State Death Tax Overview - Part II

Estate taxes are taxes levied on an estate (and thus paid by the estate) before any assets of the estate are distributed to the heirs, devisees, and beneficiaries. In today’s video – Part II of a two part series – we explore what estate taxes are levied by and owed to State governments: What states levy the taxes and how those taxes are calculated.

In Part I, we looked at the income tax and the inheritance tax. Today we tackle the estate tax. This is somewhat the opposite of an inheritance tax: Where the inheritance tax is paid by the recipient of a gift out of an estate, and is based on the size of the gift, the estate tax is paid by the estate itself, and is based on the size of the entire estate.

States with an Estate Tax

There are twelve states (11 states and DC) with an estate tax, including:

  1. Washington

  2. Oregon

  3. Hawaii

  4. Minnesota

  5. Illinois

  6. New York

  7. District of Columbia

  8. Vermont

  9. Massachusetts

  10. Connecticut

  11. Maine

  12. Rhode Island

Maryland, uniquely, has both an inheritance tax and an estate tax. There is also a Federal estate tax.

Calculating the Estate Tax - Minnesota Example

Like the Federal government, Minnesota’s estate tax has an exemption. While the Federal exemption for 2023 is $12.92 million, Minnesota’s is only $3 million. But that means until an estate is worth more than $3 million, nothing is taxed. Moreover, the only assets that are subject to the estate tax is the amount above $3 million. The amount above the exemption is called the “taxable estate”.

To follow is a chart of the estate taxes that would be owed by a Minnesota estate in 2023.

To calculate the estate tax owed on, for example, a gross estate of $12.5 million in Minnesota, we would do the following:

  1. Calculate the Taxable Estate. Subtract the estate tax exemption from the gross estate ($9.5 million)

  2. Find the Range on the Chart. $9.5 million is between $9.1 million and $10.1 million

  3. Find the Base Tax. In the identified range, the base tax is $1.059 million.

  4. Find the Marginal Estate. Subtract the higher end of the range from the taxable estate to find the marginal estate. ($9.5 million - $9.1 million = $400k) (Note “marginal estate” is not an official term that you’ll find anywhere else.)

  5. Apply the Marginal Rate to the Marginal Estate. 15.2% x $400k = $60,800

  6. Add Base Tax and Marginal Tax. $1,203,000 + $60,800 = $1,263,800

Thus, in Minnesota a $12.5 million dollar estate would owe $1,263,800 in estate taxes to the State of Minnesota. This would be in addition to any Federal estate taxes owed, but notably, since the Federal estate tax exemption in 2023 is $12.92 million, the entire gross estate would be exempted.

Conclusion

This is a very VERY basic overview of the Minnesota estate tax; it gets very complicated very quickly with the many, many nuances embedded in the tax code. If you have questions about the Minnesota estate tax, please feel free to reach out for a free consultation.

Gregory Singleton