Here's the deal: My dad lives in Iowa and inherited my mom's farmland that is in Minnesota when she passed away 18 years ago. He is 82 years old and has all four us kids as beneficiaries. Right now the land (100 acres) is being rented out. Should this be put in a trust, or just left alone or will we then have to deal with the probate process? Any advice? and yes we will be talking to a lawyer for advice but I know there are a lot of smart HROT posters out there that could give us some helpful info. or tips before we do that!!
Anyone have advice on farmland inheritance?
- Thread starter mythawks
- Start date
My mother was in a similar situation, although it was a 2nd home. They chose to liquidate the home and put the proceeds into an account that is payable on death to my sister and I. No probate and no estate taxes. In her case, capital gains taxes did not apply.
What ever you do, I would hate to see it liquidated to pay out the beneficiaries. Is there anyone in the family that would be interested in buying out the other 3 parties, say for a 10% family discount or anything? Or at least to a family friend or another local party? Farming is going to the big corps and once it is in the big corp, it won't be coming back out. Hate to see it go to a large corporation.
Heck, where is it at in MN? Lol
Heck, where is it at in MN? Lol
At that valuation you won't have to worry about inheritance taxes. If my understanding is correct, you can avoid the probate process by putting the property into a trust.
I believe the cap gains tax will need to be paid when the property is sold, regardless of who sells it (or when). The inheritance tax is different, and there should be different options to minimize that, if it even applies (the cutoff is, I think >$1M).
Thus, I think if you want to continue getting value (rental) from the property and NOT sell it to incur cap gains, you may need to look into a trust or something if that is possible, with the heirs inheriting equal shares of the trust.
But you should be aware of what the financial issues would be down the road with selling the property and dissolving the trust later. Plus, if you end up with 50/50 split voices in what to do with the property as part of the trust down the road, that is another consideration. (E.g. one trustee needs cash badly for a kid's tuition and wants to cash it out, but the others do not, or a 50/50 disagreement).
Good info there. The inheritance tax cutoff is 5M+ so a non issue.
The biggest issue is what the 4 'kids' want to do with it. Not sure the trust is worth it if you're going to sell the property.
I believe capital gains only has to be paid on the amount that the land increases in value from the time we would inherit it, if I understand that correctly.
No; far as I'm aware, the next official 'sale' of the property, regardless of ownership/inheritance, will trigger the cap gains tax.
Remember, capital gains is NOT based on what the property is worth NOW, it is based upon the DIFFERENCE it is worth now than when it was last purchased. Thus, if the property was worth $500,000 when purchased, there is only a cap gains tax on the other $300,000 or so of value. And cap gains is 'only' 15%, right? So, you could only end up paying 15% on the $300,000, or $45,000 on a property sale worth potentially $800,000. Is it worth setting up a 'trust' to defer that cap gains tax on to the heirs?
If the original land purchase value was only $100,000, THEN you're paying 15% on $700,000, or $105,000. So, it makes a BIG difference here what the 'basis' value of the property is....
the basis gets stepped up at death. if the land is worth 900k at death and is then sold for 900k there is no gain.
No; you will pay cap gains on the basis from the last purchase or sale price, but ONLY when it is sold. If you choose to NOT sell it as part of the inheritance (which I think a trust is the only way you may be able to do that), you can defer paying on that increased value to a time you decide you want to do it. But that carries with it the risks/issues of having some form of 'trust' that all inheritors have an equal stake in, and need to agree on to act/sell (or at least a majority, depending on how it is set up).
If the land is in your father's name when he dies, and needs to be split up, you MIGHT have an option to 'parcel' it into equal pieces for the kids, and maintain the basis/defer the cap gains until each individual parcel sells, but not sure that is easy or legal to do....particularly if access to the property is only thru one access route - you would need to split off a part of it as an access, etc. And that gets messy.
I'm not sure that is correct. I'd definitely make sure you have this point correct in any decision making processes....
This, I think, is true for 'residential'; not sure on farmland. Is it also different if it is homestead vs. not?
Attached is a link that explains this very basically. You do get a step up in basis from the date of inheritance. The heirs would only be responsible for gains in value after this date. The heirs would be responsible for the cash value of the crops currently growing on the property, or their income.
http://www.farmcpatoday.com/2013/02/26/how-step-up-in-basis-works/
Also depends on the value when dad your inherited it. He should have a stepped-up basis from your mom's cost basis.
As a result, the cap gains may not be as bad as you think (or maybe it is).
If he owned the property jointly with his wife, he would have gotten a step up in basis for half the value of the land, the half he inherited from his wife. His half would still have the original basis. If he inherited the entire amount, he would get a step up for the entire amount.
In any event, I think he has owned it for 18 years or so, so the capital gains would be huge now. He's going to have to spend some money on an estate planner.
So are you saying if it is put in a trust we will have to pay capital gains on the increased value from the time he inherited it?
Thats not accurate, putting the land in a trust would freeze the basis as of the day of transfer to the trust.
Yes....that's right. If it stays in a trust, the cap gains basis is value when the original owner dies.
Are you asking about putting it into a trust 'before' he dies vs 'after'?
There may be a difference there, but if the trust is in his name, then the trust is divided upon his death, and it sounds like the cap gains value resets in either case. Definitely stuff to clarify w/ a lawyer or finance guy though.
Off the subject a little... but if no one needs the $$$ right away and no one has a problem with renting out the land for a few more years, the value of farmland looks to be on at least a slight decline for the next few years. Rental rates are also seeing a decline.
I guess I wouldn't sell for a little while if you can hold off.
I guess I wouldn't sell for a little while if you can hold off.
This is great advice, but here's my guess at how this process will work in "real life"
One or all four of the kids: "GIVE ME THE MONEY!"
Most important question - do you four kids all get along? Greed and need are fickle b%tches. I've seen families destroyed by fighting over an inheritance.
Are all 4 kids expecting equal shares? If one of the kids had been farming the ground, sometimes they get a bigger share or a chance to buy out the others at a somewhat reduced cost. Sometimes parents have favorites and even stipulate which one(s) get more or less.
Is it just bare land with no buildings? If so, that's better.
No inheritance tax to worry about and setting up a trust(s) is a very good idea.
Yes, we all get along and greed won't be a problem. There are no buildings, just the land. 20 acres is non tillable so quite a few years ago the state put in a pond/wildlife area on that. None of us kids are farmers. It's the neighbor who rents it and will probably purchase it eventually.
I believe the death tax does not kick in till way above where the land is valued. The question is upon death and heirs taking it does the property get a stepped up value? That I am not sure.
It appears from googling (yeah, I know, right?) is that the value is stepped up at death. But, if it had been in a trust previously, such as being inherited by your parent in 1979 by death of their parent, and placed in trust, it would not step up with your parent's death....because it was in trust the entire time, so it would go all the way back to 1979.
So, let's say your grandfather purchased the land for $100/acre in 1982, died yesterday. It would step up to fair market value, at say $9000/acre. You inherit it at $9,000, and only pay capital gains if sold above $9,000. You don't pay on the $8,900 it gained since 1982.
So, let's say your grandfather purchased the land for $100/acre in 1982, died yesterday. It would step up to fair market value, at say $9000/acre. You inherit it at $9,000, and only pay capital gains if sold above $9,000. You don't pay on the $8,900 it gained since 1982.
Probably also depends on value of other assets as well. Life insurance proceeds are figured into that as well.
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