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Minnesota Ag Connection

It’s not a conversation any of us want to really discuss with parents or grandparents. After they are gone, depending on the value of a property, some farm families or property owners that inherit property left in an estate could face substantial tax burdens.

Recently, U.S. Rep. Michelle Fischbach (R), said that with some changes being proposed, estate or inheritance tax could impact families at the worst of times.

“The death tax penalizes families for losing a loved one and the Biden budget is taking advantage of this sad situation. These policies would come at the expense of Minnesota family farms and the next generation of Americans. I intend to push back on any legislation that could increase the death tax and impose more burdens on small businesses and family farms.” said Fischbach.

Accorded to Forbes’ Robert W. Wood, “Under President Biden’s proposal, there would be an exemption of $5 million per person, or $10 million for a married couple. But if you exceed that figure, the step-in basis for income tax purposes would be a thing of the past.”

Minnesota has a standard state tax exemption of $3 million currently. They also have a $2 million qualified farmland exemption. A standard exemption applies when someone dies as long as their net worth or their estate is under $3 million there won’t be any estate tax as far as Minnesota. If they are over that threshold, then just the amount over and above that threshold would be subject to the Minnesota estate tax.

For farmers, if they have qualified farmland, which is basically an ag homestead and to a property that is tillable, in addition to the $3 million standard exemption they would get another $2 million qualified farmland exemption. If they elect to do that they have to have qualified farmland in order to do that. After they do that for three years, they can’t sell the property outside of the family and it needs to remain agricultural land. There’s a reporting requirement related to that. There’s also a small business exemption that’s also $2 million for small businesses and there’s some qualifications with that too.

In speaking with local experts, with the right planning and depending on the value of an inherited property, some of these tax implications can be mitigated.

Fergus Falls accountant Rodger Heaton, of Heaton Tax Accounting, said the state threshold is fairly high, while the federal threshold is even higher.

“In terms of the amount one can inherit without having to worry about a tax issue it’s actually lower in Minnesota. You have a federal tax and a state tax issue with the Minnesota amount being a $3 million estate. If it goes above that you do have some state tax issues. The federal threshold is $12,920,000 ,” said Heaton.

Heaton mentioned most will not run into this, unless the property values are significant.

“That’s not a normal occurrence for most people. For instance, If someone’s parents have a 132 acre farm, when they pass, their children will inherit that property and will have step-in basis in that property. Whatever the value was when the parents passed becomes almost like a purchase price of the 132 acre farm. If it was worth $200,000 when they passed, I now own it for $200,000. I could turn around the next day and sell it, and I wouldn’t have any tax to pay. But if I inherit the farm and later sell it for $300,000, now I have a gain. That would be taxable under capital gains taxes. You only get the value at the time of their passing, it’s not a forever portion until you would sell the property,” said Heaton.

On Fischbach’s comments, Heaton said lawmakers are looking ahead to either get tax changes passed in the legislatures, but it wont come up on his radar until after it is law.

“I look at it after the fact once they’ve created the laws and once they’re passed it (legislation) and they trickle down into the tax code, that’s when I pay attention to it because there’s usually a lot of hyperbole before things are actually done. Rarely do they pertain to the year behind us. Right now all of my continuing education is focused on 2022 and a little bit on 2023, but I suspect what they’re looking to change is for 2025. There are a bunch of changes that fall off the books in 2025,” explained Heaton.

A local attorney who specializes in estate planning, business succession/agricultural law Nicholas J. Heydt, with the firm Pemberton Law, said there are a few in the county that he advises that are over the thresholds.

“Farmland nowadays in Otter Tail County can be around $6,000 to $7,000 an acre. I have a lot of clients that are over those thresholds so we’re dealing with those state tax issues all the time,” said Heydt.

Heydt advises being diligent about planning ahead.

“There’s a number of strategies behind planning for estate taxes and trying to minimize them. For my clients that are up around the threshold we often will do trust planning. By properly planning between husband and wife if we can double those exemptions. With the $3 million standard exemption for a husband and wife you can double that exemption to $6 million but you need to have proper tax planning in your estate plan to achieve that,” added Heydt.

The other factor for federal and state tax is something called portability.

“The concept there is between husband and wife. If a husband dies for instance and they don’t use their full $12,920,000 exemption, they’re able to port or move over any unused exemption to a surviving spouse which is a federal rule. Minnesota doesn’t portability all of those assets to the surviving spouse and if the wife passes away and they are over $3 million, that means there’s only a $3 million dollar exemption for both the husband and wife. They don’t each get the $3 million exemption. So that is important for estate tax planning,” explained Heydt.