In farming, the business is usually a family’s greatest asset, not only for income and investment but as the next generations’ inheritance and potential livelihood. Before the likely return of the estate tax, estate planners recommend taking a close look at what you can shelter now and in the future.
“Unless Congress and the president can come to some sort of agreement to the contrary, the estate tax will be reinstated January 1, 2013, on any estate greater than $1 million,” says attorney Curt Ferguson, founding owner of The Estate Planning Center in Salem. “It will be a 45 to 55 percent progressive rate, depending on the size of the estate.
“I hear from my clients, ‘It’s harder to keep it than it was to make it.’ They want to make sure the son or daughter committed to farming and growing the operation is able to keep most or the entire farm without dividing it up or selling it.”
The land is the main issue, says Ferguson. “Usually, 90 percent of the assets are the land. The liquid assets, money in the bank, stocks, bonds, mutual funds, are a pretty small fraction.” However, he says, it’s not uncommon to see machinery worth $1 million.
Ferguson helps clients develop a comprehensive business and estate plan. Among his recommendations are these basic tax reduction strategies.
Make sure a married couple uses both exemptions, $1 million each. Don’t waste one exemption.
Divide ownership. If assets are divided in half, and one spouse’s assets are held in trust, when one spouse dies the other doesn’t have to pay estate tax on the full amount of all assets.
Employ discounting strategies. Put the farm assets into a limited liability company. When the owner dies, rather than transferring $1 million in real estate to the heirs, shares of the LLC are transferred at an effective 30 percent to 40 percent discount, which reduces that $1 million to $600,000 to $700,000.
Transfer assets to heirs while you’re living. Current non-taxable amounts are $13,000 per gift annually to unlimited recipients, or up to $1 million one time. Be sure any estate plan is flexible so plans can be changed.
A real concern is how the estate is transferred to more than one child when only one child wants to run the farm operation, Ferguson says. To avoid a forced sale when assets aren’t equally dividable, parents may wish to stipulate a rental arrangement or buy-sell agreement, may give the entire estate to the one child who wants to farm, or make some other anticipatory plan.
“Head estate issues off early,” says Ferguson. “These issues can destroy families. I ask my clients, ‘After we’ve designed a plan and the plan has played out, will there still be family reunions? Will everyone involved say, ‘That’s the way it should be?” Intergenerational communication is very important so there isn’t hatred and jealousy.”
David Frisse, founder of Frisse & Brewster Law Offices in Paris, Illinois presents estate and family business planning seminars in and around central Illinois encouraging participants to look at several big picture questions in order to create the best possible business plan.
Do you recognize you are a steward? What you control now you won’t always control. If you look into the future two years, 20 years, what do you want to see for your family and for your farm business? How can you ensure this vision comes true? What are the obstacles to accomplishing your goals? If the estate tax is imposed on everything you own in excess of $1 million, at a combined federal and state rate typically in the 40 percent to 60 percent range, what happens to your goal? Do you give up or do something about it?
“You can start dealing with the bigger picture before 2011 without waiting to see what Congress does or doesn’t do.” Frisse says. “Go back to your vision. Once you’ve clarified your vision and goals, look closer at your situation.” What the business is worth, which holds title to your real estate, equipment and farm assets, who shares ownership with you, who owes money with you and what happens if that person has financial problems. Know what you’re good at, whether it’s raising a crop, marketing or both. And make sure you are using bookkeeping software that will help your tax preparer help you.
Frisse asks clients to consider how important keeping their farm “in the bloodline” really is. “Many family-owned farms really have two businesses, land ownership and crop production. Clarifying which family members are currently or likely to become involved in the crop production and which are not allows you to think more deeply into how to allocate responsibilities and benefit.
“The family can consider establishing who is in control while allocating economic benefit however they wish. Using farm business entities can keep control of the operation in the best hands throughout future generations, keep interlopers such as divorcing in-laws out, provide asset protection for family members and allocate economic benefits.
“This means going through a discussion to establish clear rules for future operation, value transfer, accountability, and revenue,” says Frisse. “What you are really doing is creating a succession plan for after you or other critical family members have become disabled or (have) died and identifying the resources you need for the plan to work.”
Its complex — taxes are just one set of challenges — and avoiding all estate taxes doesn’t assure your family farm will continue into the future. Simple wills and most simple trusts aren’t adequate, Frisse says. “There isn’t a magic form that will fix everything. Instead, there has to be a process of answering one question at a time. You’ve made thousands of decisions to create your family farm. To ensure your family will know what to do, you need a clear, written, reliable, legally enforceable plan.”
DiAnne Crown
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