The Minnesota Estate Tax comes into play when a taxpayer has an estate of more than $1M. Unlike income taxes there are no “tax credits”. Generally there aren’t any specific Minnesota “tax deductions” either. Starting with deaths after 6/30/2011, Minnesota does have a deduction for qualifying farm property. The deduction also works for qualifying small business property. The exclusion can be up to $4M, essentially meaning that you can deduct the value of that qualifying property before you calculate the amount of Minnesota estate tax that will be due.
The tricky part is meeting the numerous qualifications. The difference between a $5M estate and a $1M estate is $391,600 of Minnesota estate tax, so it’s very important to understand all the details and if the property qualifies for the exclusion. A qualified farm property must meet all of these requirements:
• Value of the property included in taxable estate
• Property meets the definition of a farm under MN statute
• Property was classified as homestead for property tax purposes
• Property was classified as agricultural for property tax purposes
• Deceased owned the property for 3 years prior to death
In addition to having qualified property, the heirs that are receiving the property must also meet some qualifications. Those requirements are:
• Heirs must be family members of the deceased
• Heirs must agree to continuously use the property in the operation of the farm business
• Heirs agree that the property won’t be disposed within three years to an outside party
After the property qualifies and the heirs qualify, you need to provide additional documentation with your Minnesota estate tax return. Form M706Q must be completed, which is not too tough. The tough part is gathering the attachments for that form. You are required to attach property tax statements showing the land is homestead and agricultural for the past three years. You are also required to attach deeds or purchase agreements proving the ownership for the past three years.
Finally you need to attach three years of tax returns for the deceased showing they were actively farming the land. Throw in the normal appraisal on the land and it can be quite a bulky set of attachments. It seems like a lot of work and Mickey Mouse to have it all ready, but when you consider you are saving up to $391k, it definitely seems worth the trouble.
This blog was accurate at the time published, but on May 21st the MN legislature passed changes to the estate tax laws which are retroactive and affect the small business and farmland deductions. These changes while minor are critically important in determining if an estate will qualify. Contact Chris Wittich for the latest details and planning opportunities related to estate planning and stay tuned for future blogs on the topic.