By Brian Hefty
It was good news for many farm operations when the federal estate tax exemption was recently made permanent (we’ll see how long “permanent” really lasts) at approximately $5.25 million per person in 2013, plus future increases based on inflation. Because of that, many farmers breathed a sigh of relief and decided that there was no longer any rush to work on an estate plan. However, there are still many important issues we think you should address.
First of all, there are still many states that have STATE estate taxes or inheritance taxes that start at MUCH lower thresholds than $5.25 million. For example, Minnesota, Oregon, Washington, Illinois, Ohio, and many others have state estate taxes. State inheritance taxes are collected in Iowa, Tennessee, Nebraska, Kentucky, Indiana, and Pennsylvania, among others. What I’m trying to say is that even though the FEDERAL exemption is high, the STATE exemption may not be.
Next, if you haven’t talked with your family about how your farm will get split up someday, that is probably where you should start. Quite often kids will find out at the reading of the will how things will go, and if the parents are no longer there to answer any of their questions, it often leads to problems between siblings. I know this can be an uncomfortable conversation, but it is important.
One of the questions we commonly get is, “What is probate?” Another is, “How will probate affect my heirs?” In a nutshell, probate is the process by which legal title of property is transferred from the deceased person’s estate to his/her beneficiaries. If a person dies with a will, the probate court determines if the will is valid, hears any objections to the will, orders that creditors be paid and supervises the process to assure that property remaining is distributed in accordance with the terms and conditions of the will. If a person dies without a will, the probate court appoints a person to receive all claims against the estate, pay creditors, and then distribute all remaining property in accordance with the laws of the state. The cost of probate is either set by state law or by an individual law firm. The typical cost to probate an estate is in the range of 3% to 7% of the total estate value, but it could be MUCH larger or smaller. Many farmers who have recently bought properties in Arizona have heard horror stories about probate bills from lawyers that have literally taken half of Arizona assets from the estate. To solve this issue, you can put your assets in a trust. Just talk to your lawyer about this, but it’s a pretty simple process that can help your estate potentially save thousands upon thousands of dollars by avoiding probate.
Now, there are a lot of things to talk about when it comes to estate planning, and I only have a limited amount of space here, but one strategy that many people have been using successfully is called an Intentionally Defective Grantor Trust. Don’t let the name fool you; this is an incredibly powerful tool. As a quick summary, you can gift into the Grantor Trust up to the amount of your gift tax exemption (which right now is the same as your estate tax exemption). Then, the trust can take any PROFITS off the assets placed in the Grantor Trust to buy more of your personal assets, and these assets would come over exempt from estate tax. Plus, YOU pay the tax for the trust. This is a great way to get more of your assets over into an estate tax free entity.
If you want a more in-depth discussion on these and many other estate planning topics FROM A FARMER’S POINT OF VIEW, I invite you to join Darren and me at our Scottsdale, Arizona workshop on February 15. In addition to discussing agronomy topics, we will be discussing estate planning. I hope you can join us!