Benjamin Franklin once said: "In this world, nothing can be said to be certain, except death and taxes." Unfortunately, even at death, farmers and landlords are still faced with the estate tax.
In January 2013, Congress acted to provide some stability to the estate tax system. There was a great deal of concern that any estate valued at more than $1 million could be exposed to tax. Legislation was created that makes the future a bit more permanent, if anything can be said to be permanent in today’s challenging economic environment.
For an estate of any decedent who passes away during calendar year 2014, the basic exclusion amount is $5,340,000. Tax is assessed at a rate of 40% for amounts above this exclusion, which is indexed to account for inflation.
Special use valuation. Agriculture and small business estates that have real estate assets and meet special qualifications have an addi-tional benefit called "special use valuation." In a nutshell, as long as the real estate has been involved in an operating business and the real estate will continue to be used in a family business, it might be assessed at its productive value rather than its fair market value.
There are limits to the benefit provided by special use valuation, though. For this calendar year, if the executor exercises the special use valuation method under Internal Revenue Code Section 2032A for qualified real property, the aggregate decrease in the value of the property resulting from the election can not exceed $1,090,000. This benefit will increase with inflation.
Resources you need. Estate tax planning should not be a complex process. In its simplest terms, the owner of the property decides who should receive the property after his or her death. Too often, individuals are overwhelmed with the technical details of the plan and lose sight of the overall goal: To provide a road map for the future with an eye toward minimizing any negative tax impacts when transferring assets to the next generation.
I can’t count the number of times that a client has asked, "What should I do?" As a professional, I know how to construct strategies to minimize tax, but I do not know your goals or those of your family. You alone are the most important member of your estate planning team.
Until you have some vision of what you want to happen in the future, you can’t expect a professional to be able to design a strategy to properly transfer your assets to the next generation.
Estate planning also involves the discipline of succession planning, which is addressed through the Farm Journal Legacy Project. Estate plans for farmers and small business owners often involve passing the business to family members. Estate planning must consider the needs and goals of the family business, as well as those family members not directly involved.
Estate planning is a team process. An experienced attorney is the anchor of the team and is the only professional licensed to draft documents. Other members can include an accountant , and in the case of an active business, the business succession planner. If there is a need for estate liquidity, you might want to involve an insurance professional. Services provided by the trust department of a financial institution might be required if your family has special needs that necessitate managing assets for a specific purpose.
An excellent resource to help you get a handle on agricultural estate and business planning is Neil Harl’s "Farm Estate and Business Planning." This 450-page book is written in easy-to-understand terms and includes all tax law changes through Jan. 2, 2013. The book is $35 plus $5 shipping and handling. To purchase a copy, write to 115 East Twyman St., Bushnell, IL 61422. (Illinois residents must add $2.54 sales tax.)
Stay tuned for future columns that address strategies for farmers to create estate plans.
This column is not a substitute for seeking individual accounting advice.
- Early Spring 2014