Tax Saving Opportunity for Minnesota Qualified Small Businesses

An unexpected outcome to the 2011 Minnesota budget crisis is the portion of the Minnesota Legislative Special Session budget bill that will help small business owners and farm families transition their businesses to the next generation with less estate tax.

Until recently, the amount any decedent could pass through their estate without incurring Minnesota estate tax was $1 million. This new Minnesota law exempts estate taxes up to an additional $4 million for estates that include a “qualified small business property” or “qualified farm property.” This new exemption amount is in addition to the $1 million exemption that still applies to all Minnesota estates.

This change brings Minnesota in line with the federal estate tax rules exempting estates of $5 million or less from federal tax. This new exemption only applies to estates where the decedent died after June 30, 2011, and the estate includes a small business or farm property that meets the following specific criteria.

A Qualified Small Business Property is a business property which:

• The decedent or decedent’s spouse materially participated in the business in the year before the decedent’s death;
• The business has annual gross sales of less than or equal to $10 million during the taxable year immediately preceding the decedent’s death;
• The decedent owned the business property continuously for three years immediately prior to the decedent’s death;
• The property will be continuously operated by a family member for three years following the decedent’s death, or pay a recapture tax; and 
• The estate or qualified heir must agree to pay the recapture tax at a flat 16% rate if the family operation of the property does not continue for three years following the decedent’s death.

A Qualified Farm Property is farm property which:

• Qualifies under Minnesota law as a family farm actively engaging in farming;
• Is classified as the homestead of the decedent or decedent’s spouse;
• Is classified as agricultural land and buildings;
• Was continuously owned by the decedent for the three-year period ending with the decedent’s death;
• A family member continuously uses in trade or business for three years following the decedent’s death, or pay a recapture tax; and
• The heir must agree to pay any recapture tax, if applicable, for the three-year period following the decedent’s death at a flat 16% rate.

Individuals who may have a qualified small business property or qualified farm property that is estimated to be worth more than the previous $1 million exemption amount should review their business succession and personal estate plans to confirm their plan takes full advantage of this new deduction.

This is a tremendous tax savings opportunity for those who qualify.