Estate Tax in Minnesota: $3M Exclusion, Rates, and Form M706

The Minnesota estate tax applies to estates worth more than $3 million and is completely separate from the federal estate tax. Because the federal exemption is $15 million for 2026, an estate can owe nothing to the IRS and still face a substantial bill from the state. The tax reaches Minnesota residents on everything they owned anywhere in the world, and it reaches nonresidents on real estate and tangible personal property located in Minnesota.¹

Who the Tax Reaches

If you were a Minnesota resident when you died, the state taxes your entire estate regardless of where the assets sit. A lake cabin in Wisconsin, a condo in Arizona, and investment accounts held out of state all count toward the calculation.¹

Nonresidents face a narrower obligation. If you live elsewhere but own real estate, a business, or tangible personal property physically located in Minnesota, the state can tax that portion. Pass-through entities like LLCs and partnerships are treated as transparent: if the entity owns Minnesota real estate, the state attributes that ownership to the decedent in proportion to their share of the entity.² For nonresidents, the tax is calculated on the full estate first, then multiplied by the ratio of Minnesota property to the total federal gross estate. A nonresident with a $10 million estate that includes $2 million of Minnesota real estate is taxed on 20% of the computed amount.¹

The $3 Million Exclusion

Minnesota subtracts $3 million when calculating the taxable estate. For decedents dying in 2020 and beyond, that figure is fixed and does not adjust for inflation.³ The filing threshold matches: an estate must file Form M706 if the federal gross estate plus adjusted taxable gifts made within three years of death exceeds $3 million.⁴

Only the amount above $3 million is taxed. An estate worth $3.5 million pays tax on $500,000, not on the full $3.5 million.³ The calculation includes essentially everything the decedent owned or had an interest in: real estate, bank accounts, investment portfolios, retirement accounts, life insurance proceeds, and business interests, all valued at date-of-death fair market value.

Rates and Sample Bills

The Minnesota taxable estate is taxed under a graduated schedule set out in Minnesota Statutes 291.03:¹

Up to $7.1 million: 13% flat rate on the entire taxable amount.
$7.1 million to $8.1 million: $923,000 plus 13.6% on the excess over $7.1 million.
$8.1 million to $9.1 million: $1,059,000 plus 14.4% on the excess over $8.1 million.
$9.1 million to $10.1 million: $1,203,000 plus 15.2% on the excess over $9.1 million.
Over $10.1 million: $1,355,000 plus 16% on the excess over $10.1 million.

In practice, most estates that owe the tax pay a flat 13% on everything above the $3 million exclusion. A $5 million estate has a $2 million taxable amount and owes $260,000. A $12 million estate has a $9 million taxable amount and owes roughly $1,188,000. The higher marginal rates only start once the taxable amount exceeds $7.1 million, which corresponds to a gross estate over roughly $10.1 million.

Married Couples and the Portability Trap

Minnesota follows the federal unlimited marital deduction. Property passing to a surviving spouse is not taxed at the first death, regardless of size. The statute also allows a QTIP election for Minnesota purposes even if no federal QTIP election is made, giving planners flexibility to make different choices at the state and federal levels.⁵

Here Minnesota diverges sharply from federal law: the state does not offer portability of an unused exclusion between spouses. Federally, the surviving spouse can claim the first spouse’s unused exemption, effectively doubling a couple’s coverage to $30 million in 2026.⁶ Minnesota has no equivalent. Each person gets one $3 million exclusion, and anything unused at the first death disappears.

That creates a common trap. A couple with a $6 million estate might leave everything to the survivor and pay no state tax at the first death. When the survivor later dies holding the full $6 million, only one $3 million exclusion is available, producing a $3 million taxable estate and roughly $390,000 in Minnesota tax. Planning that uses both spouses’ exclusions, typically through trusts, can eliminate this.

How Minnesota Compares to the Federal Estate Tax

The federal estate tax exemption is $15 million per individual for 2026, or $30 million for married couples electing portability. Congress retained the doubled exemption originally enacted in the Tax Cuts and Jobs Act through P.L. 119-21, setting it at $15 million for 2026 with future inflation adjustments.⁷

The gap between the two thresholds matters. An $8 million estate owes nothing to the IRS but is taxed by Minnesota on $5 million, producing a bill of roughly $650,000. If your net worth is between $3 million and $15 million, you are in the group that owes state estate tax but no federal estate tax. For the rare estate that exceeds both thresholds, the Minnesota estate tax paid can be claimed as a deduction on the federal return.

Even when an estate falls well under $15 million, filing a federal Form 706 can still make sense for married couples. Electing portability of the unused federal exemption requires a federal return regardless of size, and it can protect up to $15 million in additional coverage for the surviving spouse. A simplified late-filing procedure is available for portability elections made within five years of the decedent’s death.⁶

Additional Deduction for Small Businesses and Farms

Minnesota offers a subtraction for family-owned businesses and farms that can shelter up to $2 million in additional value. Combined with the $3 million base exclusion, the effective exemption reaches $5 million for qualifying estates.³

The requirements are strict. For small business property, all of the following must be true:⁸

The trade or business cannot be a passive activity; the decedent or spouse must have materially participated in operations.
Gross annual sales were $10 million or less in the last taxable year before death.
Shares or ownership interests were not publicly traded during the three years before death.
Cash, cash equivalents, publicly traded securities, and assets not used in the business are excluded from the qualified value.
The decedent or spouse continuously owned the property for the required period before death.

Farm property has parallel requirements. The heir must be a family member and must continue operating the business or farm. If the property loses its qualified status within the required period, the estate or heirs face a recapture tax that pays back the savings from the additional deduction.⁹ This deduction matters most for families between $3 million and $5 million where a working farm or business makes up much of the value, since without it heirs may need to sell assets to cover the tax.

Reducing the Estate Through Lifetime Gifts

Giving assets away during your lifetime is one of the more direct ways to reduce exposure. For 2026, the federal annual gift tax exclusion is $19,000 per recipient.¹⁰ A married couple splitting gifts can give $38,000 per recipient annually with no gift tax and no reduction of the lifetime exemption. A couple with two children and four grandchildren could transfer up to $228,000 per year without tax consequences. Direct payments for tuition or medical expenses don’t count against these limits at all.

One caution: Minnesota’s filing threshold includes federal adjusted taxable gifts made within three years of the decedent’s death, so the state effectively looks back three years at certain gifts when deciding whether an estate must file.¹¹ Annual exclusion gifts within the $19,000 limit are not adjusted taxable gifts and don’t trigger the lookback, but gifts exceeding the annual exclusion can pull an otherwise-exempt estate into filing territory.

Filing Form M706 and Paying the Tax

The personal representative must file Minnesota Form M706 if the federal gross estate plus adjusted taxable gifts made within three years of death exceeds $3 million, or if the estate is required to file a federal estate tax return.¹¹ The return and the tax payment are both due nine months after the date of death, matching the federal deadline so executors can work on both filings together.

Minnesota grants an automatic six-month extension for filing the return. No separate request is needed. The extended due date is six months after the regular due date or the length of time the IRS grants to file the federal return, whichever is longer.¹¹ The federal extension uses IRS Form 4768 and also runs six months automatically.¹²

The extension applies to the paperwork, not the payment. The tax is still due nine months after death. Interest begins accruing on any unpaid amount from that nine-month mark, and late-payment penalties can add to the balance.¹³ Executors who expect the estate to owe but don’t yet have a final figure should make a good-faith estimate and pay by the deadline to keep interest charges to a minimum.

1
Minnesota Office of the Revisor of Statutes. Minnesota Code 291.03 – Rates
2
Minnesota Office of the Revisor of Statutes. Minnesota Code 291 – Estate Tax
3
Minnesota Office of the Revisor of Statutes. Minnesota Code 291 – Estate Tax – Section 291.016
4
Minnesota Department of Revenue. Estate Tax Filing Requirement
5
Minnesota Office of the Revisor of Statutes. Minnesota Code 291.03 – Rates – Section: Elections
6
Internal Revenue Service. Frequently Asked Questions on Estate Taxes
7
Congress.gov. The Estate and Gift Tax: An Overview
8
Minnesota Office of the Revisor of Statutes. Minnesota Code 291.03 – Rates – Section: Qualified Small Business Property
9
Minnesota Department of Revenue. Qualified Small Business and Farm Property Deduction
10
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
11
Minnesota Department of Revenue. 2024 Estate Tax Form M706 Instructions
12
Internal Revenue Service. About Form 4768, Application for Extension of Time To File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes
13
Minnesota Department of Revenue. Minnesota 2024 Form M706 Estate Tax Return