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October 2013 Archives

Join University of Minnesota Extension for this workshop designed to assist land owners, farmers, and agri-business professionals with farm financial issues related to farmland rental rates, ownership, management, leasing agreements, and other matters.

Meetings will be held throughout southern and central Minnesota at no cost. View meeting dates and locations for central Minnesota and southern Minnesota.

MEETING DETAILS
The meetings are sponsored by the University of Minnesota Extension and will last approximately two hours.

Presenter: Dave Bau, Ag Business Management, Extension Educator

MEETING AGENDA


  • Farmland rental rate trends

  • Land values

  • Increasing input costs

  • Landlord worksheet

  • Tenant worksheet

  • A rental rate that works, Excel spreadsheet

  • Flexible leases

  • Rental lease examples

  • What is a fair rental agreement?

Who should attend:


  • Landlords and farm land owners

  • Farmers and tenants

  • Agri-businesses

  • Ag professionals

Make plans now to attend one of these free informative meetings.

In case of inclement weather, please contact the Farm Information Line at 1-800-232-9077.

For more information, please contact Dave Bau at 507-360-0664 or bauxx003@umn.edu.

View meeting dates and locations on our calendar.

Minnesota gift tax effective July 1, 2013

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Gary Hachfeld

MANKATO, Minn. (10/22/2013) - As a result of the 2013 Minnesota legislative session, Minnesota now has a state gift tax effective July 1, 2013. The rules follow many of the federal gift tax rules with a few differences. The gift tax also has implications regarding the state estate laws and tax.

The Minnesota gift tax allows for an annual gift exclusion of $14,000 per person per individual per year to any number of persons without any tax. Couples can combine their gifts for a total of $28,000 per recipient if the spouses own the asset together, write separate checks for $14,000 each or file an IRS 709 and Minnesota gift tax form. In addition, each individual is allowed a lifetime gift exclusion of $1,000,000 which represents a lifetime gift tax credit of $100,000. Couples can combine their lifetime exclusions as well. Gifts in excess of the annual exclusion amounts will require the donor to file an IRS 709 and Minnesota gift tax form. Gifts in excess of the lifetime exclusion amount will also have to file the gift tax forms and the gift will be taxed at a flat rate of 10 percent.

The value of gifts exceeding the annual exclusion amount made within 3 years of a decedent's death will be added back into the decedent's adjusted taxable estate to determine if Minnesota estate tax is due. This provision is retroactive applying to estates of decedents dying after Dec. 31, 2012. The good news here is the amount of estate tax due is reduced by the amount of gift tax paid on any gift added back into the decedent's adjusted taxable estate.

The Minnesota gift tax only applies to the transfer of property located in Minnesota. It applies to Minnesota residents but also to gifts of real estate and tangible personal property located in Minnesota but owned by any non-resident. Minnesota residents who gift real or tangible personal property located outside the state are not subject to the Minnesota gift tax.

Any gift tax due is the responsibility of the donor. However, if the gift tax is not paid when due, that recipient of the gift is responsible to pay the tax. The tax is due by April 15 after the close of the calendar year in which the gift was made. There are some exceptions if the donor dies.

The Minnesota lifetime gift tax exclusion amount of $1,000,000 per person is in addition to the Minnesota estate tax exclusion of $1,000,000. Keep in mind there is also a Minnesota Qualified Small Business Property and Qualified Farm Property Exclusion for estates that qualify. It is important to check with your accountant and attorney for information about these issues specific to your situation. Professional assistance is crucial to effective gift and estate planning.

Gary Hachfeld

MANKATO, Minn. (10/22/2013) - During the 2011 Minnesota legislative session, state lawmakers initiated a Qualified Small Business Property & Qualified Farm Property Exclusion. This $4 million dollar Minnesota estate tax exclusion for qualified small business and qualified farm property was signed into law July 2011 for decedents dying after June 30, 2011. Legislative law tied qualifying for the farm property exclusion to maintaining homestead classification on the farm land. If homestead classification is lost before the decedent's death, the estate will not qualify for the additional exclusion.

Many folks feel qualifying is not going to be a problem and is a panacea for eliminating Minnesota estate tax upon their death. However, without planning there could be major issues. There are several scenarios where the decedent could lose homestead classification and therefore not qualify for the exclusion. Those scenarios include: 1) Decedent has retired from farming and lives in town within 4 contiguous townships of the farm land, none of their children live on the farm and none of their children farm the land, the decedent rents the land to a tenant unrelated to them, 2) Decedent has retired from farming and lives in town within 4 contiguous townships of the farm land, none of their children live on the farm and none of their children farm the land, the decedent crop-share rents the farm land, 3) Decedent has retired from farming and lives in town within 4 contiguous townships of the farm land, none of their children live on the farm and none of their children farm the land, the decedent custom farms the land and 4) landowner either lives on the farm land or in town within 4 contiguous townships of the farm land, has placed the farm land in an entity and rents the land to a son or daughter who is not a member of the entity. These scenarios will render the estate ineligible for the $4 million exclusion.

If the decedent lived on the farm and farmed the land, rented the land to a farming child or rented the land to an unrelated party, they will have maintained homestead classification. If the decedent moved to town but remained within 4 contiguous townships of the farm land and they had a farming child farm the land, whether the child lives on the farm or not, they will have also maintained homestead classification. Maintaining homestead classification would qualify the estate for the additional estate tax exclusion.

This is an area that can cause huge and unnecessary estate tax issues if done incorrectly. When doing estate and business transition planning, seek the assistance of a competent attorney. Farm families today have a lot at risk. Seeking professional help will secure the future of their business and personal assets.

Should I have a Will, a trust or both?

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Gary Hachfeld

MANKATO, Minn. (10/22/2013) -- Personal estate planning is a critical part of life, especially when transferring a farm business to the next generation. However, recent survey data from four states shows that over 69 percent of farm family members do not have an up-to-date personal estate plan. Part of the reason is confusion around the differences between a Will and a revocable living trust.

A Will and a revocable living trust are instruments that will direct your assets to the individuals, a business entity, organizations, or charities upon your death. You do not need both. One or the other will suffice. The choice of which instrument to use should be based upon your estate planning goals. Each instrument has specific traits.

A Will triggers the probate process. The parameters vary by state but in Minnesota, probate occurs when the decedent owns $50,000 or more of assets or any real estate. Probate is a court supervised process. In Minnesota it takes 12-18 months on average to complete. Court and attorney fees cost, on average, 2-3 percent of the estate value. The process is also open to the public in that anyone can obtain a copy of the decedent's probate records by requesting copies from the decedent's county of residence. These records list the decedent's assets and their value on the date of death. Within the Will, an individual can list how they want their assets distributed upon their death. They can also list a guardian and conservator if they have minor children. Upon death, the decedent's assets receive an increase in basis to fair market value. A Will does not allow for protection of assets from lawsuits and other adverse actions nor does it allow an individual to do disability planning.

Assets in a revocable living trust do not go through the probate process and therefore are closed to the public. The trust must go through an administrative phase to distribute assets but this process takes much less time and generally costs much less than probate. Think of a revocable living trust as a bucket. You place all your farm and non-farm assets into this bucket. You still own the assets so you can add assets to the trust or take assets out and sell or trade them. There is no change in your tax status. Upon your death, the assets receive an increase in basis and pass to your heirs as directed in the trust document. A revocable living trust also allows you to pass assets to an heir via a "protected trust" which shelters the assets from lawsuits and other adverse actions. The trust also enables an individual to do disability planning, a process whereby you outline how you want to be cared for in the event of a disability or incapacitation. A key step in establishing a trust is "funding" the trust. That is, titling all assets with a title into the name of the trust. If this is not done, the assets are required to pass through the probate process. The revocable living trust can allow for much more flexibility in your personal estate planning than does a Will.

In addition to a Will or revocable living trust there are three additional documents required to complete the estate planning process. The first is durable power-of-attorney. Durable means the power continues if you become disabled and cannot make your own decisions. Second is the health care directive where you list how you want to be cared for if you become disabled or death is eminent. Third is listing your Health Insurance Portability and Accountability Act (HIPAA) authorized individuals. These are people you grant access to your medical records and documents. If you are unable to convey your own medical information, the medical care facility will not share this information with anyone unless you have granted them HIPAA authority.

Personal estate planning is an important process. Whether you chose a Will or a trust is less important than getting the process done correctly. Laws are changing constantly so seek qualified legal assistance when completing and implementing your personal estate plan.

Trends in farmland rental rates for 2014

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By David Bau, Extension Educator
University of Minnesota Extension

What are the trends in farmland rental rates and where are they going in 2014? There are many places to find relevant information. The "Cropland Rental Rates for Minnesota Counties" publication prepared by Gary Hachfeld, William Lazarus, Dale Nordquist, and Rann Loppnow utilizes the FINBIN data base with historic information from an adult farm management data base. You can find the publication at two different websites: the Center for Farm Financial Management website under publications, and the Southwest Research and Outreach Center website under research and outreach.

The Minnesota Agricultural Statistic Service cropland rental information is included in the annual bulletin. It can be found online (once the federal government shutdown ends). Another annual publication by the Minnesota Agricultural Statistic Service on cash rent (167 K PDF) is released in September each year.

Iowa completes a statewide survey of farmers and landlords that can be found at the Iowa State University Extension website.

In the "Cropland Rental Rates for Minnesota Counties" publication, the average annual change in rental rates by region from 2011 to 2012 from FINBIN data indicated a 8.9% increase in Northwestern Minnesota, 18.4% increase in West Central, 13.4% increase in Central, 18.0% increase in Southwest, 19.9% increase in South Central and 18.6% increase in Southeast Minnesota. Combining the regions, it would be a 17.8% increase in farmland rental rates across Minnesota from 2011 to 2012, up from the 13.1% increase the previous year.

The Minnesota Agricultural Statistic Service indicated an 11.1% increase across Minnesota from 2011 to 2012 and an 18.0% increase from 2012 to 2013. The Iowa survey data indicated in 2013 the average Iowa farmland rent increased to $270 up from the $252 average in 2012 and from $214 per acre in 2011, with all 9 districts recording an increase in average rental rates.

Cropland rental rates can vary significantly due to many factors including crop returns based on current grain prices and projected yields, land quality, tile and drainage on the farmland, the federal farm program, previous crops, herbicides and fertility, use of facilities, length of contract and other factors. In the "Cropland Rental Rates for Minnesota Counties" publication, you can also see the average rents for the bottom 10 percent and the top 10 percent to give you a range of rents paid in the county along with the median rent for each county. This publication is a helpful tool to use when determining rental rates.

The continued high prices in the grain markets continue to put pressure on rental rates to increase for 2013 but the current prices for 2013 and 2014 corn are much lower than one year ago. On October 11, 2012 Lamberton, MN cash bid for 2012 corn was $7.38 and for 2013 corn $5.79 as of October 9, 2013 the cash bid for 2013 corn was $4.18 and for 2014 corn $4.35. Assuming 175 bushels of corn produced in each year, with all crop sold out of field, the gross revenue would be $1,291.50 for 2012, $731.50 for 2013 and $761.25 for 2014.

Southern Minnesota actual yields were lower than 175 in 2012 and maybe higher in 2013, but yet to be determined for 2014. The total expense, including direct and overhead expenses, to produce an acre of corn in 2012 for over 1000 southern Minnesota farmers was $778.63 per acre paying $200 per acre rent. If a farmer achieves 200 bushels in 2013, gross revenue per acre would be $836, if expenses stayed constant, the farmer would make $57.37 profit. But for the last 10 years input costs have increased 9 percent per year, so the $778.63 expense for 2012 would increase to $848.71 in 2013, below the total revenue projection. If you apply the 9 percent again for 2014 total expenses would be $925.09 with total revenue projected at $761.25 for 2014. This would indicate a loss of $163.86 per acre.

Soybeans expenses in 2012 were $472.23 with rents at $192 per acre. Using a 7 percent increase in input costs, the average increase for past 10 years for soybeans, 2013 expenses project to $505.28 in 2013 and $540.66 in 2014. Lamberton, MN soybean prices on October 11, 2012 were $14.72 for 2012 soybeans and $12.68 for 2013 beans, while on October 9, 2013 prices were $12.43 for 2013 and $11.06 for 2014. Using these prices with assumed yield of 48 bushels per acre, gross revenue would be $706.56 in 2012, $596.64 in 2013 and $530.88 in 2014. So beans make a profit in 2012, 2013 but have a loss of $9.78 for 2014.

The average rents for the fourteen counties in Southwest Minnesota were $160 in 2010, $177 in 2011 and $209 in 2012. For the previous five years, rents in Southwest Minnesota have increased an average of 12.1 percent each year. If you apply a 12.1% increase for 2013 the average goes up to $234 and for 2014 using 12.1% percent increase again, applied to 2013 rate, the average rent for Southwest Minnesota would project to $263 for 2014.

Can farmland rents continue this increasing trend in 2014? The projected 2014 corn and soybean total income and expenses would indicate a loss at current cash forward contract prices available using historic yields. If prices increase or farmers are able to get better yields in 2014 than projected, it would be possible to pay these trending higher rental rates, but based on the current corn and soybean prices for 2014, there is a real potential for farmers to lose money. If this occurs it should cause lower or flat farmland rental rates in 2014 as compared to 2013.

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