Mankato is located in Southern Minnesota and Minnesota has a lot of agriculture. Farming is often a family business with farms sometimes staying in the same family for a hundred years (century farms).
Here are some preliminary questions we ask in doing estate planning for farmers:
- What kind of retirement income do the parents need?
- Who is going to take over the farm? Are one or more children going to take over the farm?
- Will there be estate taxes, and if so, how will they be paid? If the farm exceeds $2,400,000 in value, estate taxes should be addressed.
- How is the farm owned? Individually or by a business entity?
Federal: The federal estate tax exemption for 2018 is $11,180,000 per person. For a husband and wife, that comes to over $22 million. Most Minnesota family farmers don’t have to be concerned with this tax. If the estate exceeds these thresholds, the tax comes in at 40%.
Minnesota: The Minnesota estate tax exemption for 2018 is $2.4 million. Although this can be doubled for a married couple through estate tax planning, it is not doubled automatically. Farmers do get a break if they meet several requirements. They can get an additional exemption of $2.6 million for a total of $5 million if they meet these requirements. The requirements are very specific. If the estate exceeds these thresholds, the tax comes in at 13% and increases to 16%.
One strategy is to give the farm or part of the farm to one’s children. In Minnesota, there is no gift tax. As long as the donor lives for three years from the date of the gift, the amount of the gift is not brought back into the donor’s estate. There is no tax to the donor and no tax to the donee.
However, if the donee ever sells the farm during his/her lifetime, there will be federal and state income taxes in the form of capital gains taxes on the value of the farm. If the donee retains the farm for his/her lifetime, there will be no capital gains. Federal capital gains rates are anywhere from 0 to 20%. Minnesota capital gains are taxed at regular income tax rates, which are between 5.35% and 9.85%.