Minnesota Estate Tax Changes 2011

Last summer, as part of ending the 20-day state government shutdown that began July 1, 2011, Governor Dayton signed an omnibus tax bill that contains estate tax relief for qualifying small business and farms.  The bill’s stated purpose is to allow farms and small businesses to stay in the family. This post provides a brief overview of the estate tax changes and what it means to Minnesota families.

Being raised on a farm in southeastern Minnesota, I know how important it is to keep the family’s farm heritage preserved for future generations. 

The new estate tax law changes the exemption amount for certain small business and farm properties. The law essentially attempts to align the Minnesota exemption with the federal exemption of $5 million. Currently, under Minnesota law the exemption is only $1 million per person. However, for those meeting the necessary requirements the exemption goes up to $5 million. Qualifying small business and farm properties are those that will pass to a qualifying heir – that is, one who will continuously use the property for three years after the date of death. This would allow most family small businesses and farms to avoid paying any estate tax at all so long as they qualify.

A small business must satisfy all of the following requirements to qualify for the exemption:

  1. Its value was included in the federal adjusted taxable estate;
  2. It must be a closely held business;
  3. The decedent or decedent’s spouse must have been engaged in or materially participated in the trade or business;
  4. The gross annual sales of the business are $10 million or less;
  5. The decedent continuously owned the property for the three-year period before the date of death;
  6. The business must pass to a qualifying heir who must use it continuously in the operation of the trade or business for three years following the date of death of the decedent; and
  7. The estate and the qualified heir elect to treat the property as a qualified small business property.

farm property must satisfy all of the following requirements to qualify for the exemption:

  1. Its value was included in the federal adjusted taxable estate;
  2. The property consists of a farm, as defined by section 500.24 of Minnesota law (farm organizations statute), and was classified as the decedent’s or decedent’s spouse’s agricultural homestead, and as a class 2a property;
  3. The decedent continuously owned the property for the three-year period before the date of death;
  4. The farm property must pass to a qualifying heir who must use it continuously in the operation of the trade or business for three years following the date of death of the decedent; and
  5. The estate and the qualified heir elect to treat the property as a qualified farm property.

The new law is an attempt to make it easier to keep farms and small business in the family by recognizing the increasing value of such property. Ensuring strict compliance with the law will be key for any family wanting to take advantage of this relief.

 UPDATE: the qualified farm property deduction requirements were changed so that the property must continue to be class 2a property only; there is no longer a requirement that the qualifying heir actually farm the property.

About mnfarmbusinesslaw

I am an attorney in Rochester, Minnesota, practicing in the areas of estate planning, probate, and business and farm law.
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