Homestead Classification Rules Change For Business Entities

By Gary Hachfeld

When doing personal estate planning, one needs to take advantage of any and all estate tax exclusions at their disposal. One important exclusion is the Minnesota Qualified Small Business Property Qualified Farm Business Property estate tax exclusion. For 2016 the exclusion is worth $3,400,000. It will be reduced by $200,000 per year until 2018 when the exclusion will be fixed at $3,000,000. This is in addition to the $2,000,000 per person exclusion all MN residents will have in 2018.

The MN qualified property exclusion applies to a farm business owner’s estate upon their death providing they have followed several rules prior to death. The exclusion rules are as follows: the property must be a part of the decedent’s estate, the decedent had to own the property for 3 continuous years prior to death, the property must have met the requirements of the MN Corporate Farm Law, the property had to have been classified as 2a property and the decedent must have had homestead classification on the property at the time of death. In addition, the qualified family heir must follow some rules to keep the exclusion in place after the decedent’s death. Not complying with any of these rules would result in not being able to use the exclusion to reduce MN estate tax.

The MN State Legislature enacted the Minnesota Revised Uniform Limited Liability Company Act of 2015. The result of that has been a change in the law regarding homestead classification for MN farm business entities. The business entities affected include general partnerships, all limited liability partnerships, limited liability companies and corporations.

Business entities have become a popular tool among farmers. Many times farmers will place land in one of the available entities. The new law states if there is land in an entity, the landowner is a member of the entity and the owner is farming the land on behalf of the entity, there is no change and the owner will not lose homestead classification. However, if there is land in an entity, the landowner is a member of the entity but the entity rents the land to the owner or another individual to farm outside the entity, the landowner will lose homestead classification.

Any new businesses established had to have been in compliance with the new act by August 1, 2015 which is already in effect. Existing businesses will become subject to the new act January 1, 2018. This is potentially a huge financial issue for farm owners who plan to pass their business on to a farming heir as well as trying to establish an estate plan that can legally minimize MN estate tax.

If you have an existing business entity or plan to form a business entity, check with a professional attorney in order to be in compliance with the changes in the MN entity rules. For more details on this issue go to www.extension.umn.edu/agriculture/business and click on “Farm Transition and Estate Planning”. Once on that page, go to the upper right corner of the page under “Homestead Classification” and download a copy of an information sheet with greater detail about the law changes and other ways homestead classification can be lost as a tool for estate planning.

Source:umn.edu