INDIANOLA, Iowa (DTN) -- Congress relieved many farm families by raising the federal estate tax exemption late last year. The bad news is that 13 states still impose their own version of hell on earth in estate taxes.
At the federal level, estates as large as $5.34 million per individual or $10.68 million per couple can pass free of taxes in 2014, and future years are indexed for inflation. But farmers in seven states can be shocked with steep state estate taxes because their exemption is $1 million or less: New Jersey, Minnesota, Maryland, Massachusetts, New York, Oregon and Rhode Island. Tax rates range from 5% to 16% depending on the size of the estate, payable on top of any federal obligations, a DTN analysis found.
Six more states impose death taxes with exemptions between $2 million to $4 million: Illinois, Tennessee, Connecticut, Maine, Vermont and Washington.
Considering that the last decade generated the most robust farm real estate gains since the 1970s, such modest ceilings will put major strains on family farms. Some prime U.S. corn land now commands $17,000 and up an acre and combines cost more than an average four-bedroom house in the suburbs.
New Jersey ranks as the most valuable farmland in the nation, so its state estate tax exemption of a mere $675,000 punishes farm families severely and discourages next-generation producers. "Most farmers are asset rich but cash poor," said New Jersey farmer Steven Jany, 62, who raises corn and soybeans on 1,800 acres on the outskirts of Princeton. His son farms with him, but transferring farmland can be problematic. Values on farms that have sold their agricultural development rights (so the land remains in farming) still top $11,000 per acre in the Garden State, he noted. At that rate it only takes 62 acres to hit the state's estate tax limit.
"It's a huge burden if you want to keep the farm in the family," said Jany.
In addition, New Jersey has both an estate tax (levied on the estate of the person who died) and an inheritance tax (levied on those who inherit the assets).
CORN BELT'S MOST TAXING STATES
Halfway across the country, estate planning for Minnesotans just got more complicated this summer. Beginning July 1, Minnesota residents face a state gift tax on lifetime gifts over $1 million. Until then, farmers had been using large gifts to cope with the Minnesota state estate tax which kicks in on estates over $1 million, although that can be increased to $4 million for qualified farm property and for qualified small business property. Also, Minnesota does not allow portability (as the federal rules do) between spouses of either the gift or estate tax exemption.
State and federal tax rules get very complex very quickly, explained Nick Houle, a CPA who specializes in estate and small business transition planning for CliftonLarsonAllen LLP in Minneapolis.
"With a state gift tax like Minnesota's, you can't decide to reduce a large estate at the last minute," Houle said. The annual gift tax exclusion of $14,000 (in 2013) per person per year is still allowed. "So if husband and wife gave a total of $28,000 to each of their four children, that's $112,000 per year. Over 10 years, that would add up to over $1 million, but that takes advanced planning," Houle added. The new Minnesota gift tax law makes it tough for someone who waits until he or she is 70 years old to make a meaningful dent in estate taxes.
The best advice appears to be to start planning with an estate planning expert early, Houle said. As with any taxes, but especially estate taxes, the key is to seek expert advice to navigate state and federal rules for a smooth transition to the next generation.
Several other key agricultural states have state estate taxes farmers need to plan around. Illinois imposes a flat $4 million exemption on state estate taxes, but it doesn't take long for Illinois farmers to punch through that level. Owners of "excellent" Illinois farmland (190 bushels per acre yield, which sold for an average $13,200 an acre this summer), would only need about 300 acres to hit the state estate tax exemption -- and that doesn't include any other assets like grain bins or farm machinery.
Illinois' top tax rate on estates over $4 million is 16%. Unlike the federal estate tax, Illinois does not allow portability which means the second spouse to die only has a $4 million exemption even if the first spouse to die used less than his or her $4 million exemption.
Even in Iowa, which is not on the list of worst states for estate taxes, if you want to leave your property to your niece or nephew or someone who is not a direct descendant, spouse or your parent or grandparent, the heir to your property (other than a qualified charity) would have to pay a 5% to 15% inheritance tax.
Pennsylvania also makes an exception to its state inheritance tax, but only for "agricultural property" inherited by members of the same family and if the land is continued to be devoted to agriculture for seven years after the family member inherits the property.
Tennessee residents have a $2 million state estate tax exemption in 2014. However, the state estate tax is repealed altogether on Jan. 1, 2016.
The best states to have your farm, for inheritance purposes? Thirty states have no state estate or inheritance tax: Alabama, Alaska, Arizona, California, Colorado, Florida, Georgia, Idaho, Indiana, Kansas, Louisiana, Michigan, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Texas, Utah, Virginia, West Virginia, Wisconsin and Wyoming.
Unfortunately, because land is their business, most farmers don't have the mobility to pick up stakes.
Editor's Note: DTN will host a four-hour farm family estate planning workshop, "Pass It On!" with Nick Houle and Family Business Mediator Lance Woodbury Dec. 8 in Chicago. For details go to http://goo.gl/…
DTN's on-going Senior Partners series examines the financial, legal and emotional hurdles families face as they transition farm ownership from the senior to junior partners. To read other features in the package, go to DTN/The Progressive Farmer In-Depth at http://www.dtn.com/…
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