As most people are all too aware, the real estate market here in Minnesota and across the nation took a major hit during the recent recession as home prices plummeted and foreclosures hit new highs. Fortunately, the market is finally starting to show sustained improvement such that homeowners can breathe a sigh of relief.
Interestingly, while farms were certainly not immune to the fallout from the recession, the market for this type of property has nevertheless rebounded on perhaps a much more lucrative scale.
Indeed, experts have indicated that farm appreciation rates have risen significantly in recent years such that farmers in some Midwestern states are now being offered upwards of $15,000 dollars per acre.
While the possibility of such rapid appreciation is undoubtedly an exciting proposition for middle-aged farmers, experts indicate that it could also prove to be a costly proposition if they fail to take the necessary estate planning steps.
"If farmland values continue to grow at the rate they are growing, [farmers in their 40s and 50s] could very easily face owing Uncle Sam, and their state, $5 million, $10 million, $15 million in taxes," said one accountant who caters to rural clients.
Indeed, while the current federal estate tax exemption enables a married couple to pass $10 million (indexed for inflation) tax-free, experts indicate that this may prove insufficient if the couple owns thousands of highly valued farm acres. This is not to mention they might be subject to an estate tax levied by the state in which they live/the farm is located.
What then can farmers do to minimize their potential estate tax liability?
Experts indicate that on the state level, they can seek to establish a residence in a state like Texas or Florida, which doesn't have an estate tax. However, they caution that this typically requires living in the state for over six months out of the year, and wouldn't necessarily relieve all of the tax burden, as some estate tax may need to be paid due to the simple fact that the farm is located there.
"A lot of our farmers, when they get a little older, become snowbirds. They'll live in Texas in the wintertime and Minnesota in the summertime," said the same accountant.
Another strategy to lower potential federal estate tax liability, say experts, is to utilize the practice of gifting up to the annual tax-free exclusion, something that will serve to lower the overall value of the estate and minimize taxes.
As an example, a married couple who owns a valued farm could each give their 15 grandchildren $14,000 (the tax-free exclusion for 2014), which would serve to lower the amount of their taxable estate by upwards of $420,000.
It will be interesting to see if this rate of farm appreciation continues in the coming years ...
No matter where you live or your level of assets, it's important to consider speaking with an experienced legal professional to learn more about comprehensive estate planning and the options available to you.
Source: Farm Journal, "Tax traps: Don't get stung by estate taxes," Boyce Thompson, July 14, 2014