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Maintaining farmland homestead classification

Homestead classification is a complex issue

Homestead classification is only one of many issues that need to be addressed when developing and implementing a farm business transition and personal estate plan. One small omission or incorrect selection can be costly.

For clarification on homestead classification, visit with your county assessor for information specific to your situation. Seek qualified professional legal help during farm transition and estate planning implementation.

Homestead classification and estate tax

During the 2011 Minnesota legislative session, state lawmakers initiated a qualified small business property and qualified farm property exclusion relating to the Minnesota estate tax. The estate tax exclusion for qualified small business and qualified farm property affects those dying after June 30, 2011.

The exclusion is per qualifying individual and is in addition to the Minnesota personal estate tax exclusion available to every individual in the state. The law tied qualifying for the farm property exclusion to maintaining homestead classification on farmland until death.

Keep homestead classification to reduce estate taxes

For farmland, maintaining homestead classification reduces yearly property taxes on farmland, and upon death, maintaining homestead classification may reduce or eliminate Minnesota estate taxes.

If homestead classification is lost before the deceased person's death, the estate will not qualify for the additional exclusion.

Many folks feel qualifying is not going to be a problem and the exclusion is a solution for eliminating Minnesota estate tax upon their death. However, without planning and maintaining homestead classification, there could be major issues.

The scenarios below will help you determine your situation and whether the exclusion applies.

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Land in trust

Placing land in trust is a common estate planning strategy. However, if not done properly this approach can cause challenges to maintaining homestead classification.

The type of trust is not the current concern regarding homestead classification. Property can be placed in a testamentary, inter vivos, revocable or irrevocable trust but regardless of type, the trust does not receive the homestead classification. For additional information regarding homestead classification as it pertains to trust property, please see “Using trusts: Legal issues and options.”

Land held in a trust can be eligible for homestead classification through a trust grantor, grantor’s surviving spouse or qualifying relative occupying the property. The individual also needs to be a Minnesota resident to qualify. In addition, these same rules apply to life estates and transfer upon death deeds.

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Qualified small business property and qualified farm property exclusion adjustment

In 2017, Minnesota passed legislation that increases the Minnesota personal estate tax exclusion. This is the amount each person can pass to their heirs without having to pay any Minnesota estate tax. The changes are retroactive to deceased people dying after December 31, 2016.

Exclusion amounts by year

  • 2017: $2,100,000
  • 2018: $2,400,000
  • 2019: $2,700,000 
  • 2020 and thereafter: $3,000,000

The Qualified Small Business Property Qualified Farm Property Exclusion decreases by an amount so when the personal estate exclusion amount and the Qualified Property Exclusion amount are added together, the total exclusion cannot exceed $5,000,000 per person unless changed by the legislature.

For example, in 2017 the personal exclusion equal to $2,100,000 could be added to a maximum of $2,900,000 Qualified Property Exclusion for a total exclusion of $5,000,000 per person.

 

Caution: This publication is offered as educational information. It does not offer legal advice. If you have questions on this information, contact an attorney.

John Mathews, attorney, Lathrop GPM; Gary Hachfeld, former Extension educator; Megan Roberts, Extension educator

Reviewed in 2020

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