decedent resided and where their assets are held. When we talk about “estate taxes,” we need to discuss whether a client will be liable for the federal estate tax, but also whether any state’s separate estate taxes will apply to the client or their assets.
As of 2025, the federal estate tax will only apply if your gross estate is valued at more than $13,990,000. If you are married, your spouse is entitled to their own separate exemption. This means that a married couple can, as of 2025, pass a combined total of $27,980,000 without incurring any federal estate tax. Even if the estate tax does apply to your situation, only those amounts in excess of the exemption amount will be taxed.
In light of his federal estate tax exemption, very few people will need to worry about paying a federal estate tax. In fact, the Tax Policy Center estimated that just 7,130 individuals left an estate large enough to file a federal estate tax in 2023.
We know what the federal estate tax looks like in 2025, but what will happen in the coming years? That’s the million dollar question, or rather, the several million dollar question. Prior to 2017, the estate tax exemption was much lower, around $5.5 million. Congress passed the Tax Cuts and Jobs Act of 2017 (the “TCJA”), which raised the federal tax exemption up to $11,180,000. Unless extended by Congress, the TCJA is set to sunset as of Midnight on December 31, 2025. If this happens, the federal estate tax exemption will revert to its previous levels, which, adjusted for inflation, is expected to be around $7,000,000 per person. With the current administration in the White House, and with the Republican Party controlling both houses of Congress, it is unlikely that the TCJA will be allowed to expire. In fact, there have been discussions about terminating the federal estate tax altogether. At this time, though, there is simply no way to know what will become of the federal estate tax.
What does this mean for you? That depends. If your estate is likely to be higher than the (expected) $7,000,000 exemption, you may want to consider taking advantage of lifetime gifting using the current exemption amounts to lock in the these exemptions.
If you don’t have to worry about the federal estate tax, does that mean you’re home free? Well, that depends. Each state is free to enact their own estate tax. North Dakota has declined to do so, meaning most North Dakota residents are unlikely to be affected by an estate tax. Minnesota does have its own estate tax, and it starts at a much lower level. Specifically, Minnesota’s estate tax applies when a decedent’s estate exceeds $3,000,000.
If you are a Minnesota resident, the estate tax will consider all of your assets, wherever they are located. If you are not a Minnesota resident, but you have assets located in Minnesota, only those assets located within Minnesota will be counted. As with the federal estate tax, the Minnesota estate tax only applies to the assets in excess of $3,000,000. In other words, if a decedent dies with a taxable estate of $3,100,000, they will only pay taxes on the $100,000 that exceeds their $3,000,000 exemption. They will not pay taxes on their full $3,100,000 estate.
In addition, Minnesota has a graduated tax rate starting at 13% and increasing up to a maximum of 16% as the taxable estate goes up. There are ways to plan for Minnesota’s estate tax, but it may require clients to make difficult decisions about their residency, where their assets are located, or whether they want to risk incurring higher capital gains taxes.
Minnesota’s relatively low estate tax exemption disproportionately affects farmers and small business owners. It is often the goal of these farmers and business owners to pass along their farm or family business to the next generation. These assets also tend to be less liquid. Their beneficiaries cannot simply cash out an investment to pay the tax. This could necessitate that they borrow money or to sell off assets that are needed to continue operations.
For these situations, Minnesota allows deductions for certain qualified small business property and qualified farm property. These deductions are also beyond the scope of this post, but may be covered in a future post.
If you still have questions about estate taxes or estate planning, please consider scheduling an appointment for a consultation.
