If you’ve spent years building meaningful wealth, you’ve likely factored federal estate taxes into your long-term financial picture. But for Minnesota residents, there’s a second layer of estate tax — one that operates independently from federal rules and catches many families by surprise.
Minnesota is one of a small number of states that imposes its own estate tax, with an exemption that sits well below the federal threshold. Under the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, the federal estate and gift tax exemption was permanently set at $15 million per individual. That change removed many families from federal estate tax liability entirely — but it did nothing to address Minnesota’s separate $3 million exemption. For families with sophisticated financial pictures, that gap demands coordinated, proactive planning.
Understanding Minnesota’s estate tax
Minnesota’s estate tax applies to estates of state residents and, in some cases, non-residents with Minnesota-situs assets, with a taxable estate exceeding $3 million. For non-residents, a common misconception is if the value of Minnesota-situs assets is below $3 million, there will be no estate taxes due. However, Minnesota looks to the value of the entire estate, not just the value of Minnesota-situs assets, to determine whether the taxable estate exceeds the exemption amount.
Unlike some states that apply a flat “cliff” tax when an estate crosses the threshold, Minnesota uses a progressive rate structure: the tax applies only to the amount above the $3 million exemption, with rates ranging from 13% to 16% depending on the size of the taxable estate. Minnesota does not impose an inheritance tax and therefore, heirs are not taxed on what they receive.
The most significant structural difference from federal law is the absence of spousal portability. Under federal rules, a surviving spouse may transfer any unused federal exemption from a deceased spouse to their own estate. Minnesota does not allow this. Each individual must use, or lose, their own $3 million exemption. Without deliberate planning, the first spouse’s exemption may be wasted entirely, and the full estate could be subject to Minnesota estate tax when the surviving spouse passes away.
Strategy 1: The Credit Shelter Trust
For married couples, a credit shelter trust — sometimes called a bypass trust or family trust — is one of the most effective structures available for capturing both spouses’ Minnesota exemptions.
Here’s how this structure typically works: When the first spouse passes away, assets up to the Minnesota exemption amount are directed into a separately held trust rather than passing outright to the surviving spouse. This captures the first spouse’s full $3 million exemption and keeps that value, along with any subsequent appreciation, outside the surviving spouse’s taxable estate. The surviving spouse may still be a beneficiary and receive income and principal from the trust as needed for their lifetime.
Without this structure, assets passing outright to a surviving spouse qualify for the marital deduction and avoid Minnesota estate tax at the first death. This approach defers, rather than eliminates, the tax because the full estate could be subject to Minnesota estate tax when the surviving spouse passes away. A credit shelter trust preserves both exemptions and may meaningfully reduce the family’s overall Minnesota estate tax exposure over time.
Strategy 2: Strategic lifetime gifting
Minnesota imposes no gift tax. This creates an opportunity to reduce the size of a taxable estate through intentional transfers during your lifetime.
Annual exclusion gifts under federal gift tax rules — currently $19,000 per recipient per year — offer one approach. For families with multiple children, grandchildren, or other heirs, consistent annual transfers may add up meaningfully over time. Larger gifts may draw on the federal lifetime exemption and, while they reduce the federal exclusion available at death, they permanently remove the transferred value, along with all future appreciation, from the Minnesota taxable estate. For clients with concentrated positions, growing business interests, or appreciated real estate, a coordinated lifetime gifting strategy may serve as a powerful complement to trust-based planning.
Strategy 3: Dynasty trusts and multi-generational planning
In May 2025, Minnesota enacted a significant change to its trust laws, extending the Rule Against Perpetuities for trusts from 90 years to 500 years. This change positioned Minnesota among the most favorable states for long-term, multi-generational trust planning, commonly referred to as dynasty trusts.
A dynasty trust is a long-duration irrevocable structure designed to hold and distribute assets across multiple generations. When carefully structured, assets transferred into a dynasty trust may be removed from future estate and generation-skipping transfer (GST) taxes for the life of the trust, potentially spanning many generations. The trust may also offer protective features, including shielding assets from creditors and divorcing spouses, while preserving substantial control over distribution terms set by the grantor.
For families with significant accumulated wealth, the ability to fund a dynasty trust with assets that fall within today’s federal exemption — while those assets and all subsequent appreciation remain outside future taxable estates — represents a compelling long-term structure. Minnesota’s 2025 amendment makes it possible to accomplish this approach entirely within a Minnesota-domiciled trust.
Additional planning considerations
Beyond these three core strategies, several additional tools may be relevant depending on your situation.
Marital and QTIP Trusts — A Qualified Terminable Interest Property (QTIP) trust may offer a way to defer Minnesota estate tax at the first death while still providing income to the surviving spouse. This structure allows the grantor spouse to retain control over the ultimate disposition of assets, such as directing them to children from a prior relationship, while still qualifying for the marital deduction.
Qualified small business and farm property subtraction: Minnesota also provides a subtraction of up to $2 million for qualifying small business and farm property. This amount may be combined with the $3 million exclusion for a total subtraction of up to $5 million for qualifying assets. Families with business or agricultural holdings may benefit from evaluating whether their assets meet the applicable criteria.
Domicile and situs planning: For clients with assets in multiple states, questions of domicile (where you are legally a resident) and situs (where assets are located for tax purposes) may affect the scope of Minnesota’s estate tax exposure. Coordination of residency documentation, property ownership structures, and entity design may help manage which assets fall within Minnesota’s reach.
Liquidity planning: Minnesota estate tax is generally due within nine months of the date of death, and extensions may require interest payments. Families with illiquid assets, such as closely held businesses, real estate portfolios, or private investments, may benefit from planning for liquidity in advance to avoid being placed in a position of selling assets on an unfavorable timeline.
Coordinating federal and state planning
One of the more nuanced aspects of Minnesota estate planning today is ensuring federal and state strategies work in a coordinated way. With the federal exemption now permanently set at $15 million per person under the OBBBA, many families have appropriately shifted their focus away from federal estate tax — but Minnesota’s $3 million exemption remains unchanged. The absence of portability means that state-level planning often requires dedicated trust structures that a federal-only strategy may not include.
A thorough approach accounts for both layers, coordinates trust structures to address state and federal exposure, and revisits the plan regularly as tax laws and family circumstances evolve.
Because estate planning at this level of complexity intersects with investment management, tax planning, and long-term financial goals, a coordinated team approach — one in which estate, tax, and wealth planning are integrated — may provide the most cohesive path forward.
-
Yes. Minnesota imposes its own estate tax with a $3 million exemption, independent of the federal estate tax system. As of 2026, the federal exclusion is $15 million per person under the OBBBA, meaning many estates that owe no federal estate tax may still have a Minnesota estate tax liability.
-
No. Unlike the federal estate tax, Minnesota does not allow a surviving spouse to use any unused exemption from a deceased spouse. Each spouse must independently use their own $3 million exemption or it may be lost. A credit shelter trust is a common strategy to preserve both exemptions for married couples.
-
Minnesota uses a progressive rate structure ranging from 13% to 16% on the value of a taxable estate above the $3 million exemption. The tax is not a “cliff” tax — it applies only to the amount above the exemption, not to the entire value of the estate.
-
No. Minnesota does not impose an inheritance tax. Beneficiaries who receive assets from an estate are not taxed on those amounts at the state level.
-
No. Minnesota does not impose a gift tax. This creates a planning opportunity — assets transferred during your lifetime are typically not subject to Minnesota estate tax.
-
A credit shelter trust, also called a bypass trust or family trust, is a trust structure that captures the first spouse’s Minnesota estate tax exemption at death rather than allowing all assets to pass outright to the surviving spouse. Because Minnesota does not allow portability, this type of trust may allow married couples to use both spouses’ $3 million exemptions, potentially reducing the overall Minnesota estate tax exposure.
-
In May 2025, Minnesota amended its Rule Against Perpetuities to allow trusts to remain in existence for up to 500 years, up from the prior 90-year limit. This change enables families to create long-duration irrevocable trusts — known as dynasty trusts — that may preserve wealth across multiple generations while potentially minimizing estate and generation-skipping transfer (GST) taxes.
-
Yes. Minnesota allows a qualified small business and farm property subtraction of up to $2 million, which may be combined with the $3 million exclusion for a total of up to $5 million in deductions for qualifying assets. Families with business or agricultural holdings should evaluate whether their assets meet the applicable criteria with the help of a qualified estate planning professional. [10]
“Estate Tax.” MN Department of Revenue, https://www.revenue.state.mn.us/estate-tax
“The Minnesota Estate Tax.” MN House Research, (Nov. 2025) https://www.house.mn.gov/hrd/pubs/ss/ssesttx.pdf
“Estate Tax in Minnesota: Rates, Exemptions, and Deductions.” Legal Clarity (May 31, 2026) https://legalclarity.org/estate-tax-in-minnesota-rates-exemptions-and-deductions/
“2025 Minnesota Statutes- 501A.01 WHEN NONVESTED INTEREST, POWERS OF APPOINTMENT ARE INVALID; EXCEPTIONS.” Office of the Revisor of Statutes, https://www.revisor.mn.gov/statutes/cite/501A.01
All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Content, research, tools and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy.
