September 5, 2017 at 3:32 p.m.
A recent meeting hosted by Woltjer and Associates of Little Falls, Minn., and the University of Minnesota Extension Service on March 30 at the Initiative Foundation in Little Falls provided information regarding the farm transition and estate planning process to around 60 people in attendance.
Start the process early
A key step in building a successful farm transfer plan is starting the process early.
"Farm transfer works best when the process can take place over several years," said U of M Extension Educator David Bau.
In building a plan, several issues should be considered, including the retiree's willingness to let go and retire, the financial security of the retiree and the incoming farmer, the management potential of the entering farmer, and whether the current farm situation will be sustainable for the entering farmer. Because of these considerations, communication is fundamental in developing a successful plan.
All aspects of forming a farm transfer plan should be centered on achieving the farm's mission - where you want to go with your farm in the future. Goals act as stepping stones to help the farm move toward its mission.
"It's our experience that if you don't know what your goals are, this process will not move forward," said Gary Hachfeld, U of M Extension Educator,. "... Folks that don't do any planning or folks that do poor planning - those are the ones that end up liquidating their assets and selling the farm."
Goals should be set - and written down - by each family involved in the farm transfer process. These goals should then be blended and prioritized by each generation separately and then together, keeping the farm mission in mind.
"Goals must be well defined, realistic and have a timeline," Bau said. "The timeline is an important factor. If you put a timeline on those goals, there will be incentive to do them."
Assets and tax considerations
Ownership of farm assets can be transferred in one of three ways: through purchasing, through gifting and by inheriting. Asset basis should be considered before transfer of ownership on any asset.
Basis is the cost to recover when an asset is sold, Bau said. Basis can change yearly (adjusted basis) and is typically determined by how the asset is acquired and the amount of time it has been owned. For purchased assets, the basis is the amount paid, plus improvements, less depreciation in the time it has been owned. For gifted assets, the basis goes with the gift; therefore, the receiver's basis is the same as the giver's adjusted basis. Basis on inherited assets is equal to the fair market value (FMV) or special use valuation (SUV) of the asset. SUV is used for estates meeting specific qualifications. If an asset goes through an estate, it is assigned "stepped up" basis, typically equivalent to the FMV on the date of death.
The importance of knowing an asset's basis comes down to taxable gain when selling that asset. Tax is paid on the difference or gain between the selling price of an asset and the adjusted basis; the larger the difference, the more taxable gain.
"If you can't prove the basis [on an asset] it turns to zero, so it's important to know and communicate basis," Bau said.
Certain assets - stocks, bonds, house, furnishings, etc. - are also subject to capital gain tax. Although farmland, machinery, buildings and breeding stock are considered capital assets, they may not be subject to capital gain tax.
Estate taxes may apply if an estate exceeds the exclusion amount. These exclusion amounts vary each year. For 2012, the federal estate tax exclusion is $5,120,000; the Minnesota estate tax exclusion is $1,000,000, and $4,000,000 if it meets certain qualifications. These qualifications lie under the 'Qualified Small Business Property and Qualified Farm Property Exclusions.' With the separate federal and state estate taxes, Minnesota estate tax may be owed even if no federal estate tax is owed.
Gifts can also be subject to tax should they exceed the exclusion amount. The annual 'gift tax' exclusion amount for individuals is $13,000; for couples, $26,000. For 2012, the lifetime gift exclusion amount is $5,120,000. If exclusions are exceeded, taxes are imposed on the giver, not the recipient.
Certain gifts are non-taxable. These include gifts that do not exceed the annual exclusion or lifetime exclusion amounts; gifts to a spouse, no matter the amount, as long as the spouse is a U.S. citizen; gifts to a non-U.S. citizen spouse up to $136,000; or gifts to a qualifying charity, no matter the amount. For 2012, the highest federal estate and gift tax rates are 35 percent.
Another caution regarding gifting assets involves Medicaid (MA) and the Deficit Reduction Act of 2005. With this act, Hachfeld said, a person will not qualify for MA if they have made a gift or transfer of assets for less than FMV within 60 months (five years) of applying for MA. The ineligible period begins at the time of MA application, once the person has spent down their total assets to no more than $3,000 for an individual.
In all cases, it is best to invoke the expertise of an attorney to determine what is best for your specific situation.
To Submit an Event Sign in first
No calendar events have been scheduled for today.