Q Toward the end of this past year, the House passed a measure to freeze the federal estate tax at 2009 rates. As of Dec. 31, no action had been taken by the Senate or by President Barack Obama. So, as I understand it, in 2010 there is no estate tax. Then in 2011, without some action by the government, the limits revert back to the rates we had in 2001. How do we plan for the future with this type of a situation, especially as it relates to our succession plan?
A Yes, there is no federal estate tax for 2010. Without legislative action this year, it will be restored to pre-2001 levels—55% on estates valued at $1 million or more—in 2011.
In the scheme of things, the estate tax law is one of the elements that must be covered in a comprehensive succession plan. The estate tax law inevitably affects planning—and knowing that the law is changing means plans must remain flexible so that a family's succession intentions are achieved.
It is usually the inappropriate application of estate planning tools, which are designed to mitigate the estate tax, that divide and destroy the farm operation. The last thing you want is for the farm to be parceled and sold in the estate settlement process.
As you begin the new year and initiate the succession planning process for the first time or review your current plan—in light of the current estate tax law—consider the following questions.
Does your adviser use a comprehensive planning model for succession? I encourage using a model that includes these four elements:
¦ Financial security. A proper succession plan enhances the family's financial security. Each suggestion must be measured against what is best for the owner, the family and the operation.
¦ Management continuity/ownership transition. Transferring ownership may be as simple as identifying tomorrow's leaders, establishing a time frame for transition and defining the transfer methods. Maintaining management strength should be the focus as you evaluate each transition alternative.
¦Leadership development. People management, team development, project coordination, business design and professional growth are all part of developing new leaders. It is crucial to continuing growth and lasting success.
¦ Estate planning. An effective estate plan is designed to maintain the family's financial security, plan for equitable distributions and mitigate the estate tax liability.
Does your adviser employ a specific succession planning process? I use a six-step process to ensure a clear understanding of your goals and a thorough selection of alternative succession solutions.
- February 2010