Minnesota provides each person with a $3 million exemption for estate taxes, plus up to an additional $2 million in exemptions for qualified farm and business assets. If these exemptions are not used at the time of a person’s death, the exemption is lost. Unlike the federal estate tax exemption, unused Minnesota exemption does not carry over to a person’s surviving spouse.
Unused Minnesota exemption could cause a family to pay more Minnesota estate tax than necessary.
The best way to avoid this is to create an estate plan that uses each spouse’s exemption, while allowing the surviving spouse to keep access to the income and principal. However, if planning has not been done or was incomplete, a disclaimer could be used to fix this.
For example, when a married couple owns farmland as joint tenants, after the death of a spouse the ownership of the farmland automatically passes to the surviving spouse. The deceased spouse does not use any of their Minnesota exemption when the land is transferred directly to their surviving spouse. The total value of the land is now included in the surviving spouse’s Minnesota taxable estate. If the value of the land exceeds the surviving spouse’s Minnesota estate tax exemptions, their estate would be liable to pay Minnesota estate tax.
Disclaiming deceased spouse’s interest in farmland
To fix this situation, the surviving spouse has the option to disclaim their deceased spouse’s interest in the farmland. This disclaimer must be filed within nine months of the decedent’s date of death, and the surviving spouse cannot have claimed interest to the property or accepted beneficial ownership of the property.
After the disclaimer is filed, the deceased spouse’s interest in the farmland is then distributed to the contingent beneficiaries of his estate rather than to their spouse. By distributing the real estate to the contingent beneficiaries, they use their exemption.
When making a disclaimer, it is important that the surviving spouse be certain not to disclaim an amount of land that exceeds the Minnesota exemption amount; otherwise, an estate tax will be due. The disclaimed amount should be limited to the exemption amount available.
The upside to using a disclaimer is that they have reduced the amount of land owned by the surviving spouse and reduced the potential estate tax liability. The downside is, the surviving spouse has given up their right to the income and principal from the deceased spouse’s share of the land.
Though a disclaimer is not the best option, it is an alternative in cases where preplanning was not done and there is a need to avoid Minnesota’s estate tax.
Balzarini is an attorney at law with Miller Legal Strategic Planning Centers. Email your questions and comments for him to Miller Legal at [email protected].