I think that there are many good reasons for a federal estate tax, even though it currently only applies to married couple estates above $22.8 million (half of that for singles). While some people may argue that it is a double tax, most estates that size involve never-taxed capital gains.
It is also difficult to suggest that a society which believes everyone has an equal shot can say that those who have inherited wealth are starting in the same place as those who began with nothing. And a society which values the fruits and benefits of hard work may look askance at those who made it financially and are able to pass with limited restrictions all that accrued to them to heirs who may have done little work to earn it.
This tax is also progressive; those with the most pay the most. While there are a number of easy ways to reduce or avoid the estate tax (charity, the unlimited marital deduction and certain gifting strategies being just three) and complicated ways as well (all sorts of trusts and limited partnerships), the federal estate tax affects all U.S. citizens equally. While you can renounce citizenship and emigrate, this is not a desirable option for most people.
That is what makes Minnesota’s state estate tax troubling. In 2020, the Minnesota tax on married Minnesotans begins at $6 million estates (slightly higher for farmers) that are planned well. Thirty-three states have no state-level gift, estate, or inheritance taxes. Some of those states have warm climates with either no or lower state income taxes as well.
The easiest way to avoid paying Minnesota estate tax is to disgorge yourself of Minnesota property and move. While only 200 to 250 estates a year are going to be paying Minnesota estate tax, according to a July 2017 report for the Minnesota House of Representatives, the question is does this tax actually make sense?
There are extremes on both sides — people who will move simply for tax reasons and those who will stay regardless of tax impact. Most of us know that Minnesotans have a relatively high tax burden between income, property and sales taxes. I am not suggesting they should be lowered — that is an entirely different article. But as long as people are willing to pay those taxes, it makes sense to create incentives to collect them for as long as possible. The current estate tax is a disincentive for a number of reasons.
First, even though few families pay the estate tax, it gives an additional excuse for those who wish to avoid all Minnesota taxes to leave. Just like many people like to live in a city with the arts even though they may not ever go, there are people who want to leave places with high taxes, even though they don’t earn or own enough to pay them.
Second, the estate tax causes some people to say goodbye before they ever leave. It takes some effort to fully relocate. Those who are intending to relocate begin to withdraw their charitable support and transfer it to their new locale. Anyone who knows someone who is philanthropic and has moved also knows that at least a portion of their money is no longer directed to Minnesota causes.
Third, it is important for people to comply with residency requirements if estate taxes are a driver, and they must vigilantly watch the time that they spend in Minnesota so that they are not considered residents in an audit. The earlier nonMinnesota residency is established, the less money that Minnesota collects in all sorts of tax revenue.
Fourth, the estate tax itself is unpredictable as to timing and amount. The state doesn’t know who will die in any given year so the revenue from the estate tax conservatively go into the general fund. This is not a small amount of money for the State of Minnesota (generally more than $100 million dollars a year), but it is not money that can be counted on for state budgeting purposes.
There may be a variety of reasons why people move to Minnesota just as there are a number of reasons why they leave. While seniors may appreciate some of the things that our taxes buy — health care, green space, education for the grandchildren — they would not be attracted to the high estate tax.
We also should not create reasons for affluent seniors who support those services through their tax dollars to leave. Seniors who pay the most in taxes are also those who can most easily afford multiple residencies, making it easier for them to move. Their interest in being in Minnesota for more than six months may outweigh their desire to avoid paying income and estate taxes, but there can be a tipping point.
Changing our estate tax is a signaling mechanism that we understand there are legitimate considerations in our tax policies and that we would love for those who have achieved their success in Minnesota to stay here. We don’t need to eliminate the estate tax, we could simply match it to federal levels as a way to maintain Minnesota’s interest in tax fairness without causing someone who has typically paid significant Minnesota taxes throughout their life to consider leaving toward the end of it.
Ross Levin is the chief executive & founder of Accredited Investors Wealth Management in Edina.