Everyone should have an estate plan. Estate planning attorneys say that a lot, and we mean it! But this is even more critical for farming families. There are many unique issues and problems that play an important role when planning for families with farms, among them: estate taxes, complicated probates, business succession, emotional ties and family dynamics. Most of these issues can be dealt with by planning ahead and working with a professional to set up an estate plan and business succession plan. Not planning ahead can result in leaving your family in a situation where they are not able to hold onto the family farm. The possible complications and strategies are too numerous and too complex to address in a single blog post. But below is a cursory overview of the two toughest challenges we face when assisting farm families: taxes and family dynamics.
State Estate Taxes
Currently, there is a $1 million estate tax exemption in Minnesota. This means that each person can pass up to $1 million in assets upon passing without having to pay Minnesota estate taxes. Included in this $1 million is everything you own: crops, livestock, machinery, equipment, vehicles, land and all of your other assets. Farmland can easily bring you up to that exemption limit, especially with the values we are seeing now on farmland.
Once you reach the exemption, the state estate tax kicks in starting at a rate of 41% and generally decreasing for larger estates. Minnesota has some of the highest estate taxes in the US. Many farm families find themselves in the situation of being cash poor and land rich and do not have enough cash on hand to pay such hefty taxes within 9 months after the date of passing. When a family finds themselves in this difficult position they may be looking at selling all or part of the farm, getting a mortgage on the farm or a loan from other family members in order to pay the taxes.
But there is good news! Hmm, or maybe not.
The New Minnesota Estate Tax Exemption
The Minnesota Legislature recently enacted a new statute that could provide some relief for farm families in the form of a new exemption. The idea is that up to $4 million dollars worth of farmland is exempt from a person’s taxable estate for people passing away after June 30, 2011. Sounds great, right?
Sadly, the new statute itself is unclear in several respects and so new that there has been no clarification developed. The statute may not apply to many farms, but we can’t say for sure yet. In addition there are stringent requirements to maintain the exemption. Primary among them is the requirement that for 3 years after the owner passes the farm must be actively farmed by a qualifying relative. If this requirement isn’t met it results in having to pay the Department of Revenue back, at a rate that could be more expensive than the initial estate tax would have been.
Hopefully, as some time goes by we will learn just how this exemption will work and to whom it applies. There is also a new estate tax exemption for small businesses that may prove useful for farms as an alternative to using the exemption for farmland.
Federal Taxes
Through 2012, the federal estate tax exemption is $5 million per person. We have no idea what congress will do next. Ideally, your estate plan should take into account what we do know, but be flexible enough to adapt to the future. There can be possible savings on federal estate taxes for farmers through IRC §2032A Special Use Valuation, which Minnesota’s new exemption was modeled after, but it is complex and also has stringent requirements.
Legacy and Conflict
Most financial aspects of transferring a farm are predictable and can be planned out. The emotional issues involved can be harder to anticipate and plan around. Often grief and the individual financial issues of beneficiaries can impact behavior and the ability to withstand the difficulties of estate administration.
A skilled estate planning professional can help you come up with a plan that balances fairness, equitable distribution and a desire to help the family members who continue to farm the land. A professional estate planner can help you develop current strategies for talking to your family about succession planning and what will happen to the farm when you are gone. While it is never easy to talk about such personal family matters with your estate planning professional or with your family, time spent thinking and talking about these issues now can save your family a world of heartache when you are gone.
Strategies
Each situation is unique and it is imperative to work with a professional or team of professionals who can help you come up with the plan that is best for your family and your farm. Some plans can be laid out in a Will and implemented upon your passing away. Other plans may involve taking action now, such as setting up a business entity to hold the farm or transferring part or the entire farm to your beneficiaries before you pass through a sale or gifting.
Whatever strategy you choose, you must also be aware of the Minnesota Corporate Farm Act. Many of the best estate planning techniques for farm families involve setting up a business entity or a trust. The Minnesota Corporate Farm Act places some limitations on the types of entities that can own a farm and creates ongoing requirements for many entities. A business or estate planning attorney can walk you through these restrictions and requirements and help you decide what will be manageable for you and your family.
The Bottom Line
- Estate and business succession planning is crucial for farms and can save your family money and heartache.
- Work with a professional or a team of professionals to insure a successful plan.
- Every situation is unique and your plan should be specific to your family’s needs.
- Communicate with your family about the plan you develop.
