There have been significant well publicized estate planning legislative updates in 2017, including the increase in the Minnesota estate tax exemption amount and the proposed repeal of the federal exemption. Two lesser-known changes impact one of Minnesota’s most popular segments – snowbirds.
“Snowbird” technically refers to people who live in northern states, but move south for the winter, like a migrating bird. However, many snowbirds eventually decide to spend more time in warmer climates. This might be for the warmer weather, but is often for tax reasons as well. This group will often try to become permanent residents of the southern state to avoid Minnesota tax.
The Minnesota legislature passed two laws with significant impact on snowbirds in 2017. The first provides some breathing room for Minnesota snowbirds, allowing them to continue using Minnesota attorneys and financial advisors when attempting to establish residency in another state. The second change, though, is a tightening of Minnesota rules regarding the recognition of capital gains by business owners.
The following updates will be important to our clients who are changing residency, as well as their advisors who may not have heard about these little-known updates.
The State of Minnesota Loosens Its Residency Requirements
Use of Minnesota Professionals and Financial Institutions No Longer Considered When Determining Residency.
It is well known to our clients that the state of Minnesota has higher than average income and estate taxes. Kiplinger recently named Minnesota second on its list of the Least Tax-Friendly States in the U.S.
In addition to being heavy-handed in its taxation, Minnesota is also aggressive when it comes to determining whether a person remains a resident of the state. In the appropriately named Minnesota Department of Revenue, Income Tax Fact Sheet 1,” Minnesota sets forth 26 factors that it considers when deciding whether someone should be taxed in the state. These factors range from the number of days spent in Minnesota versus another state, to where you go to church or store your keepsakes.
One factor that has caused frustration for attorneys and other professionals relates to Minnesota’s consideration of where a person does business. For example, if a person’s primary banking relationship was in the state of Minnesota, this would be a factor that the state could use to argue that person was subject to Minnesota’s income tax. The same was true for attorneys, accountants, financial planners, and other professionals.
This factor was well known to professionals in other states, like Florida. Following a high-profile Minnesota Supreme Court decision that NBA Referee Ken Mauer (and cousin of Joe Mauer) was a resident of the state of Minnesota despite owning homes in both Florida and Minnesota, attorneys in Florida began advising Minnesota snowbirds that they should stop using Minnesota attorneys and seek local counsel. One key factor in the court’s decision was that Mauer deposited checks into a Minnesota bank account.
After considerable lobbying from banking and professional industries, Minnesota has passed a statute prohibiting the Department of Revenue from considering these financial and professional relationships when determining residency for taxation. Specifically, the following advisors will not be considered:
- Certified public accountant
- Financial advisor
- Bank or other financial institution
- Trust company
The takeaway is that a snowbird may continue using Minnesota banks and professionals without it being considered in determining the person’s residency. Our relationships with clients are often long-standing and built on trust over time. Clients should be aware of this change so that they will not be susceptible to misleading advertising attempts from out-of-state professionals. Advisors should be aware as well so that they can continue their own valued relationships.
And, in the Next Breath…
Minnesota Tightens Capital Gain Recognition After Sale of Business
Many of our snowbird clients are also business owners. Their long-term planning may involve selling their business and moving to another state. Whether their business is sold to a family member, employee, or a third party, it is not unusual for the sale to be an “installment sale.”
The Internal Revenue Service defines an installment sale as one where at least one payment from the buyer occurs after the tax year of the sale. For example, where a business owner sells their business with 20% payment due at closing, and the other 80% divided into installments over the next four years. This can be beneficial to the seller, because the gain from the sale of the business is spread out over the period of the installments. This defers the tax on the sale, and helps to keep the taxpayer’s marginal tax rate low. Like the IRS, the state of Minnesota allows installment sales to be taxed over the period of the installments.
A new Minnesota statute, passed in May of 2017, tightens the rules for non-resident sellers of an S corporation or partnership. For businesses sold in 2017 or later, if the seller of a business that operated in the state of Minnesota is a non-resident, the gain will be accelerated and become due in the year of sale.
In addition, sellers who are Minnesota residents at the time of sale, but become non-residents after the sale of the business, will need to accelerate the remaining installments. For example, a resident sells their business in 2017, receiving 20% of the purchase price. In 2018, the person becomes a resident of the state of Florida. Upon changing residency to Florida, tax on the remaining 80% of the sale will become due to the state of Minnesota. This can, of course, have significant tax consequences.
This harsh consequence can be avoided if the taxpayer enters into an agreement with the Minnesota Department of Revenue. In the agreement, the taxpayer must agree to file Minnesota tax returns for the remaining period of the installment, and to pay tax on installments as it becomes due. While this seems simple enough, there may be reasons that the taxpayer would prefer to not file continuing returns with the state of Minnesota.
This change is a trap for the unwary. Business owners who plan to sell their business and then move out of the state of Minnesota should recognize the need for preplanning. With both estate and business planning, the harsh consequences of this new law can potentially be minimized, or avoided altogether.
For more information on creating or updating your estate plan, contact Cameron Kelly at 715.381.7112 or firstname.lastname@example.org.