Minnesota farmers have been seeing the value of their farmland increase significantly over the last few years. Though it has slowed recently, this increase often results in a gross estate that is more than the Minnesota estate tax exemption. For farmers dying in 2015, the Minnesota estate tax exemption is $1.4 million. This means that if the farmer owns property worth more than the exemption amount, his family could end up paying an estate tax.
One very effective way for farmers to minimize or eliminate this estate tax is through the qualified farm property deduction. This deduction basically allows a farmer's estate to be as much as $5 million before owing any estate tax if he can deduct enough farmland from the gross estate to get below the exemption amount. In other words, in 2015 a farmer can deduct up to $3.6 million of farmland from his gross estate. This deduction has been available since 2011, but it has had some changes since then that makes it available to more families if the requirements are met.
The three basic requirements to use the deduction are: 1) the property must be classified as an agricultural homestead for property tax purposes in the year of the decedent's death; 2) the decedent must have continuously owned the farmland, either outright or through a qualified entity, for the three-year period ending at the decedent's death; and 3) the property must have been classified for property tax purposes in the year of the decedent's death as class 2a property, which, generally, means that the farm land is 10 acres or larger and is used for agricultural purposes.
While these requirements are much easier to meet than under the previous version of the law, it has been our experience that the Minnesota Department of Revenue narrowly interprets the statute. Planners that are not careful can sometimes run an otherwise good estate plan afoul of this valuable deduction by not taking these requirements into account.
As more farmers begin using trusts and entities for their estate plans, it is important to maintain agricultural homestead and the ownership requirements to ensure the farm land deduction is available. See our post examining transitioning the family farm for examples where entities might be used here: Farm Transition Blog Post, and our post about using trusts here: Trust Blog Post.
The agricultural homestead rules can become difficult to navigate where trusts, LLCs, or other entities are used to hold agricultural property. See our post examining agricultural homestead in more detail here: Agricultural Homestead Blog Post. When trusts and other entities are used, it is also important to file a Corporate Farm Report with the Minnesota Department of Agriculture so that it is treated as a "qualified entity" for property and estate taxes purposes. For most family farms, it a simple process to complete the Corporate Farm Report and required annual renewal. See www.mda.state.mn.us for more information.
If the farmland meets these requirements, the value of the property may be deducted from the Minnesota estate tax return if it passes to a qualified heir and that qualified heir agrees to hold the farm for at least three years after the decedent's death. During this time, the property must continue to be class 2a property (i.e. farmland). There is no longer a requirement that the qualified heir actually farm the land.
Our firm has experience in planning for and utilizing the qualified farm land deduction. For more information or to schedule an appointment to see if you have planned effectively for this valuable deduction, call 507-288-5567.