Leave A Legacy: Did I Mention the Estate Tax?

September 8, 2010 06:46 AM

Q We feel like sitting ducks! As my husband and I understand it, the estate tax for 2010 is zero. This past year, it was 45% of the value of an estate in excess of $3.5 million. Next year, it will increase to 55% of an estate that exceeds $1 million in value. So, even a modest-sized estate or small farm may be subject to a huge estate tax bill.

We farm 560 acres of our own ground and 3,250 acres that we lease from several other landlords. A conservative estimate of our estate is $3.92 million. When the estate tax goes back to 55%, and assuming we can use the marital deduction, we’ll still leave our children with more than a million-dollar estate tax bill. What are we supposed to do now?

A You’ve stated correctly. In simple terms, on Jan. 1, 2011, the estate tax rate will return to 55%, and the allowable estate tax exemption will be $1 million per person or $2 million for a married couple. This onerous burden will affect nearly every farm family in America.

Estate planning is an integral part of a comprehensive succession solution. The basic function of an estate plan is to transfer assets, including ownership interests, to your heirs in a cost-efficient manner. Estate planning is intended to minimize the estate tax and other transfer obligations while maximizing capital and other assets for the benefit of your loved ones upon your death.

Estate planning also acts as a contingency plan, ensuring the desired outcome of your succession plans despite a life shortened by an accident or illness.

Special care must be taken when drafting your estate plan to ensure it does not conflict with the provisions of your succession plan. We often meet with people who state that only active family members should participate in ownership, while their existing estate plan is written to distribute equally to all heirs. We see plans unintentionally written to disinherit the active adult child and leave everything to a spouse (often a second spouse with his or her own children). We’ve also seen the opposite: everything left to the kids, with no provision for financial security for a spouse or special-needs dependent. Estate plans are usually written with one goal in mind—to mitigate the estate tax—with little or no thought about the integrity of the farm or the family’s financial security.

When considering the estate tax and researching alternatives to address the family’s concerns, remember:

  • First focus on your succession goals, then craft your estate plan to complement those goals.
  • Plan for your ownership transition and the family’s financial security before considering the estate tax.
  • With time, compromise and a willingness to relinquish control, the estate tax can be mitigated.
  • There is no silver bullet to mitigate the estate tax; an effective plan will require a combination of tested tools and techniques.
  • Common estate planning strategies will not solve the estate tax and maintain an operation’s integrity.

Be aware. We know that contentment is the enemy of vigilance. The George W. Bush tax cuts of 2001, with more favorable tax rates and increasing exemption levels, allowed many farmers to become complacent regarding the estate tax, thinking of it as a manageable nuisance. At the end of 2009, legislators, legal experts and politicians assured us that the government will not let the estate tax law sunset and effectively revert to zero. Those same people said early in 2010 that the estate tax will be fixed at 2009 levels and may be retroactive for those who pass away this year.

Planning around changing tax laws is like trying to hit a moving target. With evolving family dynamics, the cyclical nature of business and new laws, you must refine your estate plan on a regular basis. There is no such thing as “once and done” in estate planning, especially when the success of your farm is on the line.

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.

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