On July 20, 2011, Governor Dayton signed an Omnibus Tax bill, which will eliminate the Minnesota estate tax on many “qualified” small businesses and “qualified” farms. The bill excludes from the Minnesota taxable estate $4,000,000 or the value of such qualified property, whichever is less. This exemption is in addition to the $1,000,000 exclusion from estate tax allowed to all individuals.
The new provision is complex, and a number of provisions will not be clear until there are regulatory or judicial interpretations. However, it is likely to provide significant benefits to many families. It is effective for the estates of persons who die after June 30, 2011.
An understanding of the statute will require complying with a number of rules and defined terms which that are new to the Minnesota estate tax. In general, the statutory framework requires that the decedent or his or her spouse owned and “materially participated” in the operation of the property for 3 years before the decedent’s death (narrow exceptions are provided in the case of certain retired or disabled owners who materially participate in operations before such retirement or disability). The property must pass to a “qualified heir” and both the estate and the qualified heir must agree to pay a 16% tax on such property if he or she does not continuously “materially participate” in the operation of such for 3 years after the decedent’s death.
A qualified small business is defined as a trade or business:
• Which had gross annual sales for the most recent tax year of $10 million or less,
• It may be owned directly, or indirectly as a result of ownership of shares of stock or other ownership interests,
• Cash or cash equivalents are not treated as part of the business.
A qualified family farm is defined as:
• A farm subject to the requirements of the Minnesota Statutes Section 500.24. The Minnesota Department of Agriculture has ruled that property in the CRP program is not subject to this section, and therefore it may be excluded from benefiting under this provision.
• The farm must be classified for tax purposes as an agricultural homestead.
• Unlike the qualified small business provision, the statute does not directly address property owned indirectly as a result of ownership of shares of stock or other ownership interests.
A qualified heir is a spouse, an ancestor, a descendant, or a spouse of a lineal descendant who inherits the qualified small business or family farm and who agrees to continue to use the property as a qualified small business or farm and to repay the recapture tax if the property ceases being used by the qualified heir during the 3 year recapture period.
The statute does not give any guidance with respect to the qualification requirements for interests in businesses or farms inherited by family members in a trust. This is unfortunate. Assume a child is the primary beneficiary of a trust, and the child’s descendants are the secondary beneficiaries. Who has to sign the recapture agreement? The child only? Or the child, and his or her descendants? In the latter case, it may be necessary to get approval of the recapture agreement with respect to any minor or unborn descendants (this is the case with respect to the Federal Special Use Valuation provision which the Minnesota statute is loosely based upon).
To qualify for this provision in the case of leased farm property, the landowner will need to be an active participant in a crop share lease. A cash lease will not qualify.
Hopefully, the Minnesota Department of Revenue will soon provide guidance on its interpretation of this new and very important provision.
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