The mainstream media, and many a town crier, are using the return of the estate tax to foreshadow the-end-of-the-world-as-we-know-it. If we’re not careful, irrational fear will prompt inappropriate reactions. Lest we forget, the return is merely a backdate of the tax that would have been imposed without the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).
From 2002 through 2009, EGTRRA gradually lowered the estate tax rate and substantially raised the applicable exclusion amount. Under the act, the estate tax is completely repealed during 2010, so there is no tax imposed on the estate of a person dying this year. But all of the provisions under EGTRRA are scheduled to sunset on Dec. 31, 2010. The real danger may not be the law, but rather your reaction.
Unless there is a change prior to then, in 2011 the estate tax will revert to what it would have been without EGTRRA. On Jan. 1, 2011, the tax will be increased to 55% of any estate in excess of
$1 million, or $2 million for a married couple. Considering the prevailing mood in Washington, it’s safe to assume that we’ll not see any relief.
That said, panic is never a good reaction. Panic limits our capability to reason and leads to inappropriate and harmful actions.
Take the offense. It’s said in sports, and it applies to business as well, that the best defense is a good offense.
It’s best to assume that the estate tax will always be a part of life and an obligation for the heirs of successful entrepreneurs. Our job as planners is to help you create a comprehensive plan that helps you to achieve your goals, satisfy your obligations and improve your family’s ability to carry on successfully.
Don’t allow the fear of an untoward estate tax to cause you to react irrationally. Use it as a motivator. Follow the five steps below, and take decisive action.
1. Clearly define your succession planning objectives. If you know what you want to achieve, decisions become clear and actions can be taken to mitigate, minimize or eliminate the estate tax.
2. Review your estate planning documents in light of your succession planning objectives and the tax of 2011. You may not need “all-new” estate planning documents; a modification of your current plans may suffice.
3. Be sure you work with legal counsel that thoroughly understands your succession planning goals. Some estate planning documents are drafted from boilerplates that divide and destroy the operation by imposing equal distributions to active and inactive heirs alike.
4. Seek a second opinion. Your farm or agribusiness is the biggest asset you own, and its value far and away exceeds the fair market value of the liquidated assets. It represents future earnings and growth opportunities that are unquantifiable. Ensuring that your legal documents support your succession objectives is an excellent investment.
5. Understand that this is not the last time you will review your succession plan. This is not a once-and-done affair. It is a transformational experience that will enhance and fortify the family and business in time.
Here are some terms that may help you engage in fruitful discussions with your planning team.
- Federal estate tax liability: Tax charged on the fair market value of a net estate and payable after the death of the owner.
- Schedule of marginal tax rates: Graduated or progressive taxes imposed on higher estate asset levels.
- Applicable exclusion amount, or estate tax exemption: The amount of a person’s taxable estate that is free from tax.
- Applicable credit amount: Used to formally calculate the estate tax, it is the tax credit equal to the tax that would be due on an amount equal to the applicable exclusion.
Kevin Spafford serves as Farm Journal’s succession planning expert. His firm, Legacy
by Design, guides farmers and agribusiness owners through the succession planning
process. Send questions and comments to Legacy by Design, 2550 Lakewest Drive,
Suite 10, Chico, CA 95928, (877) 523-7411 or LegacyProject@FarmJournal.com.