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This post has been adopted form the Minnesota Department of Revenue’s Tax Fact Sheet, Qualified Small Business Property and Qualified Farm Property Deduction.

Minnesota: Estate Tax Fact Sheet 2

This fact sheet explains the qualified small business property and qualified farm property exclusion for Minnesota estate tax purposes.

What’s New in 2013

A new law passed during the 2013 legislative session clarified and changed parts of this deduction. These changes include:

  • Clarified that “family member” includes trusts whose present beneficiaries are all family members.
  • Clarified the material participation requirement for qualified small business property.
  • Clarified that publicly traded securities and assets not used in the operation of the trade or business are not qualified property.
  • Clarified the property tax classification requirements for qualified farm property.
  • For qualified farm property, removed the requirement that for three years after decedent’s death a family member must continuously use the property in
  • the operation of the trade or business and added a requirement that the property must maintain its class 2a property-tax classification during that three year period.
  • Clarified replacement property rules for sole proprietors for the qualified small business property.
  • Created an informational return requirement during the three-year period after decedent’s death.

Overview

Under the Federal Economic Growth and Tax Relief Reconciliation Act of 2001, the federal estate tax exemption amount was increased and the credit for state death taxes was phased out between the years 2002 and 2005.

Under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, the federal estate tax exemption amount was increased to $5 million. This means that up to $5 million of assets can pass from an individual at death without incurring federal estate tax.

Minnesota did not adopt the above federal changes. As a result, the filing requirement and the calculation of the Minnesota estate tax continues to be based under the federal law in effect prior to the changes enacted in 2001. Thus, the Minnesota exemption amount is limited to $1 million. This means that only $1 million of assets can pass from the decedent at the time of death without incurring Minnesota estate tax.

Under a new law passed during Minnesota’s 2011 special session, a new exclusion is available from the Minnesota adjusted taxable estate. This exclusion is limited to decedents dying after June 30, 2011, who owned qualified small business property or qualified farm property and passed that property at death to a qualified heir. This exclusion cannot exceed $4 million. Qualified heirs must pay a recapture tax if the qualified heir disposes of any interest in the qualified property (other than by a disposition to a family member) or if a family member ceases to use the qualified property in the operation of the trade or business.

Qualified Small Business Property

Qualified small business property must meet all of the following requirements:

  1. The value of the property was included in the decedent’s federal adjusted taxable estate, which is after deductions, including debts, expenses and bequests to a surviving spouse.
  2. The property consists of trade or business property (or shares of stock or other ownership interests that are not publicly traded).
  3. The decedent or decedent’s spouse materially participated in the trade or business during the taxable year that ended before the decedent’s death.
  4. The trade or business had gross annual sales of $10 million or less during the last taxable year that ended before the decedent’s death.
  5. The property does not consist of cash or cash equivalents.
  6. The decedent continuously owned the property for the three-year period ending at the decedent’s death.
  7. A family member continuously uses the property in the operation of the trade or business for three years following the decedent’s death.
  8. The estate and qualified heir agree to pay the recapture tax, if applicable.

Qualified Farm Property

Qualified farm property must meet all of the following requirements:

  1. The property’s value was included in the decedent’s federal adjusted taxable estate, which is after deductions, including debts, expenses and bequests to a surviving spouse.
  2. The property consists of a farm meeting the requirements of Minnesota Statutes (M.S.), section 500.24.
  3. The property was classified for property tax purposes as the homestead of the decedent and/or decedent’s spouse under M.S. 273.124.
  4. The property was classified for property tax purposes as class 2a property under M.S. 273.13, subd. 23.
  5. The decedent continuously owned the property for the three-year period ending at the decedent’s death.
  6. A family member continuously uses the property in the operation of the trade or business for three years following the decedent’s death.
  7. The estate and qualified heir agree to pay the recapture tax, if applicable.

Qualified Heirs and Family Members

To qualify as an heir, an individual must be a “family member” who acquired qualified property from the decedent and who continuously uses the property in the operation of the trade or business for three years following the decedent’s death.

To qualify as a family member, an individual must be:

  • the decedent’s ancestors (parent, grandparent, etc.);
  • the decedent’s spouse;
  • parents; or
  • the spouse of any lineal descendant described above.

Recapture Tax

If either of the following occurs within three years of the decedent’s death and before the death of the qualified heir, then a recapture tax is imposed:

  • the qualified heir disposes of any interest in the qualified property (other than by a disposition to a family member), or
  • a family member ceases to use the qualified property in the operation of the trade or business, then the recapture tax is imposed.

The recapture tax equals 16 percent of the amount of the exclusion and must be paid to the Minnesota Department of Revenue within six months after the date of the disqualifying disposition or cessation of use.

How to Claim the Election

To claim the election, the executor and qualified heirs must complete and submit Schedule M706Q, Election to Claim the Qualified Small Business and Farm Property Exclusion, when filing the Minnesota estate tax return.

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