Preserve your Minnesota qualified business, property deductions

For Minnesota farm clients, one of the biggest planning decisions is how to use and preserve the Minnesota Qualified Small Business and Farm Property Estate Tax deductions.

This deduction will allow a farmer to transfer an additional $2 million in qualifying assets without paying Minnesota estate tax. This is above the standard Minnesota deduction on $3 million in assets. When making transition decisions, it is important to consider how to meet the qualifications for this Minnesota estate tax deduction.

To qualify for the small business property deduction, the following requirements must be met:

  • The property is included in the decedent’s federal taxable estate.
  • The property is used in a trade or business or is non-publicly traded stock shares or other interest in an entity that is engaged in a trade or business.
  • The decedent or their spouse have materially participated in the business in the tax year before the decedent’s death. To meet this qualification, the decedent or their spouse must have met the description provided by Section 469 of the Internal Revenue Code. This calls for a continuous and substantial involvement in the operation. A passive involvement or operation will not qualify.
  • The business has $10 million or less in gross sales in the tax year before the decedent’s death.
  • The decedent or the decedent’s spouse have continuously owned the property for the three years prior to the decedent’s death.
  • The property is transferred to qualified heirs. These include the decedent’s ancestors, such as parents and grandparents; to spouse; a linear descendant such as a child or grandchild of the decedent; the descendant’s spouse; or the decedent’s parents, a spouse of those listed previously, and a trust with those listed previously as beneficiaries.

For the farm property (real estate) deduction, the following requirements must be met:

  1. The value of the real estate is included in the decedent’s federal taxable estate.
  2. The real estate must be owned by a person or an entity in compliance with the Minnesota corporate farming laws under Minnesota Statute 500.24.
  3. The property is classified as agricultural homestead, agricultural relative homestead or special agricultural homestead under Minnesota Statute 273.124 in the year of the decedent’s death.
  4. The property is classified as class 2a property, agricultural property, under Minnesota Statute 273.13 Subdivision 23 in the year of the decedent’s death.
  5. The decedent or the decedent’s spouse have continuously owned the property for the three years prior to the decedent’s death.
  6. The property must be transferred to qualified heirs, which are the same as above.

Balzarini is an attorney at law with Miller Legal Strategic Planning Centers, a Division of Hellmuth & Johnson. Contact him at [email protected].

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