Credit Shelter Trust Basics: What Minnesota Farmers Need to Know

Minnesota farm families are often surprised to learn that the Minnesota estate tax exemption is only $3 million per person. With today’s land values, machinery, livestock, and retirement accounts, many farms exceed that threshold quickly.

In this blog we explain how revocable trusts, disclaimer trusts, formula-funded credit shelter trusts, and the family farmland deduction can help married couples maximize both spouses’ exemptions potentially protecting up to $5 million or more from Minnesota estate tax.

If you own farmland in Minnesota, estate tax planning isn’t optional; it’s essential.

Understanding Minnesota’s Estate Tax Exemption

If you’re a Minnesota farmer, there’s a very good chance your estate is exposed to Minnesota estate tax even if you don’t consider yourself “wealthy.”

Minnesota’s estate tax exemption is currently $3 million per person. That number might sound high at first glance. But when you consider that the average farm is more than 400 acres and land values can easily reach $10,000 per acre you can exceed that threshold quickly. Add machinery, equipment, livestock, grain, retirement accounts, and cash reserves, and many farm families find themselves well above the exemption limit.

Many married couples assume they automatically get to protect $6 million, $3 million per spouse. Unfortunately, that’s not how Minnesota estate tax works.

When the first spouse dies and everything passes directly to the surviving spouse, the marital deduction applies. That means there is no estate tax at the first death, which sounds great. However, the first spouse’s $3 million exemption is not used. The surviving spouse is then left with the combined estate and only their own $3 million exemption when they later pass away.

Without proper planning, that can create a significant estate tax bill.

How Farm Families Can Preserve Both Exemptions

To properly use both spouses’ exemptions, planning must be done in advance. One of the most common tools is a revocable trust that includes a credit shelter trust.

There are two primary ways to fund that credit shelter trust:

1. Disclaimer Trust Planning
   With this approach, the surviving spouse has flexibility. After the first death, the spouse can “disclaim” (refuse) a portion of the inheritance so that those assets remain in the deceased spouse’s trust. This allows the estate to use the first spouse’s exemption triggering tax at that time.

This method gives families flexibility. It allows them to evaluate the estate’s value, the current exemption amount, income tax considerations, and reporting requirements before deciding how much to shelter.

2. Formula-Funded Credit Shelter Trust
   In larger estates waiting to decide may not make sense. A formula-funded credit shelter trust automatically directs the maximum allowable amount into the trust at the first death, ensuring the exemption is fully used without additional decision-making.

This approach provides certainty and locks in estate tax savings at the first death.

The Family Farmland Deduction: An Important Opportunity

Minnesota also offers a family farmland deduction. If farmland qualifies up to an additional $2 million of farmland may be sheltered.

This means that in some cases, a farm family may protect up to $5 million at the first death when combining the $3 million exemption with the farmland deduction.

Check out the Ultimate Guide to Family Farmland Deduction Blog to learn more.

Maintaining Control and Income

One concern many farmers have is whether using a credit shelter trust means the surviving spouse loses control. In most properly drafted plans, that is not the case.

The surviving spouse can serve as trustee. They receive all income generated by the trust. If needed for health, education, maintenance, or support, principal can also be accessed.

When using a formula-funded credit shelter trust, a limited power of appointment can be included. This allows the surviving spouse to redirect assets among a defined group offering flexibility while still preserving estate tax savings.

Every Farm Is Different

There is no one-size-fits-all farm estate plan. Some families benefit from disclaimer flexibility. Others need the certainty of formula funding. Asset values, land ownership structure, and long-term goals all matter.

What is consistent, however, is this: planning must be done in advance. Estate tax strategies cannot be implemented after death.

If you are a Minnesota farmer, it is highly likely that estate tax planning should be part of your succession strategy. The right trust structure can preserve millions of dollars for the next generation but only if it’s set up properly.

Farm succession planning never stops, and estate tax planning is one of the most critical pieces.

Take the Next Step

To learn more about estate planning, keep an eye on our Events page located at: https://www.wagnerlegalmn.com/events/

If you’re ready to start being proactive about your estate plan and want guidance tailored to your family, assets, and goals, contact Wagner Oehler, Ltd. to get started.

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