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After establishing a trust, the next step is to properly fund your trust. Funding a trust is the process of transferring or directing assets to your trust. This can be done by re-titling assets in the name of your trust or, alternatively, naming your trust as the beneficiary of certain assets. Many times, we prefer to name your trust as beneficiary. For farm land, this is particularly important since who actually owns the farm land can make a big difference for property taxes and other tax laws. In many cases, farm land should not be owned by trusts given the current property tax laws.
Every farm has a property tax classification. Most farmers' farm land will be classified as "Agricultural Homestead". The Ag Homestead classification allows farmers to receive a tax break on the property taxes they pay to the county. In general, any farm land the farmer owns and farms will receive Ag Homestead. This can be true whether the farmer lives on the farm land or in town (depending on the distance). Farm land that is at least 40 acres and within 4 cities or townships of the home farm can also be "linked" to the home farm and also receive the Ag Homestead classification if it is owned by the exact same ownership entity.
Here's the problem when trusts owns farm land: farm land owned by two separate trusts is not owned by the exact same ownership entity! It is not uncommon for a husband and wife to each have their own trusts and for each trust to then own 50% of the farm land. This results in the farm land being owned by two ownership entities, wheres a husband and wife owning property individually are treated as one ownership entity. This means that only one trust is allowed to receive Ag Homestead and that the land in the other trust will not receive Ag Homestead. In the example above, 50% of the land would lose its Ag Homestead classification.
The Ag Homestead classification is important for a number of reasons. First and most obvious, is that farmer will pay much more in real estate taxes for any land that is not classified as Ag Homestead. This can be thousands of dollars year after year as a result of misguided estate planning.
In addition to paying higher property taxes, losing Ag Homestead can also result in much higher Minnesota estate taxes. Minnesota's estate tax exemption (the amount a single person can pass after death without paying estate tax) is set to increase to $3 million in 2020. With the high value of farm land and machinery, it does not take a lot for a farmer to accumulate that much value in his or her estate. However, family farmers can deduct the value of farm land from their estate if certain qualifications are met. One of those qualifications is that the farm land must be classified as Ag Homestead in the year of death. If the farm land is owned by two separate trusts, under the current law, one of the trusts must lose the Ag Homestead Classification for all the farm land owned by that trust - disqualifying the farmer from using one of the biggest estate tax breaks available for family farms.
The only saving grace for farmers in this situation is that the county assessors have not evenly applied this rule, despite clear guidance from Minnesota Revenue for them to do so. Here is the language directly from the Minnesota Property Tax Administrator's Manual:
"Properties owned by separate trusts may not be linked to each other, even if the grantors of the separate trusts are married. Mr. A’s Trust cannot be linked to property owned by Mrs. A’s trust. If Mr. A and Mrs. A are joint grantors of a single trust, all property under that exact same ownership (“Mr. and Mrs. A Trust”) may be linked, but may not be linked to trusts with differing ownership/different grantors."
See: http://www.revenue.state.mn.us/local_gov/prop_tax_admin/education/ptamanual_module4.pdf.
This is an issue we have been working around and watching for several years. Our attorneys have also been working with other estate planning attorneys throughout Minnesota to change this law so that married couples can retain the Ag Homestead classification even if they split the ownership into their separate trusts. In fact, the Minnesota State Bar Association advocated for this in the most recent legislative session. Unfortunately, this proposed change in the law did not make it into the final budget bill so, as it stands, it is our view that a farm couple should not split the ownership of their farm land into two separate trusts.
Our approach is to draft each estate and farm succession plan based on the facts and circumstances of each client. We stay up-to-date and informed with laws that may impact our clients and their estate plans and adapt our approach accordingly for long-term success. We work with farmers everyday, and we understand the importance of delivering pragmatic and forward-thinking legal advice.
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