Family Landowners may Hurt from Minnesota Death Tax

Published On: 31st January 2015

From the internet

In the U.S., more than 1/3 of all of the land in the forest is owned by families. Many of these pieces of land are owned by individuals over 65 years of age. Because of their age, it won’t be long before that land has to go through the estate transfer process, making it possible that it will be subject to tax.

While many Minnesotans are aware of the federal estate tax change, there has been a change in tax minimization planning where people now think about succession more than anything. However, not planning for tax minimization could result in the family having to sell parts of land that they don’t want to have to sell.

In the past, the federal income tax code has had a credit for taxes a person pays to the state upon the death of the taxpayer. The credit was phased out in 2005 and replaced with a state death tax deduction. A return of the credit almost happened because there was a possibility that conditions would revert to what was seen in 2001.

This caused states to respond to the federal tax change in two ways.

The first was that a number of states did absolutely nothing. This inaction nearly killed the state death tax. When the federal credit was done away with, the state could no longer collect estate taxes. If the federal estate tax would be put in place again, then the states would once again collect a state death tax.

The second way states responded was to the creation of an estate tax that stood on its own. Fourteen states and the District of Columbia took this route and they still have their state death taxes. In those states, private forest land accounts for up to 94 percent of the forested areas within some states.

Minnesota tied its state death tax exemption to the federal exemption at one time. Minnesota uses the estate tax law the way that it was used as of December 31, 2000.

At that time, the federal law had an exemption for estate with assets worth less than $675,000. The exemption that Minnesota set up was set to increase in increments all the way up to a $1 million exemption.

Due to Minnesota state law being tied to the 2001 federal law, an estate in 2011 (which a $5 million federal exemption was allowed) would pay a state tax rate of 41 percent on the first $93,000 over the $1 million.

In Minnesota 44 percent of land is privately owned. Because land values increase over time, it is not difficult to see how a modest amount of land in an estate could be cause for an estate tax. There are some federal proposals in place regarding changes to the death tax rate and the exemption levels. Should the federal tax credit make a return, the landowners in the states that did nothing will have to make plans for an estate tax once again.