Dear Michael: We are from Minnesota and have heard rumblings of a new tax on gifts given in the state of Minnesota. We were intending to do some gifting through an LLP and now have heard that our kids may have to pay taxes on the gifts. Is this true? Is there anything you can add to this? – Taxing Gifts in Minnesota?
Dear Taxing: I hate to say it, but yes, it's true. The state of Minnesota is rolling out a new tax on gifts of more than $1,000,000 per person and it is effective July 1st, 2013. The tax will be a whopping ten percent of the value of any gifts over and above a one million dollar lifetime exemption.
There are a few things to state about this new tax bill and, just to forewarn you, none of them are good.
One, they made this announcement of these new taxes somewhere between June 1st and June 13th and gave the residents of Minnesota less than two weeks' notice about a huge change in the way the state of Minnesota will receive taxes from their residents.
I understand the challenges many states have, being cash strapped to meet their costs of highways, Medicaid, Medicare, etc., etc.
But only giving the people of Minnesota two weeks' notice before a momentous – and there's no way to understate how big this is – smacks of a fox trap on the part of Minnesota legislators. It's amazing when there's something this big –like this new tax – just how tight a lid can be kept on it until it's sprung on you.
Second, the state not only is going to collect these taxes on all things given within the state to Minnesota residents, but they are going to collect this tax on non-residents, as well, on any real estate or 'tangible' property gifted of property in the state of Minnesota. If I'm a resident of North Dakota, Iowa, Wisconsin, or any state and I wanted to make a gift of Minnesota owned land or tangible assets, the state can now take ten percent of that gift if it's in excess of one million lifetime.
This includes any real estate or tangible property held within 'pass through' entities – such as corporations, S-corporations, LLC's and LLP's and even some trusts.
Additionally, on this part of the tax law, the state wants to make this part of the law to non-residents 'retroactive' to January 1st, 2013.
The history on 'retroactive' tax bills hasn't been real good for any government entity that's tried to make them a part of law. I would assume that any non-resident who made good faith gifts prior to the enactment of this law will soon be getting in line with the Supreme Court with all of the other people who made good faith gifts without knowledge of this.
When about two thousand people get lined up with the Federal Supreme Court to hear court cases on the 'retroactivity' of this law to pay taxes to the state of Minnesota, I'm guessing it'll go the way of other retroactive tax bills and get shot down. But kudos to Minnesota for bucking history.
Third, this tax of ten percent starts at a one million dollar exemption per person (less any exclusionary federal gifts of currently $14,000 per year per person). The federal government does not start charging taxes on gifts or estates on anything over a five million dollar lifetime exemption.
Dropping this to one million dollars at a ten percent rate is like a forty percent increase in estate taxes on the federal level. People would be marching down Pennsylvania Avenue in Washington, D.C. if they increased the federal estate and gift tax by forty percent with pitchforks and hot oil. We almost saw that in January of this year when the estate tax law was subject to running out on December 31st, 2012 and returning to one million dollars.
What isn't stated at this point in time is whether or not the ten percent will be based on the Fair Market Value (FMV) of the asset, the possible lesser value of FMV brought on by fractured ownership interest of an LLP or LLC, or what type of valuation method the state of Minnesota is going to allow residents – and non-residents – to use as a valuation method.
The information piece I have also does not state whether or not 'prior gifts' given would be used as a part of the 'lifetime' gifts. In other words, if I gave away two million dollars last year, do I immediately pay ten percent on future gifts?
Based on the prior bombs they dropped in this legislation, I wouldn't expect any breaks off of the FMV and or appraised value, but I don't know.
You folks who were planning on gifting in Minnesota – or gifting a part of Minnesota – have about one week to make this change to avoid this ten percent tax on assets over and above the one million dollar lifetime limit on gifts mandated by the state of Minnesota and I have no way to tell you how this is going to work regarding prior gifts, valuation of the gifts themselves or how 'retroactivity' is going to stand up for non-residents.
All I can say is 'Wow'. Minnesota joins a long list of two states who have enacted similar legislation.