Salt Lake City Estate Planning

Fiscal Cliff Killing Family Farms

Farmers worried about tax increases that would take effect Jan. 1 if Congress can't compromise on the so-called fiscal cliff have helped lead to a frenzy of farmland sales this fall. The worries about possible increases in capital gains and estate taxes are adding to the normally busy time for farmland sales after harvest in Iowa and Nebraska.

With the Fiscal Cliff looming with each passing day to 2013, family farms may be the latest casualty.

So, what’s the big deal? Why the flurry of family farm sales in 2012?

Some background is required to appreciate the problem. The perennial tax problem stalking family farms is that they are “illiquid assets.” The land is itself the primary asset enabling family farmers to make a living. Accordingly, when the land is sold there can be hefty taxes to pay. To make matters worse, if the death tax exemption drops to $1 million in 2013, then the heirs may be forced to sell the land just to pay the taxes.

More than a few news sources have shed light on this dilemma recently, to include the San Francisco Chronicle in an article titled “Farmland sales [are] brisk because of tax law changes.”

While the reality of the Fiscal Cliff is not good for farming families, it’s also not good for anyone owning real estate or other illiquid assets.

Going forward, do you have any illiquid assets or legacies worth leaving that require protection? Take a lesson from those that have already gotten to work: this takes action and forethought.

Reference: SFGate (San Francisco Chronicle) (November 25, 2012) “Farmland sales brisk because of tax law changes”

Family Farmers Should Keep a Weather Eye on the Estate Tax Exemption

Without congressional action, in 2013, the estate tax exemption will shrink to $1 million per person with no spousal transfer, and the top rate will increase to 55%, striking a blow to farmers and ranchers trying to transition from one generation to the next.

The Joint Economic Committee recently released a report on the devastating power unleashed upon family farms when an estate tax is triggered. Simply titled “Estate Tax Report Released,” the committee also considered the broader impact on the economy.

The report, approved by the American Farm Bureau Federation and examined in Farm Futures, notes that, while farm owners may have a great potential wealth … such wealth is tied up in land (an illiquid asset) and is not necessarily cash-in-hand.

However, the IRS will hold you accountable for the estate taxes due on your land, even if you have to sell the land to pay for it.

"When estate taxes on an agricultural business exceed cash and other liquid assets, surviving family partners are forced to sell illiquid assets, such as land, buildings, or equipment to keep their businesses operating," said AFBF President Bob Stallman. "With 88% of farm and ranch assets illiquid, producers have few options when it comes to generating cash to pay the estate tax."

If you (or a loved one) own a family farm, then there is no time like the present to make proper estate plans to protect and preserve the farm and the family wealth it represents. You have worked hard to make a living from your farm. It is common sense to spend some time and money protecting and preserving it. Take time now to consult with a tax and estate planning attorney. 

Reference: Farm Futures (July 26, 2012) “Estate Tax Report Released”

Estate Planning for the Family Farm

Farmers and ranchers are typically strapped for cash so when one of them dies leaving an estate large enough to be exposed to the federal estate tax the family can expect to have to sell something to cover the tax. That does not have to be the case. The estate tax has been described as a “voluntary” tax. Voluntary, that is, if you are willing and able to take advantage of the planning opportunities that are in the law. If not, life insurance can be a very appealing alternative to having to sell the family farm.

Living and working on a farm oftentimes means taking a different position toward land itself. If you also own the land, then it means you need to take a different stance toward your assets and your family wealth.

Farmers are in need of a proper and exhaustive estate plan more than anyone else. Fortunately, Hoosier Ag Today provided some helpful pointers in an article titled “Estate Planning for Family Farms and Ranches.”

While there are consistently bumper harvests, the land keeps on giving. Unfortunately, the land also is an incredibly valuable thing due to this potential giving. As a result, that value makes it fall prey to estate taxes if you try to pass it on to the next generation.

To truly own and understand the ownership of your land, it is necessary for a farm owner to make proper estate plans and to prepare for succession of the farm. For small farms that might be a simpler process, even modest planning can help preserve the family and the farm alike.

In the end, many farms will need far more than modest planning. The key is to select and implement the appropriate strategies for your unique circumstances. I recommend reading the original article as a starting point. However, if you are serious about planning for your family farm, it is imperative that you discuss your options with an estate planning attorney. 

Reference: Hoosier Ag Today (June 4, 2012) “Estate Planning for Family Farms and Ranches”

Planning for the Family Farm

So, you are ready to retire. You’ve worked hard for many years and you now look forward to spending time with grandchildren, fishing, golf or taking that long-delayed trip to Hawaii. However, there are just a couple problems that may need to be resolved. First, who will take over the farm?

If you or someone you love is a farmer, then you know the special challenges that generally come with estate planning and, more specifically, the succession of the farm. Planning for your estate and for your family is a difficult concept, but it’s ever more difficult when it means planning for the land itself.

A recent article from Drovers Cattle Network titled, “Commentary: Can you retire?” offers an interesting perspective on the farmer’s estate planning challenges. In the end, whether bovine, equine, or straight up agricultural, the problems are the same. Farms are living places in every sense of the word; any overseen gap in a farm is like a missed heartbeat.

Will there be a missed beat or two between yourself and the next land cultivator? If yes, it may be more than either you or the land (the herd, the flock, or what have you) can bear. Planning for the farm succession is no easy feat in these generations, especially with youth more and more concentrated in urban locations/lifestyles and the farm a perennial casualty to the estate tax.

It’s important to remember that any successful farm transfer is one that will have to begin early, with a well thought-out plan. How to transfer the farm is another matter, and a complicated one depending on your potential heirs, or buyers, and the farm itself.

You owe it to yourself and to the land to appreciate these difficulties and form a full-fledged plan to deal with them. Be sure to engage competent legal counsel experienced in working with agricultural assets and farming families.

Reference: Drovers Cattle Network (May 28, 2012) “Commentary: Can you retire?”

Successful Succession of Family Farm is NOT Automatic...Plan Successful Succession of Your Family Farm

Your “estate plan,” however, should not be your farm’s succession plan. Succession planning is a “process” – “not an event,” … an estate plan is a piece of the process that is succession planning.

Farm and family. Perhaps more than any other kind of industry or property, planning for the succession of the family farm poses a significant challenge to the estate planner.

Some of these challenges are described in a recent article in Agri-View titled Estate planning lays framework for smooth transition.

When the farm is a family farm, and therefore also the family business, planning for your estate is really about planning for the succession of the business and the farm. This can be a delicate process, but it is better to start the process sooner rather than later.

For one thing, don’t overlook the fact that farmland values can trigger estate taxes (real estate bubbles aside, land is the only thing that consistently grows in value – ‘cause God ain’t makin’ any more of it’ – and farms are all about land). Accordingly, some rather sophisticated estate planning (and liquidity planning) may be in order, or the family farm could be lost to the IRS. Not good.

Estate taxes aside, there are many other considerations to secure the future of the “family” element of the family farm. For example, who will inherit the farm, let alone continue to operate it? What if your children live in the suburbs and work every day downtown? Who will actually do the “farming?” Perhaps renting or sharecropping might be more practical. Regardless, these are the kinds of practical real-world matters that ought to be decided with a legal framework to ensure succession success.

So, if you are a farm-owner, and particularly the owner of a family farm, then there is much work to be done. While I recommend reading the original article, be sure to engage competent legal counsel, as well as any farm extension agent assistance that may be available.

Reference: Agri-View (March 29, 2012) “Estate planning lays framework for smooth transition”

Estate Tax Planning...Prepare for the Worst

These days, most people are aware that there is a lot of confusion surrounding the estate tax.  As an estate planning attorney / tax attorney, I have the pleasure of planning for a lot of unknowns and confusion regarding my clients' affairs.  That is my job.  Look at the unkowns and confusion and plan for it and straighten it out...Thus, the current situation regarding the estate tax is intriguing for me...but is not new to me (or more estate planning and tax attorneys).

With congress now in post-election turmoil and heavy ideological differences at stake, there are many things that we simply can’t yet know and this makes planning both essential and baffling for clients. Amongst the greater issues coming to the forefront is the looming return of the estate tax. The estate tax – also known as the “death tax,” “inheritance tax,”  or "wealth redistribution tax" depending on one’s persuasion – has been suspended entirely for 2010. The suspension was the result of the inability of a divided congress to come to a decision, and so too, now we must wait on a divided congress to come to a decision on what is to happen next. Without Congressional action, the hiatus on the estate tax will dissolve on schedule and thereby return to the last status of the tax, as it was in 2001, with an exemption of $1 million and a top rate of 55%.  Yes...this is the "worst" situation that most estate planning attorneys are planning for.

Morningstar Advisors throws a spotlight on the problem from all angles in their October/November issue. If you have much to lose because of the return of the estate tax, they advise that you prepare for the worst. It’s also wise to look at how the estate tax may play out in various circumstances – such as for “ordinary” middle class couples, blended families, same-sex couples, families with special needs children, and family businesses. Be sure to check out their tips for common family situations.

Whatever your situation is, it’s important to know what’s going on and how it affects you, but it is most important to have a plan with a competent advisor to help you and your family pass safely through this shifting terrain.  I encourage everyone to become as educated as they want, but to also remember that estate tax planning is complex, so you need quality advisors.

Learn more about the federal estate tax on our website, including our handy estate tax calculator. Also, be sure to sign up for our free monthly e-newsletter, and follow this blog for updates.  And if you are into it, follow our estate planning news on Twitter and Facebook, or follow our general law firm news on Twitter and Facebook.

Inheritng Real Estate or Passing Real Estate to Heirs

"My father died and left the house he lived in to his wife, my stepmother... My father told me the house would be mine and that he had life insurance to pay it off if anything happened to him."

-NORTH JERSEY.COM (OCT. 17 2010): INHERITING PROPERTY FOLLOWS SIMPLE RULE: PUT IT IN WRITING (http://www.northjersey.com/realestate/105124109_Inheriting_property_follows_simple_rule__Put_it_in_writing.html)

 

I wish it weren’t true, but the above scenario is one that is played out all-too-often within families. The writer in this particular instance says she had been paying the mortgage, insurance, homeowners’ association dues and taxes on her father’s house for the past ten years, with the (apparently verbal) promise that the house would be hers when he passed. However, it appears that the house was left to her father’s wife, this woman’s stepmother. She wonders now what recourse she may have. (Read the entire story online NorthJersey.com)

When it comes to real estate, a gift of any current or future interest should be made in writing, and memorialized with the appropriate legal documents (a will, trust, deed, etc.). In the absence of legal evidence to support this woman’s claim, it is very possible that she is simply out of luck. She may be able to recoup some of her money by filing a claim against the estate, but even that is not a sure bet (and even if she is successful, she likely won't recover all she has paid).

If you have an “informal” arrangement with family members regarding real estate, or other estate assets, I would encourage you to “formalize” it with the appropriate legal documentation sooner, rather than later. Certainly before the financial stakes are as high as they became for the woman in the NorthJersey article.  A basic revocable trust and beneficiary designations could have resolved the concerns raised by the woman in the NorthJersey article. 

Visit our website to learn more about fundamental estate planning, such as wills, revocable trusts, insurance trusts, and powers of attorney.  If estate and gift taxes a a concern, we offer free inforamtion on those topics as well.  And finally, if you find yourself in a situation simlar to the woman in the article, we offer assistance in estate and trust administration (including estate and trust contests and dispute resolution).

Headline Regarding the Federal Estate Tax

"If the Congress doesn't do anything by the end of 2010, the estate tax will go back to 2001 levels with a $1 million personal exemption and a maximum rate of 55 percent. Why haven't they done any­thing yet?"

--THE MONTGOMERY ADVERTISER (OCT. 17, 2010):CONGRESS UNLIKELY TO TACKLE ESTATE TAX (http://www.montgomeryadvertiser.com/article/20101017/BUSINESS/10160352/Congress-unlikely-to-tackle-estate-tax)

We certainly have seen plenty of speculation about the fate of the federal estate tax this year. I have my opinions and every other attorney and tax expert has theirs.  Unfortunately, there is not a lot of consensus amount tax attorneys.  Oh....Just in case you missed it, this is the year the federal estate tax was repealed – for one year only. Unless Congress takes some action otherwise, however, the tax will return January 1, 2011 … reverting back to the 2001 rules with a $1 million personal exemption and a maximum rate of 55 percent. Economists and politicians have weighed-in on the subject all year long. At one point, virtually all of the “experts” agreed that Congress would “most likely” institute a $3.5 million exemption amount and a top rate of 45 percent, and applied it retroactively to 2010.

Most now agree that is an unlikely scenario...but they don't agree what exactly will happen.

Columnist John Norris writes convincingly that he thinks Congress will not act, and that the 2001 rules will go into effect next year. He suggests that if your estate exceeds $1 million, you consider getting yourself to an estate attorney. I would have to add that, if you have not planned or updated your estate plan recently, it’s time to get moving … whether your estate exceeds the $1 million exemption or not.  It may also be time to add some insurance to your estate to cover taxes or replace wealth that is dissapated because of taxes (especially for owners of small businesses, family farms, and real estate).

You can learn more the federal estate, and even project how the return of the estate tax could affect you by using the handy Estate Tax Calculator on our website. Use this calculator to project the value of your estate, and the associated estate tax, for the next ten years. Also, if you’re ready, you can use this handy form to request an estate planning consultation.  The estate and gift taxes are comlex to navigate--so I highly recommend retaining an attorney that devotes a substantial portion of his or her practice to estate planning to assist you with planning your estate.

ESTATE PLANNING / LIFE INSURANCE

"The life-insurance industry has enjoyed beneficial tax treatment for its products for nearly a century. Whenever Congress tried to change that, insurers always had a mantra at the ready: We protect widows and orphans."

-THE WALL STREET JOURNAL  (OCT. 3, 2010): SHIFT TO WEALTHIER CLIENTELE PUTS LIFE INSURERS IN A BIND

Strategic use of life insurance frequently is a key aspect of comprehensive estate planning, solving a wide variety of estate planning challenges from providing liquidity to pay estate taxes, to charitable bequests and ensuring the continuation of a closely-held business. One of the key characteristics of life insurance, making it such a versatile estate planning tool, is preferential tax treatment. Properly structured, life insurance proceeds pass tax-free to beneficiaries, and earnings on investments held within certain types of “permanent” life insurance also generally accrue tax-free.

According to a recent article in The Wall Street Journal, there is some national debate, however, about the tax-preferred status of life insurance.  Once primarily a safety-net against the impoverishment of widows and orphans, life insurance has increasingly become a tax-advantaged investment and estate planning tool. 

High-end policies for $2 million and up, which can carry annual premiums of $20,000 or more, made up nearly 40% of the face value of new whole-life and universal-life policies sold in 2007, according to an analysis done for The Wall Street Journal by Limra, an industry-funded research group. Such large policies accounted for just 10% a decade earlier, and 1% two decades ago. 

Meanwhile, the percentage of American families owning life insurance continues to fall. Thirty percent have no life-insurance coverage of any kind, a four-decade high, according to a Limra survey. In an effort to reverse this trend, some insurance companies are experimenting now with policies for sale through banks that can be issued more speedily. Prudential, Allstate, MetLife, and ING Group are among those trying new approaches that aim to sell policies more cost-effectively to the middle class.

Due to the current situation regarding the estate tax, it might be prudent to acquire additional life insurance--and make sure ownership is properly structured to afford maximum benefit (irrevocable life insurance trusts are frequently a great way to own life insurance).  Of course, if there are substantial changes in the tax treatment of life insurnace, we will try to blog about it or update you in our newsletter.

The Estate Tax In the News

I recently came across another articles about the estate tax in the news on CNNs finance website (see Estate Tax in Limbo). It again shows the confusion surrounding the estate tax and its future. Indeed, we must plan for the worst (reenactment of the estate tax in 2011 with an exclusion of $1 million) and hope for the best (a higher estate tax exclusion level). Planning for various outcomes regarding the estate tax can be accomplished with the right provisions in your revocable living trust. Make sure you consult with an estate planning attorney knowledgeable in estate tax issues to assure your revocable trust is properly drafted. There is a push to pass estate tax reform, but no one seems to really know whether anything will be finalized. Only time will tell. I am not optimistic that the final resolution to the estate tax confusion will be a high estate tax exclusion (e.g., $5 million)--I think the government will be looking for revenues wherever they can be found and that at the lower exclusion levels, there still aren't very many estates that will be hit with estate tax (as a percentage of people dying). Also, increasing revenue through estate taxes may be easier than increasing it through income taxes--especially in a rough economy. Again, however, no one really seems to know what will happen to the estate tax, so the confusion may continue for a while yet. If you would like to learn more about the estate tax, please call me for a free consultation or register on my website (www.hunterestategroup.com).