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The Small Business and Farm Property estate tax exemption- A great new tool to reduce Minnesota estate tax
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:
- Its value must be included in the federal adjusted taxable estate,
- 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,
- The gross annual sales of the business must have been 10 million or less
- The decedent must have owned the business for at least 3 years before death, and
- 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:
- Its value must be included in the federal adjusted taxable estate,
- It must be property that consists of a farm, and must have been the decedent’s agricultural homestead for property tax purposes.
- The decedent must have owned the farm property for at least 3 years before death, and
- 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.
Do I need a will?
Quite often, I have clients come into our office and ask me this very question. And honestly, the answer is, “it depends.” There are a lot of useful tools out there to plan for distribution of your assets at the time of your death that are not a will, and often times, these tools take care of a person’s assets without requiring a will.
What does a will do?
At a minimum, a will is a document where you designate who you would like to settle out your affairs. This person is called a “Personal Representative” and he or she steps into your shoes when you have died and acts to settle out your affairs. The rest of the will tells this person what to do with your assets. You decide who they go to, and in what amount. If necessary, you can put more complex tools in place, such as a trust for tax-planning, incapacity of a beneficiary, or other various reasons. An important thing to note is that a will only applies to probate property. This is property that only you own (not jointly), and that does not have another type of beneficiary designation on it.
What are the alternatives?
There are a lot of alternatives to a will, depending on the type of assets you own. Some of these alternatives do not require the services of an attorney. The first thing that most people use is a beneficiary designation. This is most often used on retirement plans, life insurance, and annuities. This allows you to designate with the company that holds your account or plan who you would like to receive these assets when you die. If this is done, the filing of a death certificate is generally all that is needed for these assets to pass to whomever you have designated.
A second, similar tool is called a pay-on-death (POD) or transfer-on-death (TOD) designation. This is often done on bank accounts, certificates of deposit, and some other types of investments. It acts like a beneficiary designation in that, you put on record with your bank or investment firm who you would like to receive any of these sorts of assets when you die.
A third tool for the passing of real property (land) is called a Transfer on Death Deed. This is a deed that you file with the Recorder’s Office that tells them who you would like to receive your property when you pass away. The deed does not take effect until you, or if you are married, you and your spouse, have passed away. If you file this deed, when you die, a simple affidavit and death certificate are filed, and the property is transferred to the people you have designated. This tool is not appropriate in all situations, but in some cases, it can be a very easy and inexpensive way to pass your property when you die. It is advisable to engage an attorney to draft this deed for you if you decide to do this, to ensure that the deed is drafted properly and in recordable form.
Please call our office if you have questions about this information, we would be happy to sit down with you to see if a will, or some combination of other tools, is a good fit for you.
Our newest attorney
Here’s a little more information regarding the newest attorney in our office, Kelly A. Ketterer. Welcome Kelly!
So why Cold Spring?
Take one look at the traffic in the Twin Cities, and see why I would run screaming from the place! But more seriously, I am originally from a small town (Clear Lake, Iowa) and I love small town life. It has always been my desire to settle in an area like this.
What made you decide to practice law?
I always wanted to do something to help people in my work. In college, I took courses in law for my political science degree, and I really got turned on to it. I love the intricacies of the law and the creativity that I can find within it to come up with novel solutions to a client’s unique problems.
What is your favorite thing about your practice?
I love meeting with clients and getting to know them. I am blessed to meet such interesting people. I like being able to use my skills to create a product that meets all the client’s needs at a good price. I like it when people leave feeling good about what we have accomplished together.
What do you do in your spare time?
I like to do outdoorsy things, cook and bake, garden and read. I also volunteer with my church and with the Minnesota State Bar Association’s “Wills for Heroes” program.