Minnesota Estate Tax: Thresholds, Rates, and Planning Strategies

Minnesota is one of a small number of states that impose their own estate tax in addition to the federal estate tax. The Minnesota estate tax applies to estates valued above $3 million — a threshold far lower than the $13.61 million federal exemption (2024, adjusted for inflation). This gap means that many Minnesota families who owe nothing in federal estate tax still face significant state estate tax liability.

Understanding how the Minnesota estate tax works — and the planning strategies available to minimize it — is essential for anyone whose estate may approach or exceed the $3 million threshold.

Minnesota vs. Federal Estate Tax: Key Differences

The most significant difference — beyond the exemption amounts — is portability. At the federal level, a surviving spouse can use the deceased spouse’s unused exemption (called the Deceased Spousal Unused Exclusion Amount, or DSUE). Minnesota offers no such provision. When the first spouse dies, any unused portion of their $3 million Minnesota exemption is permanently lost.

This lack of portability makes careful planning for married couples especially important under Minnesota law.

Who Owes Minnesota Estate Tax?

The Minnesota estate tax applies to:

• Minnesota residents — The entire worldwide estate of a Minnesota resident is subject to the tax, regardless of where the assets are located
• Non-residents — Only the portion of the estate consisting of real property and tangible personal property located in Minnesota is subject to the tax

An estate tax return must be filed with the Minnesota Department of Revenue if the gross estate (before deductions) exceeds $3 million. The gross estate includes:

• Real property (primary residence, investment property, cabin/lake property)
• Financial accounts (bank accounts, brokerage accounts, CDs)
• Retirement accounts (IRAs, 401(k)s, 403(b)s)
• Life insurance proceeds (if the decedent owned the policy or had incidents of ownership)
• Business interests (closely held corporations, LLCs, partnerships, sole proprietorships)
• Personal property of significant value
• Annuities and other contractual rights
• Assets in revocable trusts (included because the grantor retained the right to revoke)

Many individuals underestimate their total estate. When the value of a home, retirement accounts, life insurance death benefits, and other assets are combined, it is not uncommon for a middle-class Minnesota family to exceed the $3 million threshold. For a complete breakdown of how these rules fit within the broader legal framework, see Minnesota estate planning laws.

Minnesota Estate Tax Rates

Minnesota’s estate tax rates are graduated, meaning larger estates pay a higher effective rate. The rates range from approximately 13% to 16% on the taxable amount above the exemption.

For reference, on a taxable estate of:

These figures are approximate and depend on available deductions. The actual computation follows a bracket structure set by Minn. Stat. § 291.016.

The “Cliff” Effect

Minnesota’s estate tax historically had a notable “cliff” — estates just over the $3 million threshold could owe a disproportionately high tax relative to the amount exceeding the exemption. While legislative adjustments have softened this effect somewhat, the transition from no tax to owing tax still creates a planning incentive for estates near the threshold.

Filing Requirements and Deadlines

A Minnesota estate tax return (Form M706) must be filed if the gross estate exceeds $3 million. The return is due nine months after the date of death, the same deadline as the federal estate tax return.

Key filing considerations:

• A six-month extension is available by filing Form M706-EXT before the original due date
• The Minnesota return references the federal return — if a federal return is filed, a copy must be attached to the Minnesota return
• Payment is due by the original due date even if an extension to file is obtained — interest accrues on any unpaid tax

Deductions That Reduce the Taxable Estate

Marital Deduction

The unlimited marital deduction allows assets passing to a surviving spouse (who is a U.S. citizen) to be deducted from the gross estate. This means no estate tax is owed at the first death if everything passes to the surviving spouse.

However, this strategy merely postpones the tax problem. When the surviving spouse dies, their estate — now potentially much larger — may owe significant estate tax.

Charitable Deduction

Assets left to qualified charitable organizations are fully deductible from the gross estate. Charitable bequests reduce the taxable estate dollar-for-dollar. Common charitable planning tools include:

• Outright charitable bequests in a will or trust
• Charitable remainder trusts (CRTs) — provide income to the donor or beneficiaries for a period, with the remainder going to charity
• Charitable lead trusts (CLTs) — provide income to charity for a period, with the remainder passing to family members

Debts and Administration Expenses

Legitimate debts of the decedent, funeral expenses, and costs of administering the estate (attorney fees, personal representative fees, appraisal costs) are deductible from the gross estate.

Planning Strategies to Reduce Minnesota Estate Tax

Strategy 1: Credit Shelter Trust (Bypass Trust)

For married couples, a credit shelter trust (also called a bypass trust, family trust, or B trust) is one of the most important tools for Minnesota estate tax planning.

How it works: At the first spouse’s death, an amount up to the Minnesota exemption ($3 million) is transferred into an irrevocable trust for the benefit of the surviving spouse and/or children. The surviving spouse can receive income from the trust and, in some cases, distributions of principal for defined purposes (health, education, maintenance, and support).

Why it matters: Because the assets in the credit shelter trust are not included in the surviving spouse’s estate at the second death, this strategy effectively doubles the amount that can pass free of Minnesota estate tax — from $3 million to $6 million for a married couple.

Without a credit shelter trust, the first spouse’s unused Minnesota exemption is permanently lost (no portability). This is the single most important planning distinction between state and federal estate tax for Minnesota married couples.

Strategy 2: QTIP Trust (Qualified Terminable Interest Property)

A QTIP trust allows the first spouse’s estate to claim the marital deduction on assets placed in trust, while controlling who ultimately receives those assets after the surviving spouse’s death.

How it works: The surviving spouse receives all income from the QTIP trust for life, and the trustee may (or may not) have discretion to distribute principal. At the surviving spouse’s death, the remaining assets pass to the beneficiaries designated by the first spouse (typically children).

Why it matters for Minnesota: QTIP trusts are particularly useful in blended families, where the first spouse wants to provide for the surviving spouse while ensuring that children from a prior relationship ultimately receive the assets. A QTIP trust can also be combined with a credit shelter trust for maximum flexibility.

A Minnesota-specific QTIP election can be made separately from the federal QTIP election, allowing different planning approaches at the state and federal level.

Strategy 3: Irrevocable Life Insurance Trust (ILIT)

Life insurance proceeds are included in the taxable estate if the decedent owned the policy or had “incidents of ownership” (such as the right to change beneficiaries). For individuals whose life insurance would push their estate above $3 million, an irrevocable life insurance trust removes the policy from the taxable estate.

How it works: An irrevocable trust owns and is the beneficiary of the life insurance policy, excluding the death benefit from the insured’s estate. Note: transferring an existing policy to an ILIT is subject to a three-year look-back rule.

For more on irrevocable trusts, see the guide to irrevocable trusts in Minnesota.

Strategy 4: Lifetime Gifting

Minnesota does not impose a state gift tax, making lifetime gifting particularly effective. Each individual can give up to $18,000 per recipient per year (2024, adjusted for inflation) without federal gift tax consequences. Direct payments for tuition or medical expenses are excluded entirely, with no dollar limit.

Every dollar gifted reduces the estate, potentially bringing it below the $3 million threshold with no state-level tax consequence.

Strategy 5: Charitable Planning

Charitable giving reduces the taxable estate while supporting causes the donor values. For estates near the $3 million threshold, a relatively modest charitable bequest can eliminate the estate tax entirely. Tools include charitable remainder trusts, donor-advised funds, and outright charitable bequests — all of which reduce the taxable estate dollar-for-dollar.

Strategy 6: Disclaimers and Post-Mortem Planning

Minnesota law recognizes qualified disclaimers — a surviving spouse or beneficiary can refuse (disclaim) all or part of an inheritance, redirecting assets to the next person in line (such as a credit shelter trust). Disclaimer planning requires careful coordination with the estate plan and must be completed within nine months of the decedent’s death.

The Federal Estate Tax Sunset

The current federal estate tax exemption of $13.61 million is set to sunset after 2025, potentially reverting to approximately $5 to $7 million (adjusted for inflation) unless Congress acts. If this occurs, more estates would face both state and federal estate tax, adding urgency to planning for Minnesota families.

Taking Action on Estate Tax Planning

Estate tax planning involves the intersection of state and federal tax law, trust law, and financial planning. Key steps include estimating the gross estate (including beneficiary-designated assets), evaluating the impact of both state and federal estate tax, implementing appropriate trust structures, and reviewing the plan regularly as asset values and tax law change. For high net worth estates, additional strategies such as GRATs, family limited partnerships, and generation-skipping trusts may be appropriate.

For an overview of the broader legal framework, see Minnesota estate planning laws. For a discussion of trust options, see the guides to revocable living trusts and irrevocable trusts in Minnesota.