As a part of the 2011 Minnesota Special Session Tax bill, the legislature enacted a Small Business and Farm property tax exemption. You can view the text of this bill here. What this exemption does is provide a Minnesota estate tax exemption for qualified small business and/or farm property. This exemption, combined, has a limit of $4 million. When you add this to the already existing $1 million exemption that we all have, for 2011 the Minnesota exemption can equal the federal estate tax exemption for those persons with qualifying property.

The requirements for qualified business property are as follows:

1. Its value must be included in the federal adjusted taxable estate,
2. It must be property that was used in the operation of a trade or business in which the decedent or the decedent's spouse was actively involved in operating,
3. The gross annual sales of the business must have been 10 million or less
4. The decedent must have owned the business for at least 3 years before death, and
5. A family member who is a qualified heir must use the property for three years after the date of death.  A qualified heir is one who agrees to this three year use.

The requirements for farm property are very similar:

1. Its value must be included in the federal adjusted taxable estate,
2. It must be property that consists of a farm, and must have been the decedent's agricultural homestead for property tax purposes.
3. The decedent must have owned the farm property for at least 3 years before death, and
4. A family member who is a qualified heir must use the property for three years after the date of death.  A qualified heir is one who agrees to this three year use.

If the property subject to this exclusion is NOT used by a family member for three years after the death of the decedent, then it will be subject to a recapture tax. This tax is equal to 16% of the value of the exclusion, and is due 6 months after the qualifying use stops.

This exclusion could be a powerful, yet mostly simple tool for those persons who own small business or farm property to increase their exclusion from Minnesota estate tax without the use of more complicated trust planning. Please call me today if you think you may have property that meets these standards.