Don’t let estate tax changes stop planning
The 2010 Tax Relief Act lowers estate taxes for 2011 and 2012 by increasing the exemption from $1 million to $5 million (as indexed after 2011), and reducing the top rate from 55% to 35%. The $5 million exemption is per person, with a $10 million exemption for married couples. Many more farm families have a value that comes in under the exclusion amounts.
People ask me how this changes farm estate planning. My answer is “not much, if any.” Yet I fear many farmers will grow complacent in light of this relief.
I urge you to consider the following six items carefully;
• Federal estate taxes. Pencil out what your farm estate is worth, and then run scenarios based on appreciation of land and assets. Factor in what happens if Congress decides to go with a lesser exclusion amount. Does your current estate plan give trustees or heirs any flexibility in addressing federal estate tax liability? If there’s a tax liability, does your plan allow certain assets to be sold first to pay the tax?
• State taxes. Indiana has an inheritance tax that levies $92,500, plus 10% of net taxable value over $1.5 million, on estates above $1.5 million.
• Probate fees. Probate can be a long, very expensive process. Fees tend to vary, but figure on about 3% to 6% of the farm estate. Also, time equates to money. I’ve heard of estates tied up for over a decade. Ask yourself if your estate plan utilizes a trust or other mechanism that avoids the probate process. Has it been properly funded?
• Long-term care. The road to many farm auctions has been paved because of this. Does your estate plan have provisions for dealing with these expenses? Would your farm estate be in jeopardy of being whittled away should you and your spouse require long-term care?
• Liability protection. A good estate plan should utilize tools to limit liability. Simply put, there may not be much to pass on if a lawsuit or government agency drains away assets. Questions you should ask include: Does my estate plan utilize corporate entities that limit liability? Does my estate plan increase the number of people having an ownership interest, thus increasing liability from the acts or omissions of thee people? Does my estate plan factor in insurance needs?
• Divorce. A good estate plan needs to address what happens if an inheriting child becomes involved in a divorce. Do the parents want half or more of the assets given to that child lost through divorce? Of course not. It’s extremely important to take the necessary steps to guard estate assets from future divorces.
There’s a lot more to be wary of than merely federal estate taxes. One or more of these “farm estate drainers” can put the next generation in the NFL (not farming league). We’ll discuss how to address these issues in future articles.
Schwarz II farms 2,500 acres with his family near Stroh in northeast Indiana and is an agricultural law attorney and farm estate planner. He can be reached at 260-665-9779 or firstname.lastname@example.org. Find more information at www.farmlegacy.com. These articles are for general informational purposes and do not constitute an attorney-client relationship.
This article published in the February, 2011 edition of INDIANA PRAIRIE FARMER.