New View of Pass-Through Entities in Relation to MN Estate & Gift Taxes

/ July 1, 2013

House - iStockWe have posted a few updates on the 2013 MN Omnibus Tax Bill (the “Bill”) and the changes the Bill brings to MN’s estate and gift taxes (see Erik Doerr’s post, 2013 MN Omnibus Tax Bill, and Maggie Green’s post, Minnesota Gift Tax 2013).  Another change that comes with the passing of this Bill is the way the MN Department of Revenue (“DOR”) will view some pass-through entities that hold MN property.

As we have discussed in the past, if MN residents own property outside of the state of MN, they may want to consider putting that property in either a MN pass-through entity, such as an LLC, or a trust to avoid an ancillary probate in that other state (see my post, Limited Liability Company in Estate Planning). Non-Minnesota residents often use this planning tool too for property located in the state of MN. A non-Minnesota resident might form an LLC in the state in which he or she resides and transfers the MN property into that non-MN LLC.

However, with the passing of the Bill, MN DOR will disregard the pass-through entity if the entity holds property located in the state of Minnesota. When a non-MN resident dies, if he or she owns interest in a pass-through entity that holds Minnesota real or tangible personal property, MN DOR will look beyond the entity and view the property as owned by the non-MN resident decedent. Therefore, the non-MN resident decedent may be exposed to MN gift and estate taxes.

The text of the change can be read here and scrolling to line 134.31. A pass-through entity, for purposes of this section of the Bill, includes:

  • An entity electing to be taxed as an S-corporation;
  • An entity taxed as a partnership;
  • A single-member LLC or similar entity, regardless of whether it is taxed as an association or is disregarded for federal tax purposes; or
  • A trust to the extent the property is includable in the decedent’s federal gross estate.

This change applies to decedents who have died after December 31, 2012.

If this change affects you or to discuss various tax planning strategies for your estate, be sure to consult with an attorney or CPA.