Use the current estate tax laws, economic situation to your advantage
Don’t let this year slip by without considering the current estate and gift tax exemptions. If you don’t, the burden might cost your family thousands, if not millions, of dollars in taxes when you die.
In 2010, Congress approved changes in the federal estate tax that set the 2012 rate at 35% with a $5.12 million exemption. But those changes expire at the end of this year and farmers will face a
$1 million estate and gift tax exemption and increased tax rates of 55% (and up to 60% for estates valued at more than $10 million) unless Congress approves new legislation.
Given the rapid increases in farmland values in recent years and periods of higher commodity prices, many farm families could easily exceed the lower limits and be forced to sell a portion of their assets just to pay their tax bill.
"Right now, we are waiting to see what Congress is going to do with the estate tax. Since we’re in an election year, the decision could come out after the election," says Gary Hoff, a University of Illinois Extension taxation specialist.
Hoff says the direction that estate taxes will go is uncertain. "My advice to farmers is to be ready to move in an instant. If you’re going to have to have documents put together because they have something that becomes effective Jan. 1, you may need to talk to your advisers now and get them prepared," he explains.
Based on the possibility of the federal estate tax exemption being $1 million versus $5 million or anywhere in between, Hoff suggests that farmers have plans in place for any scenario.
A fleeting opportunity. A good way to reduce your tax burden is to gift portions of your assets or wealth.
"What planners are looking to do is to identify any opportunities to set up gifts, while the exemption is still really high," says Walter Lynn, a CPA and president of Lynn & Associates in Springfield, Ill.
He stresses the importance of understanding the impact of the current gift tax valuations versus a valuation for estate tax purposes at time of death.
With the current federal estate and gift tax exemption, you can give away approximately $5 million to any person. Hoff says that if you have a huge estate, gifting is definitely something to consider.
Lynn adds that some techniques to transfer values work better with low interest rates. The older generation could now sell land or equipment to the upcoming generation, while interest rates are low for loans. The current situation also supports gifting. "If people want to make gifts or transfers, this is a once-in-a-lifetime opportunity."
Be realistic about assets. To achieve your tax and estate planning goals, Hoff says, you must be able to clearly explain your plan. "You have to tell your estate planner what results you want to achieve. If you can do that, the planner can find the tools to make that happen," he says.
When visiting with your advisers, it’s also important to be realistic about asset values. "Your planner probably has little idea as to what real values are for a farmer’s assets," Hoff says.
When defining assets, think in broad terms and include all machinery, land, financial resources, etc. Hoff also suggests getting real appraisals of high-dollar assets. "If your assets are much higher than originally estimated, you may not have the right plan," he says.
When determining land values, remember that there are a lot of factors that drive prices, Lynn adds. Shifts in land prices might mean you need to consult your advisers and revisit your plan.
Keep your plan updated. Due to the likely estate law changes coming in 2013, now is a great time to revisit your tax and estate plans, Hoff says.
Additionally, you should update your plan when goals or situations change. Keep in mind the "5 D’s," Lynn says, which are life events that require that succession or tax planning agreements are in place and up to date.
The 5 D’s are:
Another task to add to your to-do list is to inventory important documents and passwords. Include
details such as who holds your life insurance policy and where your safety deposit boxes are located. "If you die suddenly, others need to know this information," Hoff says.
While he understands this process is not easy, Hoff says, "if you do it once, then it’s not nearly as much work to update it."
Create a Strong Advisory Team
Tax and estate planning for farmers is ever-changing—and just part of the complex succession planning process. To keep up to speed and accomplish your goals, taxation specialist Gary Hoff and CPA Walter Lynn suggest farmers involve several different experts.
When seeking out professionals to help guide you along the planning process, make sure that they understand the tax laws specific to agriculture and are aware of your goals and situation.
Experts to involve include:
- Estate planner
- Insurance providers
- Financial planner