The Congressional vote to avert the so-called fiscal cliff exempts estates of $5 million in value from the federal estate tax. However, Minnesota’s estate tax exemption remains at $1 million and is not expected to change anytime soon.
Given that many Minnesotans do not have $5 million or more in individual assets, most Minnesotans should focus on estate planning strategies to avoid the Minnesota estate tax.
The $5 million exemption from the federal estate tax is somewhat surprising given that it was $1 million as recently as 2002 and 2003; $1.5 million in 2004 and 2005; $2 million in 2006, 2007 and 2008; and $3.5 million in 2009. It jumped to $5 million in 2010 when Congressional leaders earlier wrangled over various issues, including the estate tax.
Many estate tax observers did not expect Congress to continue the exemption at a level as high as $5 million, which is indexed for inflation. Large estates will be taxed at a top rate of 40 percent (40%) under the new legislation compared to a top rate of 35 percent (35%) in 2012.
The new 40% rate is low on an historical basis. The top federal estate tax rate ranged from 45% to 50% between 2002 and 2009.
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