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Mortgage contract - iStockIn Minnesota, many homeowners can qualify their primary residences for homestead status. By classifying a piece of property as a homestead, the property may qualify for a reduced classification rate, a reduced taxable market value, a property tax refund, and/or other special program eligibility.

To qualify for homestead status, the following criteria must be met:

  • The applicant must be an owner of the property;
  • The applicant must occupy the property as their primary residence; and
  • The applicant must be a Minnesota resident.

A homestead classification can be sought as soon as a person takes ownership of a piece of property and meets the criteria above. An application for homestead is made to and approved by the County Assessor in the county where the property is located. For most counties, an application can be found on the County’s website.

This classification can be applied for any time during the year; however, if the application is made by December 15th and then approved, property taxes payable in the following year will reflect the classification rate.

Homestead classification often comes up in the estate planning context when a revocable trust is used and a grantor’s home is titled into the trust. When this happens, homestead classification needs to be re-applied for on the piece of property since the property now has a new owner, the trust.

For more details on whether your Minnesota piece of property qualifies for homestead status, contact your County Assessor.

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Blank Paper & Cup of Coffee - iStockEstate planners do encourage clients to be specific with their various bequests within their estate plan. When describing gifts of both real and tangible personal property or defining beneficiaries, we want the assets and individuals to be identifiable. However, it can actually cause problems when clients get too specific and potentially lead to unintended complications when the estate is administered.

Property

When describing real property in your estate plan, you have to decide if you are wanting to leave the particular piece of property you currently own to your beneficiaries or if you are intending to leave whatever real estate you own at your death to your beneficiaries. You will want to convey your intentions to your estate planning attorney so that they can draft your plan accordingly. If you plan to leave whatever “home” you live in at the time of your death to your beneficiaries then you probably do not want to specifically reference the address or legal description of the property you currently own in case you move or sell that property before your death. Limiting such bequest to a specifically referenced address or legal description can cause the gift of real estate to fail and possibly transfer to unintended recipients.

The same is true for tangible personal property. When clients complete their tangible personal property lists, they might include the locations of an item but then move the item or give it away during their lifetime. They might also incorrectly describe the item, making its identity questionable. It is important to try to put yourself in the shoes of your nominated estate administrator and ask yourself, “Is this item/gift clearly defined and identifiable?”

Additionally, when clients make specific cash gifts in their estate plan, they run the risk that there will not be enough cash in the estate to satisfy those specifics gifts. Instead, clients might want to consider making bequests in terms of percentages or shares so that their beneficiaries will at least receive some gift – regardless of how big or small the estate.

Beneficiaries

Another common problem is when clients end up limiting bequests to certain individuals but in actuality intend to include a broader group. For example, grandparents might make a gift to their grandchildren and list them by name but not include a provision to incorporate any grandchildren born, or adopted, after the date of their Will or Trust. While the client prefers to be specific and list the names of their grandchildren, it might actually be easier for the gift to be made in more general terms, such as “to my grandchildren” in order to incorporate any future grandchildren.

Fiduciary Directions

Lastly, sometimes clients want to provide very detailed instructions to their fiduciaries with regards to the administration of their estate and/or trust(s). Being too specific with such guidance can be problematic when it limits the fiduciary’s ability to act in the future when circumstances have changed after the client has passed. Clients might think it is a good idea to list specific instructions to their nominated trustee with regards to the distributions of a trust fund on behalf of the client’s children. These instructions might significantly limit the distributions when, for example, the child is faced with a medical emergency for which they could benefit considerably from less restrictive distributions. While it is certainly advisable to give some guidance to your fiduciaries, clients might want to provide some discretionary authority to their fiduciaries to adapt to changing circumstances.

As clients review their new, or old, estate plans, again, they should put themselves in the shoes of their nominated estate administrators and ask whether the gifts and instructions are clear or whether there is room to interpret the plan differently than what was intended. You might find it could actually be beneficial to leave certain provisions more general than too specific. Be sure to work with your estate planning attorney to figure out the best way to convey your wishes.

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Close up of vintage typewriter machine - iStockWhat is Succession Planning?

Simply put, succession planning is the process of transitioning key people within a business so that the business can continue to operate after the owner or key executives leave. Think of it as planning for the future of the business so that it can outlive the owners. This process involves a lot of planning as well as finding and training the right people to fill the main roles of the company. These people may be internal employees or outside hires, but when it comes to small businesses it’s usually the children of the owner.
This article is going to focus on transitioning a family business because I grew up with a family owned and operated restaurant. I will go over some mistakes to avoid and I have also included a bonus if you make it all the way to the end of the article – a succession planning checklist!

The Transition Starts Now

You generally don’t consider transitioning your business early on it in its life and your career but you should start as soon as possible. This could easily be a multi-year process with a lot of training and organizing. Or worse, you could pass away without having a chance to ease your successors into place. Having a written plan with action steps is best and should include key documents such as a buy/sell agreement.

The first step is to lay out your goals. These goals should address your future income needs, your future involvement in the business including your future ownership (will you continue to maintain an equity stake?), and your business’ values and legacy that you want to impart to your children or other future stakeholders.

Next you need to determine how to achieve these goals. A large part of this process is choosing who you want to be your successor(s). This can be a difficult decision, especially if you have multiple children. It’s your job to think like a business owner and decide who might be the most qualified. You could leave the business to multiple children but make sure they work well together because a business partnership could put a lot of stress on a family especially if there are differing opinions.

Now that you have found your successor, let the training begin. Have them shadow you on the job. If you do not have your job tasks written down in a manual this would be an excellent time to start documenting everything you do in a handbook. Your successor can write while you talk. I have found in many small businesses the day-to-day tasks are kept in only one place, the owner’s head. Get these written down now, because you may not be around to answer questions that come up later.

Selling the Company and Making the Transfer

There are many tools which can be used in transferring a business and will depend on your goals that were outlined above. You may need the help of a lawyer to carry these out properly.

Gifting: You can start gifting stock and possibly avoid some taxation. This is often used with other tools in transferring ownership.

Trusts: This can also be a good method for avoiding some tax associated with transferring a business. A trust can also be structured to provide income for the previous owners.

Outright Sale: When selling to a family member using this method you need to consider valuation issues and tax issues associated with an outright sale.

Buy/Sell Agreement: This is an agreement between shareholders and the company to purchase the shares of the owner in the event of a death or exit of the business’ owner. This type of agreement can be structured in different ways, again, depending on the goals of the company and its shareholders.

Family Partnership: This has been written about before on Epilawg and can be found here and states, “The Family Partnership can be part of a business succession plan for the transfer of interests in a family business. In addition, it allows an older generation to reduce the size of their estate while remaining active in the decision-making and management process.”

Avoid Mistakes in Succession Planning

Timing: Don’t be too focused on your work and ignore the importance of a succession plan. One of the biggest mistakes a small business owner can make is delaying this important part of any business. By delaying you are not able to accomplish your succession planning goals and will also delay the vital training process. This will make it very difficult for your children or other future owners to run the business effectively. Even if your children/successors are working in your business right now, they may not be exposed to everything that it takes to run the business. As you know being an owner you take on many different roles, all of which need to be explained and passed down.

Equality: Your children have different skills and interests. It might seem fair to give them an equal share but this might lead to disagreements and could hurt the business. Thinking about these issues ahead of time makes it possible to plan. You can work with your estate attorney to split up your estate so it is equitable to all of your children and still transfer the business to one child.

If you are a small business owner you might also be interested in reading The Right Time to Get Out by Epilawg’s own Jennifer Santini. In it she outlines things to consider before selling your small business.

As promised you can find your small business planning checklist here! It will list out many things to think about as you go through your succession planning process. Just choose the Succession Planning Checklist from the drop-down menu.

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Conservatorship Basics: Part II

by Jayne Sykora November 4, 2014 Incapacity Planning

Last week, in Conservatorship Basics Part I, I discussed what a conservatorship is, who can be a conservator and the process for getting a conservatorship in place. In today’s post, I will cover a conservator’s […]

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Conservatorship Basics: Part 1

by Jayne Sykora October 29, 2014 Incapacity Planning

Oftentimes, most have heard of and have a basic understanding of a guardianship (whether for a minor child or for an incapacitated adult). A guardianship allows for another to be appointed as guardian over the […]

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In the News – Planning for Digital Assets

by Jennifer Santini October 26, 2014 Estate Planning 101

“Protecting Your Afterlife in the Digital Realm” Once again the discussion about planning for your digital assets received national attention on CBS Sunday Morning.  The segment features various companies* that are helping individuals protect their […]

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Are you a Minnesota Resident?

by Jennifer Santini October 23, 2014 Estate Planning 101

We’ve said before that Minnesota is not a favorable state in which to die because of the state’s estate tax laws. Some believe that the same is true for other tax reasons as well. While […]

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Death with Dignity

by Kim Prchal October 15, 2014 Guest Articles

Brittany Maynard, an Oregon resident, selected the date November 1, 2014 as the day she will end her life. Brittany is 29 years old, and was recently diagnosed with terminal brain cancer. She is plagued […]

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5 Lessons from Kindergarten to Ease Estate Administrations

by Jennifer Santini October 7, 2014 Probate

Unfortunately no matter how close a family might seem, it always has the potential to endure disputes between members either during everyone’s lifetimes or after someone has passed away. The fights can get ugly and […]

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Cyber Attacks: It’s no longer “if” it will happen, but “when” it will happen

by Geoff Engelhart September 29, 2014 Business

The vast majority of us are not running international, Fortune 500 operations. We are leading, or working with, small to mid-sized businesses. With that comes the false sense of security that cyber thieves aren’t targeting […]

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Cabin LLCs: The Basics

by Jayne Sykora September 25, 2014 Business

For many, cabins provide an opportunity to get away from it all, to spend time with family and friends (maybe beside a body of water) and decompress from daily life. Unfortunately, cabins can also cause […]

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