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Goodbye to the gift tax

What could be better in an election year than a tax cut, or, even better, an outright repeal?

Hardly anything, and some say that’s why this year’s changes to estate and gift taxes seemed to be pushed and pulled through the Legislature in record time. The bill was signed by the governor the same day it was passed.

The law was changed March 21, to make more money exempt from estate tax; decrease the estate tax rate; and eliminate the gift tax retroactively for the prior three years. Now the first $1.2 million in an estate is free from tax, and the exemption steps up every year culminating at $2 million in 2018. Gifts made in the previous three years must be added back into the estate.

That still differs from federal tax law, which exempts the first $5.34 million from estates of decedents who die this year.

The bill that went through the Senate had a $5 million exemption but it was amended on the floor of the Legislature. Still, the law was passed three weeks before filings were due, allowing some people to skip estate or gift tax returns. That came after some political touch and go that had it held up until March 21.

“Compared to where we were six months ago, I’m happy. We’re completely happy with the gift tax repeal but our preference would be to have a bigger exemption. We were willing to accept a phase-in, but we’d like to see conformity [with the federal tax],” said Scott Nelson, chair of the Minnesota State Bar Association probate and trust section. “We wouldn’t have had this without the budget surplus.”

‘Significant’ benefit for some

The estate tax amendments are a significant benefit for those with estates of $4 million or less.  For larger estates, the law provides relatively little relief. “A client with a $5.1 million taxable estate will pay approximately $402,000 under the new tax law and would have paid about $402,800 under the prior tax law.  That said, tax savings is tax savings and the graduated rates are easier to comprehend and easier to explain to clients,” said Minneapolis attorney Christopher Burns in an email to Minnesota Lawyer.

“Previously the initial amount over the exemption amount (previously $1 million ) was taxed at 41 percent with amounts after that being taxed at 5.6 percent and increasing gradually thereafter.  Under the new legislation we start at a 9 percent rate of tax on the amount over the exemption (in 2014 now $1.2 million), instead of a 41 percent rate, which is a welcome change,” Burns continued.

The 2014 amendments are the 14th time the estate taxes have been amended since the first tax was adopted in 1905, according to a March 5 report from the Department of Revenue. The estate tax affects fewer than 3 percent of decedents and generates less than 1 percent of Minnesota’s total state tax revenue. The gift tax passed last year was repealed retroactively so no revenue was generated from that.

But the estate and gift taxes seem to attract a lot of attention even though relatively few returns are filed. Attorneys identified several practical and political reasons for that. One is that the tax is an important element of estate planning because if the estate is handled properly no tax will be due. “Bill Gates could move to Minnesota and not pay any estate tax,” Burns said.  He could leave his estate to his spouse or a charity tax-free.

Due to another change in the law Minnesotans who have taxable estates may use a Qualified Terminable Interest Property Trust, known as a QTIP trust, even if they don’t elect to do so for their federal estate tax purposes. That’s a way to put the assets in a life estate to the spouse and preserve something for the children.

The gift tax is also controversial because it is unusual. Only one other state, Connecticut, has it, and it seems unfair to tax money that has already been taxed for the privilege of giving it away, said Minneapolis attorney Michael Sampson. “People find that estate tax offends their sense of fundamental fairness. The estate tax is a policy tax rather than a [income-generating] tax. It was enacted in 1916 to help pay for World War I and force people like the Rockefellers to put money into circulation,” he said. “With tax policy you always have to skirt the line between discouraging keeping money in the hands of a few people, and encouraging, not discouraging, the accumulation of wealth.”

It also makes the state look bad, lawyers say.  “Repeal is a very positive and important step for the Minnesota tax landscape. People want to leave the state [because of it]. Our retired residents have started seriously looking at other jurisdictions because of taxes. I really believe that,” said Minneapolis attorney Bridget Logstrom Koci.

Burns agreed. “The affluent can choose to live anywhere,” he noted.

Some didn’t like the gift tax because it allowed persons to make inter vivos gifts shortly before death, thus avoiding the estate tax. Those who are offended by it call it “deathbed robbery.” It’s why the Legislature made the appeal retroactive for three years, Logstrom Koci said.

It’s good that the state eliminated the tax before the returns had to be filed, Losgrom Koci said. The system was cumbersome, filings had to be on line only and couldn’t be printed for the taxpayor’s  records, and payments had to be electronic. “The more you looked at it the worse it got, Sampson said.

Furthermore, the returns had so much information that clients became concerned about identity theft, Logstrom-Koci said. Their anxiety was compounded because the estate system is new, and anytime there is a new system there can be glitches, she said. .

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