Minimizing Your Tax Burden: How Trusts Can Mitigate State and Federal Estate Taxes

Estate taxes can quietly erode the wealth you’ve spent a lifetime building. For families in Bloomington and throughout Minnesota, understanding how trusts fit into a broader estate plan is one of the most practical steps you can take to protect what you’ve worked so hard to leave behind.

The good news is that with the right trust structure in place, it’s entirely possible to significantly reduce, and in some cases eliminate, both state and federal estate tax liability. This post breaks down how that works in plain terms.

Does Minnesota Have Its Own Estate Tax?

Minnesota is one of a handful of states that imposes its own estate tax, separate from the federal estate tax, with its own exemption threshold.

Yes, and the threshold is lower than most people expect. Under Minnesota Statutes Section 291.016, the Minnesota estate tax applies to taxable estates exceeding $3 million. That figure applies to deaths occurring in 2024 and beyond, following adjustments made under recent legislative changes.

By contrast, the federal estate tax exemption sits at $13.61 million per individual for 2024, as established under the Tax Cuts and Jobs Act of 2017. That federal threshold is currently scheduled to sunset at the end of 2025, potentially dropping to roughly half that amount, adjusted for inflation, in 2026 and beyond.

What that means practically is that a Minnesota resident with a taxable estate between $3 million and $13 million could owe state estate taxes while owing nothing at the federal level. Many families in Bloomington don’t realize they’re in this range until it’s too late to plan around it.

How Trusts Can Reduce or Eliminate Estate Tax Exposure

Trusts reduce estate tax liability by removing assets from your taxable estate, sheltering them through exemptions, or splitting them strategically between spouses.

Several trust structures accomplish this goal, each suited to different family circumstances.

Credit Shelter Trusts (Bypass Trusts)

A credit shelter trust, sometimes called a bypass trust, is one of the most common tools married couples use to maximize both spouses’ estate tax exemptions. When the first spouse dies, assets up to the exemption limit are placed into the trust rather than passing directly to the surviving spouse. Those assets are then excluded from the surviving spouse’s taxable estate when they pass away.

This structure is especially useful in Minnesota because the state does not provide portability of its estate tax exemption between spouses, unlike the federal system, where a deceased spouse’s unused exemption may be transferred to the surviving spouse through a portability election. Without a credit shelter trust, a surviving spouse in Minnesota could lose the deceased spouse’s exemption entirely.

Irrevocable Life Insurance Trusts (ILITs)

Life insurance proceeds are often overlooked as a potential estate tax problem. If you own a life insurance policy outright, the death benefit is generally included in your taxable estate. An irrevocable life insurance trust holds the policy outside of your estate, so the proceeds pass to beneficiaries free of estate tax.

Qualified Personal Residence Trusts (QPRTs)

For families whose primary asset is a home, a qualified personal residence trust transfers the property out of your taxable estate at a reduced gift tax value. You retain the right to live in the home for a set term, and at the end of that term, ownership passes to your beneficiaries.

Spousal Lifetime Access Trusts (SLATs)

A spousal lifetime access trust allows one spouse to make a gift into an irrevocable trust for the benefit of the other spouse. The contributing spouse removes the assets from their taxable estate while the beneficiary spouse still has access to trust funds during their lifetime. These trusts require careful drafting, particularly in light of potential changes to the federal exemption.

What Happens When the Federal Exemption Drops?

If the Tax Cuts and Jobs Act sunsets as scheduled, the federal exemption could fall to approximately $7 million per individual in 2026, bringing many more estates into taxable territory.

This is one of the most urgent estate planning issues facing families right now. Trusts funded before the sunset could potentially lock in current exemption amounts under IRS guidance, but acting sooner rather than later is critical. The IRS has issued final regulations (T.D. 9884) confirming that individuals who use the higher lifetime exemption before it decreases will not be subject to a ‘clawback’ tax if the exemption is later reduced.

Waiting to see what Congress does is a reasonable instinct, but it’s a costly one if the exemption drops and you haven’t made use of it. Working with an attorney who understands both Minnesota’s rules and the evolving federal landscape puts you in a much stronger position.

Working With an Attorney Who Understands Both Layers

Minnesota estate tax planning requires an attorney who knows both the state’s unique exemption structure and how it interacts with federal law.

At Sandahl & Damhof, we understand that estate planning conversations can feel heavy. We work hard to make them feel approachable. Our team takes the time to explain every option in plain language, walk through the real numbers that apply to your situation, and help you feel confident in the decisions you’re making for your family.

We serve clients throughout Bloomington and the surrounding Twin Cities area, and we bring a straightforward, personable approach to what can otherwise feel like an overwhelming process. Whether you’re starting your estate plan for the first time or revisiting an existing plan in light of upcoming federal changes, we’re here to help you work through it clearly and without pressure.

Call us at 612-448-3898 or contact us to schedule a conversation with our team.

Last updated: July 2026