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January 2012 Archive for Farm Estate and Succession Planning

RSS By: Andrew Zenk

This blog focuses on making complex and difficult topics in estate and business planning understandable and applicable to the reader.

Andy is an Agribusiness Consultant for AgCountry Farm Credit Services, Fargo N.D., a farmer owned cooperative and part of the Farm Credit System serving eastern North Dakota and northwest and west central Minnesota.

Federal Estate Taxes – A History Lesson and What Lies Ahead?

Jan 19, 2012

 

Federal Estate Taxes – A History Lesson and What Lies Ahead?
The Federal Estate Tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death. The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them. The total of all of these items is your "Gross Estate." The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets.
Once you have accounted for the Gross Estate, certain deductions (and in special circumstances, reductions to value) are allowed in arriving at your "Taxable Estate." These deductions may include mortgages and other debts, estate administration expenses, property that passes to surviving spouses and qualified charities. The value of some operating business interests or farms may be reduced for estates that qualify.
Once the taxable estate is determined, you compare that to the exemption amount for the year of passing. This is where the uncertainty lies. We have been in a time of change and continued uncertainty. 
 
The amount of the exemption amounts for federal estate taxes have changed over the years. As recent as 2008, the exemption amount was $2,000,000 per person. In 2009, the exemption amount was $3,500,000 per person. There was no estate tax in 2010. The law was scheduled to go back to $1,000,000 in 2011; however, Congress took action and changed that late 2011. In December 2011 Congress passed a bill that included changes in the federal estate tax exemption amounts. 
 
For decedents dying in 2011 and 2012, the Act greatly reduces the reach of the estate tax by granting estates a $5.0 million exemption for property subject to the tax. In 2009, the last year in which there was an estate tax, the exemption was $3.5 million, so this is a significant increase. In addition, the Act introduces the concept of exemption “portability” between spouses. If one spouse does not use all of his or her $5.0 million exemption, it may be used by the estate for the surviving spouse, effectively creating a $10 million exemption for married couples. The few estates that exceed this $5.0/$10.0 million threshold will be subject to a new 35% tax rate, considerably lower than the 45% rate that prevailed before 2010.
 
Notice that the Act applies to 2011 and 2012. What happens after that depends ultimately on what Congress decides. If they do nothing, the estate tax exemption law is set to “sunset.” This means that the exemption amount will be $1,000,000 per person and no portability. The tax rate will be 55%. Ouch. Will this happen? Experts in the field of estate planning feel strongly that Congress will make changes prior to year end. We will wait and see. 
The best thing for you to do is have the best defense available. Estate planning! I do not suggest doing anything drastic like gifting all of your assets. That opens a whole other issue. Instead, find an expert in estate planning and work through a plan that meets your needs. 
 
Disclaimer: The information contained in this publication provides a general overview on various topics and is strictly for informational purposes only. The reader should consult a qualified professional for advice based on his/her specific circumstances. AgCountry Farm Credit Services and the writer of this blog make no representations as to the accuracy or completeness of any information on this site or found by following any link on this site, and shall not be liable for any errors or omissions herein or for any losses or damages resulting from the display or use of this information. 
 
Required Disclosure Pursuant to IRS Circular 230: Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code; or (2) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.
 
 
 

Family Limited Partnerships and Gifting - Q&A

Jan 09, 2012

 

Continuing with the previous posting, this information will address a variety of issues regarding the use of a family limited liability limited partnership (“FLLLP.”) Remember, every state has its own specific laws and every plan is different so it is crucial to make sure this fits your plan. Here are some answers to “practical” questions with using a FLLLP and gifting. 
 
There is a potential benefit of a FLLLP from a gifting strategy standpoint. Once the FLLLP is established, you have the opportunity to begin a gifting strategy involving the land as an asset in the FLLLP and transfer it to your children. Gifting can occur in a variety of ways, but commonly it would work with each year Mom and dad gives limited partnership interests to your children up to the annual gifting amounts. It is also possible to use each of their unified credit amounts, depending on the strategy that works best. Again, as explained earlier, it is important to get an understanding of the latest laws regarding gifting and unified credit amounts, with respect to the newly enacted law, from your attorney. 
 
The benefit of gifting in this entity is that you are able to use Minority and Marketability discounts to reduce the value of the gift, and ultimately give more of the assets. Because the limited partnership interest in the FLLLP lacks control (minority interest) and lacks free transferability (marketability), a discount can be obtained for the limited partnership with a qualified appraisal. Thus, more actual value is transferred through the gift on a discounted basis. The result is that whatever limited partnership interests Mom and dad give away during their lifetime reduces the value of their estates. Moreover, if Mom and dad still own any limited partnership interests at their death, those will also be subject to discounts in value, which reduce the size of the estate and therefore the amount of their estate tax liability. It is a tremendously effective gifting strategy, assuming you choose to implement it. There is no requirement to gift with this entity. 
 
If you do decide to gift, there are some “practical questions” to be answered.   The answers are as follows:
 
1.    “Mom and dad” would always maintain their general partnership interests. As general partners, can decide to rent the land in the partnership to anyone they wanted.
 
·         As long as you retain the general partnership ownership units, they have the control of who rents the farmland. 
 
2.    If your children owned a limited partnership interest in the FLLLP, they could also, as separate individual farmers, rent the land from the FLLLP.
 
3.    Since mom and dad are General Partners, they have full control of the partnership. However, it is absolutely important that distributions from the profits of the partnership be made in a pro rata format, if gifting begins.
 
 
 
·         For example, if Mom and dad own 80% of the limited partnership interests, and your children own 20%, then the distributions for that year would go 80% to Mom and dad, and 20% to your children. 
 
o   Because of this, it is crucial that Mom and dad are comfortable with their annual income abilities, and ensure that any gifting that is done is not to the detriment of their income needs.    
 
4.    What happens if 5 years down the family decides to dissolve the FLLLP. Further assume that by this time, Mom and dad own 50% of the Limited Partnership interests and remained General Partners. Further assume that your two children each own 25% respectively. 
 
·         In this example, all owners of the FLLLP would take their respective shares of the partnership, and as long as they didn’t sell their shares, it would be a non-taxable event. 
 
·         Remember, mom and dad have to be comfortable with the land being in their children’s individual names. If something happens to them (divorce, untimely death, etc.), what happens then is usually out of the control of mom and dad. 
 
 
 

Disclaimer: The information contained in this publication provides a general overview on various topics and is strictly for informational purposes only. The reader should consult a qualified professional for advice based on his/her specific circumstances. AgCountry Farm Credit Services and the writer of this blog make no representations as to the accuracy or completeness of any information on this site or found by following any link on this site, and shall not be liable for any errors or omissions herein or for any losses or damages resulting from the display or use of this information. 
 
Required Disclosure Pursuant to IRS Circular 230: Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code; or (2) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.
 

Q&A on Family Limited Liability Limited Partnerships

Jan 07, 2012

 

Continuing with the previous posting, this information will address a variety of issues regarding the use of a family limited liability limited partnership (“FLLLP.”) Remember, every state has its own specific laws and every plan is different so it is crucial to make sure this fits your plan.  Here are some answers to “practical” questions with using a FLLLP and farming. 
 
 
1)            “Mom and dad”, as general partners, can decide to rent the land in the partnership to anyone they wanted.
 
a.    Generally, the FLLLP would rent the land to your farming operation. 
 
b.    If Mom and dad owned a limited partnership interest in the FLLLP, they could also, as separate individual farmers, rent the land from the FLLLP.
 
2)            What would happen when either or both mom and dad died?
 
a.    Here it is crucial that your estate plan is updated so that the shares of the entity are transferred as you want.
 
b.    Assuming their plan stated that the general partnership ownership and the remaining Limited Partnership interests ownership would go to their children (needs to be set up in Mom and dad’s Wills), then there be no problems with your children either continuing or dissolving the FLLLP at that time, and each taking their respective 50% of the land in their own individual names.
 
3)            What happens if 5 years down the road, you decide to dissolve the FLLLP. 
 
a.    In this instance all owners of the FLLLP (mom and dad, respectively) would take their respective shares of the partnership. This means that the land would come out of the FLLLP and into your individual names. As long as you did not sell the land at that point, it would be a non-taxable event. 
 
b.    Remember, if shares are gifted to children, or sons / daugthers in law, and the entity is later dissolved, their share of the land based on their gifted ownership of the FLLLP goes to THEM; not revert back to mom and dad as the original givers. 
 
The next posting will talk about some benefits and consequences to gifting the shares of a FLLLP. 
 

Disclaimer: The information contained in this publication provides a general overview on various topics and is strictly for informational purposes only. The reader should consult a qualified professional for advice based on his/her specific circumstances. AgCountry Farm Credit Services and the writer of this blog make no representations as to the accuracy or completeness of any information on this site or found by following any link on this site, and shall not be liable for any errors or omissions herein or for any losses or damages resulting from the display or use of this information. 
 
Required Disclosure Pursuant to IRS Circular 230: Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code; or (2) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.
 
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