High-Net-Worth Estate Planning in Minnesota: Strategies Above the $3 Million Threshold

Estate planning for high net worth individuals and families in Minnesota involves a fundamentally different set of challenges than planning for a typical estate. Minnesota imposes its own estate tax on estates exceeding $3 million—a threshold that is far lower than the $13.61 million federal exemption (2024) and one that captures a substantial number of Minnesota families whose wealth is concentrated in real estate, retirement accounts, life insurance, and closely held business interests.

The interplay between state and federal estate tax, the absence of portability under Minnesota estate tax law, and the potential sunset of the current federal exemption create both urgency and opportunity for proactive planning. High net worth estate planning is not simply about drafting a will—it requires a coordinated strategy that addresses tax minimization, asset protection, business succession, and multi-generational wealth transfer.

The Minnesota Estate Tax Threshold and Its Impact

Minnesota’s $3 million estate tax exemption is deceptively low. The gross estate includes real property (primary residence, investment properties, the family cabin), financial accounts, retirement accounts, life insurance death benefits, closely held business interests, and personal property. When aggregated, many Minnesota families who do not consider themselves “wealthy” discover they exceed the threshold. Minnesota estate tax rates range from 13% to 16%, applied in addition to any applicable federal estate tax.

Core Strategies for High Net Worth Estates

Irrevocable Life Insurance Trust (ILIT)

Life insurance is one of the most common assets that pushes an estate above the Minnesota threshold. If the decedent owned a life insurance policy at death, the full death benefit is included in the gross estate—even though the proceeds pass directly to the named beneficiary outside of probate.

An irrevocable life insurance trust (ILIT) removes the policy from the taxable estate entirely. The trust owns the policy, pays the premiums (funded by gifts from the insured), and receives the death benefit. Because the insured does not own the policy, the proceeds are excluded from their estate for both state and federal tax purposes.

Key ILIT considerations include the three-year look-back rule (transferring an existing policy triggers inclusion if the insured dies within three years), the importance of annual Crummey notices to qualify premium payments as gift tax exclusions, and the selection of an independent trustee. For more detail, see the guide to irrevocable trusts in Minnesota.

Grantor Retained Annuity Trust (GRAT)

A GRAT allows the grantor to transfer assets to beneficiaries with little or no gift tax cost. The grantor places assets into an irrevocable trust and retains the right to receive annuity payments for a fixed term. At the end of the term, remaining assets pass to beneficiaries.

If the trust assets appreciate faster than the IRS’s assumed rate of return (the Section 7520 rate), the excess growth passes to beneficiaries free of gift and estate tax. Zeroed-out GRATs—where annuity payments are structured to return the entire initial value plus the assumed return—have become a standard technique for transferring appreciation with zero gift tax exposure.

Family Limited Partnership (FLP) and Family LLC

A family limited partnership or family LLC allows the senior generation to transfer business interests or investment assets to the next generation at a discounted value. The senior generation retains control as general partners or managing members while transferring limited partnership or membership interests to children and grandchildren.

The transferred interests are eligible for valuation discounts—typically 15% to 35% for lack of marketability and lack of control—reducing the taxable value for gift and estate tax purposes. However, the IRS scrutinizes FLPs carefully. The entity must have a legitimate business purpose beyond tax reduction, operate with proper formalities, and the senior generation must not retain excessive control or use partnership assets for personal expenses.

Generation-Skipping Trust (GST Trust)

For families focused on preserving wealth across multiple generations, a generation-skipping trust avoids estate tax not only at the first generation but also at the second. Without a GST trust, assets are potentially subject to estate tax at each generational transfer—when the grantor dies, when their children die, and so on.

By allocating the grantor’s generation-skipping transfer tax exemption (currently $13.61 million at the federal level) to the trust, assets can pass from grandparent to grandchild—and beyond—without triggering estate tax at the intermediate generation. Under Minnesota’s trust code (Minn. Stat. Chapter 501C), trusts can now endure for up to 500 years, making multi-generational planning far more viable than under the old rule against perpetuities.

Credit Shelter Trust (Bypass Trust)

Because Minnesota does not offer portability of the estate tax exemption between spouses, the credit shelter trust remains essential for married couples. At the first spouse’s death, assets up to the $3 million Minnesota exemption are funded into an irrevocable trust for the benefit of the surviving spouse and descendants. These assets are excluded from the surviving spouse’s estate at the second death, effectively preserving both spouses’ exemptions and shielding up to $6 million from Minnesota estate tax.

Without a credit shelter trust, the first spouse’s unused Minnesota exemption is permanently lost—a planning failure that can cost hundreds of thousands of dollars in unnecessary estate tax.

Charitable Planning Strategies

For high net worth individuals with philanthropic objectives, charitable planning serves the dual purpose of supporting meaningful causes and reducing estate tax liability. Key tools include charitable remainder trusts (CRTs), which provide income to the grantor for a period with the remainder passing to charity, generating an income tax deduction and removing assets from the taxable estate; charitable lead trusts (CLTs), which reverse the structure by paying income to charity first and then transferring remaining assets to family at a reduced tax cost; and donor-advised funds (DAFs), which offer flexibility for ongoing philanthropy with an immediate income tax deduction.

State Residency Considerations

Because Minnesota is one of only a handful of states with its own estate tax, some high net worth individuals consider changing residency to a state with no estate tax (such as Florida, Texas, or Nevada). However, the Minnesota Department of Revenue scrutinizes claimed changes of domicile carefully, examining the totality of circumstances—including where the individual spends most of their time, where they vote and bank, and whether they maintain substantial connections to Minnesota. A change of domicile must be genuine and well-documented to withstand scrutiny.

Coordinating Federal and State Estate Tax Planning

Because the exemption amounts differ dramatically ($3 million state vs. $13.61 million federal), a strategy that is optimal for federal purposes may not be optimal for Minnesota purposes. Minnesota allows a state-only QTIP election, permitting different treatment of a qualified terminable interest property trust at each level—a tool that experienced estate planning attorneys use to optimize both exposures simultaneously.

The current $13.61 million federal exemption is scheduled to sunset after 2025, potentially reverting to approximately $5 to $7 million (adjusted for inflation). If this occurs, significantly more estates will face both state and federal estate tax, making coordinated planning even more critical.

Asset Protection and Prenuptial Agreements

High net worth individuals—particularly business owners and professionals—face greater exposure to lawsuits and creditor claims. Asset protection trusts can shield assets by removing them from direct ownership. While Minnesota does not permit self-settled domestic asset protection trusts, a Minnesota resident may establish a trust in a jurisdiction with more favorable laws, provided the transfer is not made to defraud existing creditors. Irrevocable trusts established for the benefit of a spouse (SLATs) or children also provide asset protection while keeping assets accessible within the family unit.

A prenuptial agreement can further complement the estate plan by defining separate versus marital property, waiving or limiting the elective share under Minn. Stat. § 524.2-213, and coordinating with trust structures. Minnesota courts enforce prenuptial agreements under the Minnesota Uniform Premarital Agreement Act (Minn. Stat. § 519.11), provided both parties made full financial disclosure and entered the agreement voluntarily.

The Importance of Ongoing Review

High net worth estate plans are not static documents. Asset values fluctuate, tax laws change, family circumstances evolve, and planning strategies that were optimal five years ago may be inadequate or counterproductive today. A comprehensive estate plan for a high net worth Minnesota family should be reviewed at least every two to three years—and immediately upon any significant life event, change in tax law, or material change in asset values.

The strategies described here—ILITs, GRATs, FLPs, generation-skipping trusts, charitable vehicles, and credit shelter trusts—are sophisticated tools that require careful coordination to function properly. Each must be integrated into a cohesive plan that accounts for the client’s specific financial situation, family dynamics, business interests, and philanthropic goals, all within the framework of both Minnesota and federal law.