Minnesota Estate Tax and Property Ownership: Why Residency Alone Does Not Shield Families from Tax Liability

Introduction

Ten states, including Minnesota, have an estate tax. Many Minnesotans believe that if they relocate to another state—particularly one without an estate tax—they can avoid Minnesota’s estate tax altogether. Unfortunately, the rules are not so simple. Minnesota taxes the assets of its residents at death, and the value of tangible assets located within the State of Minnesota owned by non-residents at death. In other words, you cannot necessarily escape Minnesota estate tax by moving away. A Minnesota cabin, farmland, or even a business presence in the state can all create “nexus” or connection justifying the imposition of Minnesota estate tax. Without careful planning, children and heirs may be surprised by a tax bill that could have been minimized or avoided through foresight.

This article will first explain the statutory framework that applies when a taxpayer dies owning Minnesota-sited property, illustrated with practical hypotheticals. We will then turn to strategies that can be used to mitigate the tax burden, including the use of gifts, disclaimers and Minnesota exemptions.

Overview of Minnesota’s Estate Tax

Minnesota imposes an estate tax on a resident’s assets, including real, personal, tangible, and intangible property, owned at death and located within the State of Minnesota, less certain deductions such as the unlimited Marital Deduction for transfers to a surviving spouse. Non-residents are also taxed on the value of their estate to the extent tangible property is “sited” or located within Minnesota. Specifically, the Minnesota gross estate includes the value of assets owned by a person wherever located worldwide, “excluding . . . any property included in the estate which has its situs outside Minnesota, and (b) including any property omitted from the federal gross estate which is includable in the estate, has its situs in Minnesota, and was not disclosed to federal taxing authorities.”¹ Real property and tangible personal property are normally considered “sited” in the state or county where it is located.

Conversely, the location of intangible personal property, such as stocks, bank accounts, investment accounts, closely-held business interests, etc., is determined by the primary residence of the deceased taxpayer. Minnesota generally cannot tax the value of intangible property owned by a non-resident. However, a person cannot avoid Minnesota estate tax by holding Minnesota real or personal property in a passthrough entity and then moving out of state. Minnesota treats the business entity as through it does not exist. The entity’s assets are deemed to be personally owned by the deceased taxpayer. If more than one person owns the company, ownership of the Minnesota sited property is attributed to the deceased taxpayer in proportion to his or her percentage ownership interest.

The Minnesota estate tax varies between 13% and 16% with each tax bracket increasing by $1 million increments. Similar to the federal unified credit, Minnesota has a basic exclusion of $3 million that reduces the value of the taxable estate. No Minnesota estate tax is owed by estates valued at $3 million or less (regardless of residency). The estates of Minnesota residents may also be eligible for additional $2 million deduction for the value of certain Qualified Farm Property and Qualified Small Business Property. In total, up to $5 million dollars can escape estate tax.

Minnesota Estate Tax on Non-Residents and Residents with Foreign Property

Minnesota residents who own real estate or tangible assets outside Minnesota, as well as non-residents with Minnesota property, must contend with complex rules to determine how much of their estate is subject to Minnesota tax. To start with, Minnesota treats the deceased taxpayer as if all property owned by them at death is subject to Minnesota estate tax, less the $3 million Minnesota estate tax exemption and other applicable deductions. This is known as the Minnesota taxable estate. The Minnesota taxable estate is then used to calculate the initial amount of Minnesota estate tax by applying the marginal tax rates in the table above. The resulting tax liability is further reduced proportionally by the value of Minnesota sited property over the total value of the decedent’s estate—also known as the federal gross estate.

Example 1 – Minnesota Resident w/ Vacation Home

Dan Smith is a Minnesota resident with a $5 million gross estate—$1 million of which is attributed to a Florida vacation property. Dan passes away in 2025 leaving behind three children and no surviving spouse. Dan’s estate does not qualify for any additional deductions. How much estate tax is owed to Minnesota? The answer is $208,000.

Example 2 – Minnesota Resident Relocates to Arizona

Donald Schmidt is a retired farmer with no spouse and four children. Donald currently has a $7 million estate. His estate consists of $4 million in qualified farm land, $1 million in an Arizona residence, and $2 million worth of investments. Donald decides to move to Arizona as a permanent resident, but passes away eight months later. The result is that Donald’s estate owes $297,143 in Minnesota estate tax.

The above examples underscore a critical point: non-residents do not escape Minnesota estate tax liability simply because they live elsewhere. Minnesota will recover its share of estate tax attributable to Minnesota sited property.

Mitigating Minnesota Estate Tax Through Pro-Active Planning

While Minnesota’s estate tax rules can be rigid, several strategies remain available to reduce Minnesota estate tax exposure. These strategies primarily involve maximizing available exemptions and deductions, and reducing your Minnesota taxable estate through gifts, sales, tax deferred exchanges, and disclaimers.

The $3 million Minnesota estate tax exemption is available to residents and non-residents alike. As a result, a taxpayer at or near the Minnesota exemption can implement a gifting program to make use of the federal gift tax annual exclusion. Each completed gift will reduce the taxpayers gross estate with the goal being to reduce the taxpayers estate below $3 million. For the 2025 calendar year, each person can gift $19,000 per year per donee free of tax consequences. For instance, a father of four could gift $19,000 to each of his children for a total $76,000.

It should be noted that Minnesota does not have a gift tax. It may be appropriate for individuals without a federal taxable estate ($15 million in Unified Credit for 2026) to give above and beyond the annual gift tax exclusion; however, those gifts will be clawed back into a decedent’s Minnesota taxable estate if he or she passes away within three years of the gift. Assets will not be clawed back into your Minnesota estate if sold for fair compensation. Older taxpayers residing outside of Minnesota should consider selling Minnesota assets for cash, which would be considered intangible personal property for Minnesota estate tax purposes. Your attorney or accountant will need to weigh the income tax liability of the sale against the estate tax exposure caused by retaining Minnesota assets in your taxable estate.

As to real estate, commercial real estate or real estate held for investment or business purposes may qualify for tax deferred treatment under Internal Revenue Code 1031—also known as a 1031 exchange. While an in-depth discussion of 1031 exchanges are beyond the scope of this article, most real estate is considered “like-kind” for other real estate. Bare farmland generally can be exchanged for improved real property, such as an apartment building. In this scenario, an Arizona resident whose only Minnesota sited property is real estate could eliminate their Minnesota estate tax liability by exchanging this land for commercial real estate property located in another state without an estate tax.

Example 3 – Maximizing Estate Deductions

Maximizing available deductions if also important. Turning back to Example 2, how could we have structured Donald’s estate to transfer his wealth in a more tax efficient manner? Remember that Donald had $4 million in qualified farm real estate. By moving to Arizona, Donald gave up the homestead status of his farmland and lost $2 million in additional deductions for Qualified Farm Property. Donald’s estate would have saved $37,143 if Donald had remained a Minnesota resident and split his time between the two states.

Disclaimers provide one of the few post-death options to mitigate tax liability for those decedent’s who failed to plan around these issues. In simple terms, a persona can disclaim (or refuse) to accept property from a decedent. A person making the disclaimer is usually treated as having predeceased the decedent taxpayer. As a result, the assets that would have gone to the disclaimant will pass to other persons named in the decedent taxpayer’s will or trust, or if none, to other heirs-at-law in accordance with the Minnesota laws of intestate succession. A qualified tax disclaimer must be irrevocable, in writing, describe the disclaimed assets, and delivered to the decedent’s personal representative or trustee within 9 months of the decedent’s death.

Disclaimers can be strategically employed to change the proportion of Minnesota-sited property in the estate, along with the corresponding estate tax liability.

Example 4 – Disclaimers Involving a Married Couple

Warren and Veronica are Florida residents. The couple collectively have $10 million in assets. Their respective estates have not been equalized. Warren owns $7 million with $3 million in Minnesota sited business property. Veronica owns $3 million in non-Minnesota sited property. Warren passes away in 2025 leaving all of his estate to Veronica, except for those assets which she disclaims. Disclaimed assets go to a disclaimer trust for the benefit of Veronica and the parties’ surviving children. Veronica passes away six months after Warren.

No Minnesota estate tax is owed by Warren’s estate because of the unlimited Marital Deduction, but the value of Veronica’s estate has been increased by Warren’s assets, which include Minnesota sited property. If no disclaimer is made by Veronica’s Personal Representative, her Estate will owe $273,000 in Minnesota estate tax.

However, Veronica’s Personal Representative could make a qualified disclaimer shortly after her passing to push the Minnesota farmland back into Warren’s taxable estate. Warren’s estate would not owe any Minnesota estate tax because all of the Minnesota farmland would be sheltered from estate tax by Minnesota’s $3 million exemption. Likewise, Veronica’s estate would not be liable for Minnesota estate tax because it wouldn’t hold any Minnesota sited property. In addition, Veronica would have indirect access to the land and income there from under the terms of the Disclaimer Trust.

Conclusion
Minnesota residents face worldwide taxation, while non-residents remain exposed on their Minnesota-sited tangible property. The state’s $3 million exemption offers some relief, and tools such as disclaimers provide opportunities to reshape the taxable estate after death, but these measures require foresight. Without proactive planning, families may be caught off guard by how aggressively Minnesota asserts its estate tax jurisdiction.

The lesson is simple: Minnesota estate tax does not stop at the border. Real estate, equipment, and business assets anchored in Minnesota tie heirs to Minnesota’s tax system, regardless of where the decedent lived. Careful planning—before and even after death—can mean the difference between preserving wealth and writing an unexpected check to the state of Minnesota.

The information provided in this article is not intended to and does not constitute legal advice. The statements herein are for general informational purposes only. Should you have a question about your specific situation, it is recommended that you consult with a licensed attorney or other professional.