State death tax changes may hurt family landowners

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In the United States, more than a third of all forest land is owned by families. Studies tell us that half of these family forests are owned by someone over the age of 65. In the not-too-distant future, the land will go through the estate transfer process, and potentially be subject to taxation.

In 2010, when the federal estate tax was reduced, landowners rejoiced, and it was hard not to be happy for them.

Recent changes to the federal tax code have reduced or eliminated the federal estate tax for many taxpayers. However, lurking in the background without much attention from the forestry community, are state estate tax laws, or state death taxes.

Although many taxpayers are aware of the federal estate tax changes, there has been a shift from planning for tax minimization, to planning for succession. In some states, this failure to plan for tax minimization could result in the need to cut timber or sell parts of family???s land.

???Doing Nothing???

Historically, the federal income tax code has included a credit for taxes paid to the state upon a taxpayer???s death.

On January 1, 2005, this credit was phased out, replaced with a deduction for state death taxes. With the possible reversion to 2001 conditions tax-wise, we almost saw a return of the credit.

States responded to the federal tax changes in two different ways.

Twenty-three states did nothing. This lack of action effectively killed the state death tax, because those states had linked the state tax to the federal credit.

When the federal credit was eliminated, the state could no longer collect state estate taxes. However, should the federal estate tax again include a credit for state death taxes, these states would once again collect death tax revenue.

Another way states responded was the creation of a stand-alone estate tax. As of August 2014, fourteen states and the District of Columbia still have a state death tax. In the states with estate taxes, private forest land comprises between 34 percent to 94 percent of states??? total forested areas.

States such as Minnesota tied their state death tax exemption to the federal exemption at a specific point in time. Minnesota uses the federal estate tax law, as it was on December 31, 2000.

On that date, the federal law included an exemption for estates with less than $675,000 in assets. Minnesota???s exemption was set up to increase, in steps, to a $1 million exemption.

Because the state???s estate tax is tied to the pre-2001 federal law, an estate in 2011???when the federal law allowed a $5 million dollar exemption???would pay state taxes at the rate of 41 percent on the first $93,000, over the $1 million exemption.

In March 2014, Gov. Mark Dayton (D) signed legislation increasing the exemption to $1.2 million for 2014, with step increases. The exemption will continue to increase until 2018, when it reaches $2 million.

Triggering the Tax

In Minnesota, 44 percent of forest land is owned privately. As land values increase over time, it isn???t hard to see how a modest amount of forest land in an estate can trigger a state estate tax.

The resulting tax may exceed the liquid assets in the estate, requiring either a sale of timber before the forest has matured, or a partial property sale.

Over the past few months, a couple of states made efforts to increase the exemption and in at least one case to expedite the phasing out of the state death tax.

Additionally, there are federal proposals on the table to change both the death tax rate, exemption levels. Should the federal tax credit for state death taxes return, landowners in 23 states will have to plan for estate taxes in their state.

Many forest landowners have been under the belief that very few of them will have to worry about the estate tax. In reality, many of the states with state death taxes have a lot of private forestland.

Although much work has been done on federal estate tax reform, there is still state death taxes still represent a hidden threat to continuing stewardship of the land within the family.

Tamara Cushing ( is the Starker Assistant Professor of Private & Family Forestry at Oregon State University.


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