Estate tax, gift tax, and generation skipping tax
Federal estate tax
Current federal estate tax law has permanently established the federal estate tax exclusion at $5,000,000 and indexed it for inflation. For 2013 the exclusion amount is $5,250,000 per person with an applicable tax credit amount of $2,045,800. For 2014 the exclusion amount is $5,340,000 with an applicable tax credit amount of $2,081,800. The law has permanently established the maximum federal estate tax rate at 40%. The "portability" provision has been made permanent in the law which allows for the surviving spouse to utilize any of the federal exclusion not utilized by their deceased spouse. To qualify, a federal estate tax return must be filed on behalf of the decedent even though there may be no federal estate tax due.
Federal annual gift tax exclusion
The federal annual gift exclusion (amount each person can gift to as many persons they want in one year without federal gift tax) is $14,000 per recipient in 2013 and 2014. Spouses can combine their annual exclusion amounts for a total gift of $28,000 to as many persons per year as they wish. Note: if spouses are gifting the $28,000 they are required to write separate checks for $14,000 each or file an IRS 709 gift tax form.
Gifts in excess of the annual exclusion amount but less than the lifetime exclusion amount require filing an IRS 709 gift tax form but no tax is due while the donor is living. Gifts recorded on an IRS 709 form are added back into the decedent's estate value at death to determine if federal estate tax is due. Gifts in excess of the lifetime exclusion amount require gift tax being paid. The tax is due by April 15 of the year following the year of the decedent's death.
Federal lifetime gift tax exclusion
Current federal gift tax law has permanently established the federal lifetime gift tax exclusion at $5,000,000 and indexed it for inflation. For the tax year 2013, the federal lifetime gift tax exclusion is $5,250,000. The exclusion amount for 2014 is $5,340,000. The law has permanently established the maximum federal gift tax rate at 40%.
Note: think of the federal estate tax, gift tax and generation skipping tax exclusion amounts as one pot of money. That is, each person in 2013 has a total of $5,250,000 (2014—$5,340,000) worth of exclusions and each person can chose how to spend the amount—estate tax, gift tax or generation skipping tax. Each person does not have three separate pots of money, each equal to the exclusion amount.
Minnesota estate tax
For Minnesota, the estate applicable exclusion amount is $1,000,000 per person. The tax rate for estate amounts in excess of the exclusion, range from 41% to 9.96%. The first $75,000 above the $1,000,000 exclusion is taxed at 41% and the last $50,000 of the amount over the exclusion is taxed at 9.96%.1
Minnesota estate tax laws apply to non-residents. It allows for taxation of a non-resident's estate, where the non-resident has ownership interest in Minnesota property held in a pass-through entity when the entity owns real estate or tangible personal property (machinery, livestock, equipment, grain inventory, etc.). Pass-through entities are defined as S corporations, partnerships, single-member LLCs and trusts. This portion of the law is effective for the estates of decedents dying after Dec. 31, 2012.
Qualified small business property and qualified farm property exclusion (Minnesota only)
With the signing of the Minnesota Legislative Special Session Budget Bill in July 2011, there is a new additional estate tax exclusion amount for Minnesota qualifying small business and farm property owners only. The exclusion is limited to decedents dying after June 30, 2011. The additional exclusion is $4,000,000 on in addition to the $1,000,000 exclusion per person mentioned earlier, if decedent qualifies.
Qualified farm property exclusion (Minnesota only)
To qualify, the property value must have been included in the decedent's federal adjusted taxable estate after deductions. Property must meet the definition of a farm according to Minnesota Statute (MS) 500.24 (to date that includes only sole proprietorship property—no business entities qualify at this time unless the Minnesota State Legislature changes the law). Property was classified as the homestead of the decedent or decedent's spouse and classified as Class 2a property. NOTE: if the farm family has lost homestead designation on the farm land, the land does not qualify for the exclusion. The decedent continuously owned the property for three years ending at their death. Farm entities currently qualified for the exclusion include sole proprietor, general partnership, limited partnerships (LP, LLP and LLLP), LLCs, trusts and life estate. The decedent must have had a controlling interest in the entity and must have filed a Minnesota corporate farm law report to qualify.
The family member(s) inheriting the property do not have to continuously use the property in the operation of the trade or business for three years following the decedent's death. The family member(s) inheriting the property do not have to homestead the property but must continue its 2a property classification for three years after the decedent's death or a recapture tax applies.
Qualified small business property exclusion (Minnesota only)
Qualified small business property has to comply with the same rules as does the qualifying farm property. There are three additional rules:
- the small business cannot have had gross annual sales in excess of $10 million during the last taxable year that ended before the decedent's death,
- the decedent or decedent's spouse must have materially participated (worked in the business or been financially at risk) in the business, and
- cash or cash equivalents do not qualify for the exclusion.
For both qualified farm and small business property, a qualified family member or heir includes: decedent's ancestors such as parents, grandparents, etc.; decedent's spouse; a linear descendent such as a child, grandchild, etc. of the decedent, of the decedent's spouse, or of the decedent's parents; or spouse of any lineal descendent described previously. If any of the following occur within three years of the decedent's death and before the death of the qualified heir, then a recapture tax is imposed:
- The qualified heir disposes of any interest in the qualified property (other than by a disposition to a family member),
- For the qualified farm property deduction, a family member does not maintain the 2a classification for the qualified property,
- For the qualified small business property deduction, a family member does not materially participate in the operation of the trade or business.
The recapture tax equals 16 percent of the amount of the exclusion and must be paid to the Minnesota Department of Revenue within six months after the date of the disqualifying disposition or cessation of use.
To claim the exclusion, complete and submit Schedule M706Q, Election to Claim the Qualified Small Business and Farm Property Exclusion when filing the decedent's Minnesota estate tax return.
When an estate elects the Qualified Small Business Property and Qualified Farm Property Exclusion deduction, a qualified heir must file two informational returns to confirm that no recapture tax is due. The first return is due 24–26 months after the decedent's death. The second return is due 36–39 months after the decedent's death. This requirement is effective for returns due after December 31, 2013 (that is, for estates of those who died after Dec. 31, 2011).
Minnesota gift tax
Effective July 1, 2013 there will be a gift tax in Minnesota. It allows for an annual gift exclusion of $14,000 per donor, per person, per year to any number of persons without any tax consequence. This annual exclusion is doubled to $28,000 for couples if they write two checks equal to $14,000 each or file an IRS 709 form and MN 709 form. For gifts that exceed the $14,000 per individual ($28,000 per couple) exclusion amount, the donor must complete both an IRS 709 and MN 709 gift tax form.
Each person has a Minnesota lifetime gift exclusion amount of $1,000,000 with an applicable $100,000 lifetime gift tax credit. For couples that amount doubles to $2,000,000 exclusion with an applicable lifetime gift tax credit of $200,000. This exclusion is in addition to the $1,000,000 Minnesota estate tax exclusion amount.
Gifts in excess of the lifetime exclusion amount will be taxed at a flat rate of 10 percent. The value of gifts in excess of the Minnesota annual exclusion amount (recorded on the IRS 709 and MN 709 forms) made within 3 years of the decedent's death will be added back into the decedent's estate to determine if Minnesota estate tax is due. The 3 year add back provision is retroactive applying to estates of decedents dying after Dec. 30, 2012. The amount of Minnesota estate tax due is reduced by the amount of Minnesota gift tax paid on any gift added back and included in the decedent's Minnesota adjusted taxable estate.
Minnesota gift tax applies to the transfer of property located in Minnesota only. The Minnesota gift tax applies to Minnesota residents and to gifts or real estate and tangible personal property (machinery, livestock, equipment, grain inventory, etc.) located in Minnesota but owned by any non-resident.
Minnesota residents transferring real and tangible personal property located outside Minnesota are not subject to the Minnesota gift tax.
Minnesota gift tax is due April 15 after the close of the calendar year in which the gift was made. Late payments will be assessed a penalty of 10% or $100, whichever is greater. The donor of the gift is liable for paying the gift tax. If the gift tax is not paid when due, the done (recipient) of the gift is personally liable for paying the tax.
- For annual gifts of $14,000 individually ($28,000 couple)—no tax, no IRS 709 or MN 709 form.
- For annual gifts $14,001 up to federal and Minnesota gift exclusion individually ($28,001—up to federal and Minnesota gift exclusion per couple)—no tax due while the donor is alive, file IRS 709 and Minnesota 709 forms.
- For annual or lifetime gifts greater than federal or Minnesota gift exclusion—tax due by April 15 the year following the year of the gift and file IRS 709 and MN 709 forms.
Note: This information piece is offered as educational information only and is not intended to be tax, legal or financial advice. For questions specific to your farm business or individual situation, consult with your tax preparer.
- 2011 National Income Tax Workbook, Land Grant University Tax Education Foundation.
12011 National Income Tax Workbook, Land Grant University Tax Education Foundation, Inc. p. 673.