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What is an estate tax and how does it work?

On Behalf of | Jul 7, 2016 | Estate Valuation |

Just like the federal government, Minnesota has an estate tax that it imposes on certain Minnesota estates. Unlike an inheritance tax, which is imposed directly on an heir or beneficiary, the estate tax is imposed directly on the property of a deceased person an ordinarily will be paid before the property is distributed to the heirs.

Residents of Saint Paul need to remember that Minnesota’s estate tax is not exactly like that of the federal government. Planning for the Minnesota estate tax is therefore different from planning for the federal tax. Another thing residents should keep in mind is that even if alternative estate planning techniques like trusts, joint property, etc., can help a family stay of out probate court, they do not necessarily mean that a family gets out of paying estate tax to Minnesota.

In general, in order to determine how much Minnesota estate tax is owed, one must first determine the value of the estate. The personal representative must include all property in the estate valuation except where Minnesota law specifically states otherwise. Once the personal representative determines the value of an estate, a system of credits and exemptions may apply. The estate then pays a tax to Minnesota that represents a percentage of the total estate.

Estate tax issues can lead to probate litigation or similar legal conflicts. For example, if the state disagrees with how a personal representative figured the tax, then the state may attempt to impose additional tax on the estate, as well as penalties and interest. On the other hand, if a personal representative makes errors that lead to an estate’s paying too much tax, the heirs may seek to have the personal representative removed.

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