New Minnesota Estate Tax Impacts Non-Resident Investors and Local Businesses
Minnesota enacted dramatic changes to its estate and gift tax laws last year. Minnesota's new gift tax has attracted national attention as only the second state gift in the country. One change has been largely ignored despite its potential to impact many non-Minnesota residents who have an indirect interest in real estate located in Minnesota. Specifically, this new tax now imposes an estate tax on non-Minnesota residents for the value of real estate located in Minnesota that is held in a pass-through entity, such as an LLC, partnership or S corporation. Prior to July 1, 2013, non-Minnesota residents were only subject to Minnesota estate tax on directly-owned real estate or other “tangible” property, such as equipment. Under the new law, non-Minnesota residents who simply are partners or owners of a pass-through an entity that holds Minnesota real estate, may now have Minnesota estate tax obligations.
The original intent of the new law was to prevent non-Minnesota residents from avoiding Minnesota estate tax by transferring a Minnesota home to an LLC, but the law was drafted far more broadly. Beyond the potential tax, non-Minnesota residents may also face significant administrative burdens.
For non-resident investors, the effects of the new law include the following:
- A non-Minnesota resident who is a shareholder of a pass-through business that operates in Minnesota will now be subject to Minnesota estate tax if the business owns any real estate in Minnesota.
- Out-of-state investors in real estate partnerships or REITs will be subject to Minnesota estate tax.
- Upon death, non-Minnesota residents whose estates exceed $1 million must now file an estate tax return in Minnesota, even if no estate tax return is required in their home state and even if no estate tax return is required by the IRS.
An unintended consequence of the new law may impact Minnesota businesses. Any new partnership or LLC (or s-corporation) that will own Minnesota real estate may have difficulty attracting out-of-state investors.
In addition, the law fails to offer direction on how to value real estate owned by a Minnesota business. Consider a 1 percent partner in a REIT holding 10 real estate investment properties in Minnesota. That partner could be required to submit appraisals of all Minnesota real estate, at their own expense. If an operating business holds real estate for operations, no guidance is provided on how to allocate the general debts of the business against the value of the real estate to arrive at a net value of the real estate. No guidance is available regarding discounts that apply to minority interests, and real estate that cannot be sold independent of the business.
To understand how the change to Minnesota’s estate tax laws might impact you or your business, please contact your usual Stinson Leonard Street contact.