By Megan Roberts, Extension Educator
It has been a quiet year for major changes in farm
transition and estate planning at both the federal and state of Minnesota
level. Nonetheless, there are still several updates to discuss.
Federal estate exclusion
is increased for inflation
After the major, far-reaching 2018 federal tax changes from
the Tax Cuts and Jobs Act of 2017, 2019 was remarkably less dramatic for
federal changes. The federal lifetime gift and estate exclusion remains at the
higher $11 million (indexed for inflation). In 2019, the lifetime exclusion is
$11.4 million per person. In November 2019, the IRS announced the lifetime exclusion
is $11.58 million per person in 2020.[1]
Although the federal exclusion remains very high and federal
tax consequences of gifting or inheritance are likely minimal or non-existent for
most farms, farmers should not interpret this as a reason to put off estate
planning. First, the new higher federal lifetime exclusion of $11 million
(indexed for inflation) is set to sunset in 2025 and revert to the $5 million
dollar exclusion (indexed for inflation). While larger gifts can be planned and
executed before the 2025 deadline with no adverse impacts,[2]
the estate side of the lifetime exclusion is dependent on when someone passes
on, and we don’t typically know when that will be! That means when making
estate plans that rely on federal tax free inheritance at the higher lifetime exclusion,
it is wise to have a conversation with your legal and tax professionals about
what the alternative plan is for post-2025. Second, because the Tax Cuts and
Jobs Act of 2017 did dramatically raise the lifetime exclusion, estate plans
created prior to its passage in December 2017 should be reviewed to ensure
language is still reflective of current wishes and fits with the current tax
climate. For example, if a pre-2018 will was written in a way that included
language about transferring assets in excess of the lifetime exclusion to a
spouse, the higher exclusion might result in no spousal asset inheritance,
creating a possibility for a contested will. Third, taxes are just one facet of
estate and transition planning; there are many other important considerations farm
families should discuss when implementing their plan.
Minnesota expands
agricultural homestead qualifications
At the Minnesota level, several bills were proposed in the
legislature that would have affected farm transfer and estate planning.
However, at the end of the session, most did not make it into law. One topic
that did pass and become a new 2019 state statute was revised agricultural
homestead qualifications. Some policy makers felt farm families that were
utilizing legal structures were having too much difficultly qualifying for
agricultural homestead. Therefore the Minnesota legislature made updates to how
to qualify for homestead when using business entities (i.e. family farm
corporation, joint farm venture, limited liability company, or partnership)[3] and/or trusts[4]
on your farm. For farmers and farmland owners, maintaining agricultural
homestead, agricultural relative homestead or special agricultural homestead is
important both for your annual property taxes and for your end-of-life state estate
taxes. First, let’s discuss how ag homestead can result in an annual credit
providing property tax relief. As the Minnesota Department of Revenue explains,
“this credit reduces the tax on certain class 2a agricultural homestead land,
along with any contiguous class 2b rural vacant land, for qualifying owners.
You do not need to apply for this credit. It is automatically included on your
tax bill if you qualify.”[5]
Second, maintaining ag homestead can have end-of-life estate tax benefits
because since 2011 Minnesota grants an additional estate tax exclusion to
farmers and farmland owners that maintain agricultural homestead until death. This
is known as the “qualified farm property deduction.”[6]
Another legislative change related to the state estate
exclusion involved adding language to the qualifications for the qualified farm
property deduction that adds dollars to the state estate exclusion. Using both the Minnesota personal estate
exclusion, in combination with the additional farm property estate exclusion, a
Minnesota decedent can transfer up to $5 million tax free at death.
Specifically, the words “decedent’s spouse” were added to the qualified farm
property exclusion, making the statute more inclusive for married couples that
may not own land jointly and have a decedent after December 31, 2017.[7]
Remember, for the extra qualified farm property exclusion, the land must be
agricultural homesteaded.
County assessors make decisions on homestead
Because of the legislative changes that occurred in 2019 and
the important financial implications of those changes, it is important to
understand if you do not have homestead designation or if you do have homestead and which type (i.e. agricultural homestead, agricultural relative homestead or special
agricultural homestead). Check with your county assessor if you have questions
about your farmland’s homestead status. The Minnesota Department of Revenue is
tasked with interpreting homestead statutes, while your local county assessor
makes the decision on if you qualify for homestead.
Minnesota increases school building bond agricultural credit
Although not directly related to homestead, another
legislative change that relates to a farmer’s annual property tax is the School
Building Bond Agricultural Credit. For the Ag2School credit, the qualifying
land must be classified as 2a (agricultural), 2b (rural vacant) or 2c (managed
forest land), but does not necessarily need to be homesteaded. The 2a,
2b, and/or 2c qualifying land excludes, “property consisting of the house,
garage, and immediately surrounding one acre of land of an agricultural
homestead.”[8] In
2019, the legislature enacted higher credits beginning in tax year 2020.[9]
As stated in the statute, “[f]or property taxes payable prior to 2020, the
credit percent is equal to 40 percent. For property taxes payable in 2020, the
credit percent is equal to 50 percent. For property taxes payable in 2021, the
credit percent is equal to 55 percent. For property taxes payable in 2022, the
credit percent is equal to 60 percent. For property taxes payable in 2023 and
thereafter, the credit percent is equal to 70 percent.”
Focus on what you can control
While this article discusses legislative changes, there are
also regulatory and judicial rulings that can affect estate planning. This article
is by no means an exhaustive list of changes in 2019. At the end of the day,
while laws, regulations and judicial findings certainly affect estate planning,
they are typically outside our control. I encourage farmers to focus on what
they can control in the process: their farm transfer goal setting, their family
conversations, and their making the time to meet with their estate and transfer
professionals, including a tax accountant and an estate planning attorney.
If you are a
farmer looking for more information about farm transition, there are several
resources offered by the University of Minnesota. This winter, University of
Minnesota Extension, in partnership with the Minnesota State College and
University System, will hold a series of day-long workshops and multi-day
retreats on farm transition and estate planning. Registration for workshops and
retreats are now open. University of Minnesota Extension also has in-depth
articles on both transfer and estate planning on our website. More information
on our articles and our workshops are available at
z.umn.edu/farmtransition. Or contact me, Megan Roberts, at meganr@umn.edu.
[3] Minnesota
Session Laws - 2019, 1st Special Session, Chapter 6, Article 4, Sec. 10.
Minnesota Statutes 2018, section 273.124, subdivision 8
[4] Minnesota Session Laws - 2019, 1st Special
Session, Chapter 6, Article 4, Sec. 12. Minnesota Statutes 2018, section
273.124, subdivision 21
[7] Minnesota
Session Laws - 2019, 1st Special Session, Chapter 6, Article 2, Sec. 24.
Minnesota Statutes 2018, section 291.03, subdivision 10
[8] Minnesota
Statutes 2019, Chapter 273 Section 273.13, subdivision 21
[9] Minnesota
Session Laws - 2019, 1st Special Session, Chapter 6, Article 5, Sec. 2.
Minnesota Statutes 2018, section 273.1387, subdivision 2
