copyright © 2014. university of minnesota. all rights reserved. federal & minnesota estate...

Copyright © 2014. University of Minnesota. All Rights Reserved.

Federal & Minnesota Estate & Tax

Update

Gary A. Hachfeld

Extension Educator - Ag Business Management

University of Minnesota Extension

Ag Lenders Conference

Southwest Research & Outreach Center

August 12, 2014


Capital Gains Tax


Capital Gains Tax• Long-term federal capital gains tax rates (assets

held more than one year):

– 5% (0%), 15%, 20%, 25% & 28%.

• 5% rate becomes 0% if taxable income is within the 10% or 15% federal income tax bracket. Applies only to gain between taxable income and top of 15% tax bracket amount - 5% does not apply on that portion.

• 15% rate for any gain in excess of 15% federal income tax bracket amount or if taxable income is in 15% federal income tax bracket or greater, but less than 39.6% income tax bracket.

AGI taxable income 2014 = $43,800

Example: AGI taxable income 2014 = $73,800 AGI taxable income 2014 = $43,800

Land sale: capital gain of $70,000

Top of 15% Fed tax bracket 2014 = $73,800 ($43,800 + $30,000)

First $30,000 of capital gain0% capital gain tax rate

Final $40,000 of capital gain15% capital gain tax rate


Capital Gains Tax• Long-term federal capital gains tax rates (assets

held more than one year):

– 5% (0%), 15%, 20%, 25% & 28%.

• 5% rate becomes 0% if taxable income is within the 10% or 15% federal income tax bracket. Applies only to gain between taxable income and top of 15% tax bracket amount - 5% does not apply on that portion.

• 15% rate for any gain in excess of 15% federal income tax bracket amount or if taxable income is in 15% federal income tax bracket or greater, but less than 39.6% income tax bracket.


Capital Gains Tax

•Long-term federal capital gains tax top rate goes to 20% for individuals with federal taxable

income over threshold amounts set for 39.6% income tax rate:

- Thresholds:

-$400,000 for individuals

-$450,000 for married filing jointly

-$425,000 head of household


Federal Estate Tax• American Taxpayer Relief Act of 2013:

– Tax act set federal estate tax exclusion amount at $5,000,000 per person and indexed it for inflation.

– 2014 federal estate tax exclusion amount is established at $5,340,000 per person.

– Permanently includes “portability” of exclusion between spouses.• Deceased spouses unused portion of federal estate tax

exclusion is “portable” (transferable) to the surviving spouse.

• To qualify for portability option, required to file estate tax return for decedent even if estate is not taxable.


Federal Estate TaxFederal estate taxes assessed only on amounts exceeding federal estate tax exclusion amount. Credit is applicable tax on exclusion amount. Exclusion & credit can vary by year.

Year of Death Exclusion: Credit:

2013 $5,250,000 $2,045,800

Stepped-up Basis

2014 $5,340,000 $2,081,000

Stepped-up Basis

2015 ? ? ? ? ? ?


Minnesota & Federal Exemption Amounts

Year of Minnesota Federal Death Exemption Amt. Exemption Amt.

2011 $1,000,000 $5,000,000 and $4,000,000**

2012 $1,000,000 $5,120,000 and $4,000,000**

2013 $1,000,000 $5,250,000 and $4,000,000**

2014 $1,200,000 $5,340,000 and $4,000,000**

** With Qualifications !!!


Minnesota Estate Tax

• MN Exclusion Amount:

– Estates of decedents dying after Dec. 31, 2013

• 2014 - $1,200,000

• 2015 - $1,400,000

• 2016 - $1,600,000

• 2017 - $1,800,000

• 2018 - $2,000,000


Minnesota Estate Tax• MN estate tax law allows for the taxation of a

non-resident’s estate, where the non-resident has ownership interest in MN property held in a pass-through entity that owns real estate or tangible personal property (machinery, livestock, etc.).

• Pass-through entities are defined as S corporations, partnerships, single-member LLCs and trusts. Excludes publically traded entities.

• Law is effective for the estates of decedents dying after Dec. 31, 2012.

• MN estate value and associated tax is also impacted by the Qualified Small Business Property & Qualified Farm Property Exclusion and the MN gift tax.



Qualified Small Business Property

&

Qualified Farm Property Exclusion



• Qualified Small Business Property and Qualified Farm Property Exclusion:

– Signed into MN law July 2011.

– Increases MN estate tax exclusion for qualified farm and small business property only.

– New exclusion is limited to decedents dying after June 30, 2011.


Minnesota Estate Tax• Qualified Small Business Property &

Qualified Farm Property Exclusion:

– Qualified farm property:

• Property was classified for property tax purposes in taxable year of death as agricultural, ag relative or special ag homestead under M.S. 273.124. If decedent had lost homestead classification prior to death, property does not qualify for exclusion.

• Property was classified for property tax purposes in taxable year of death as class 2a property under M.S. 273.13, subd. 23.




– Qualified farm property:

• Qualified heir(s)/family member(s) do not have to use the property in the operation of the trade or business for three years following decedent’s death.

• Qualified heir(s)/family member(s) do not have to homestead the property.

• Property must stay classified 2a property for three years after decedent’s death.



Qualified Farm Property Exclusion:– Farm entities currently qualified for exclusion:

• Sole proprietor• General Partnership• Limited Partnerships (LP, LLP, LLLP) & LLCs• S Corporations & C Corporations• Trusts• Life Estates

– Individual must have a controlling interest and file a MN. corporate farm law report to qualify.



• Qualified Small Business Property & Qualified Farm Property Exclusion:

– Recapture tax provision: if any of the following occurs within three years of the decedent’s

death and before the death of the qualified heir, a recapture tax is imposed:

• Qualified heir disposes of any interest in the qualified property (other than by disposition to a qualified family member),




– Recapture tax provision (continued):

or • For the qualified farm property deduction, a family

member does not maintain the 2a classification for the qualified property,

or • For the qualified small business property deduction,

a family member does not materially participate in the operation of the trade or business.



• Qualified Small Business Property & Qualified Farm Property Exclusion:

– Recapture tax:

• Tax equal to 16% on the amount of the exclusion.

• Must be paid to Minnesota Department of Revenue within six months after the date of the disqualifying disposition or cessation of use.



Qualified Farm Property Exclusion:– When estate elects this deduction, qualified heir

must file two information returns to confirm no recapture tax is due.• First return due 24 - 26 months after decedent’s

death.• Second return due 36 - 39 months after decedent’s

death.– Requirement effective for returns due after

Dec. 31, 2013 (that is, for estates of those who died after Dec. 31, 2011).



• NOTE:– If you qualify for the $4 million dollar Qualified

Small Business Property & Qualified Farm Property Exclusion, regardless of the increase in the MN $1 million dollar exclusion, your total MN estate tax exclusion amount cannot exceed $5 million dollars per person.


FEDERAL GIFT TAX• Each individual has an Annual Gift Exclusion of

$14,000 - couples together total $28,000.

• Each individual has a Lifetime Gift Exclusion equal to the federal estate tax exclusion

($5,340,000 for 2014).

• Federal Annual Exclusion does not apply to gifts of future interest such as remainder interest portion of life estate.

• Some gifts are not taxable.

• Some gifts are taxable.


Minnesota Gift Tax– MN gift tax was repealed back to June 30, 2013.

– Tax was originally effective July 1, 2013.

– Gifting is still connected to MN estate tax. Value of gifts above the federal annual gift

exclusion amount, made within 3 years of death, must be “added back” into the value of the decedent’s estate to determine if MN estate tax is due.

– The “add-back” rule applies retroactively to all gifts made after the date of June 30, 2013.


Gifting & MN Estate Tax– For decedents with an ownership interest in

property that is located in MN, the decedent’s personal representative must file a MN estate tax return IF:

• A federal estate tax return is filed

OR

• The sum of the decedent’s federal gross estate plus federal adjusted taxable gifts (recorded on IRS 709 form) made within 3 years of decedent’s date of death, exceeds the MN estate exclusion for the year the decedent dies.


Federal Estate & Gift Tax Rates

Maximum Estate Maximum GiftYear Tax Rate Tax Rate

2011-12 35% 35%

2013 40% 40%

2014 & thereafter 40%* 40%*

*Law is currently permanent at maximum 40%. Law could change rate.


Minnesota Estate & Gift Tax Rates

Marginal Estate Tax GiftYear Rate Range Tax

Rate

2011-12 41% - 9.96% No Gift Tax

2013 41% - 9.96% No Gift Tax

2014 9% - 16% No Gift Tax

2015 - 2018 10% - 16% No Gift Tax


FederalEstate & Gift Tax

–Federal: for 2014 you have one exclusion amount worth a total of $5,340,000 per person.

–You decide how you want to spend it:• Estate Tax

OR

• Gift Tax


Minnesota Estate & Gift Tax• Minnesota:

– You potentially have two exclusion amounts:

1. MN estate tax exclusion each person receives, with an amount based upon year of death, increased each year to a maximum of $2,000,000 in 2018.

2. If you have agricultural land that qualifies for the MN Qualified Small Business Property & Qualified Farm Property Exclusion, you potentially have an additional $4 million exclusion.

NOTE: total MN estate tax exclusion amount cannot exceed $5,000,000 per person.


Power-of-Attorney


Power-of-Attorney• Statutory Power-of-Attorney (POA):

– After Jan. 1, 2014, all statutory short form powers of attorney, executed prior to that date, become common law powers of attorney and do not get various statutory protections.

– Under the current statute, an accounting is required IF: • the grantor requests an accounting,• the document requires an accounting,• an interested party requests an accounting,• the Attorney in Fact (person with POA) reimburses himself or

herself for any expenditure.

– Failure to provide an accounting as required, can lead to treble (triple) damages to the grantor and the requirement to pay attorney fees and costs to the person petitioning for an accounting.


Irrevocable Trusts&

Medicaid Qualification


Irrevocable Trust (IT) - for MA

• IT established on or after July 1, 2005:– Mom is grantor, places land into IT.

– Daughter is trustee of the IT.– Mom gets land rent but can not change

provisions of the IT.

– If MA is an issue, assets in an IT established in MN on or after July 1, 2005 are considered countable assets for spend down requirement when applying for MA. (Current litigation may limit this to only ITs established within 60 months of application for MA).

– If MA is not an issue, IT stands intact.


Contact Information

Gary A. Hachfeld

507-389-6722

[email protected]

mailto:[email protected]


Farm Transition & Estate Planning Update

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