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| Death is certain, but federal estate taxes don’t have to be |
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Agricultural Law
By John Schwarz
Recently, I noticed some past issues of Farm World have had reader input and opinion regarding the Federal Estate Tax (FET). Having read these articles, I thought I’d offer a few thoughts on the FET in this column.
To begin, there have always been at least two different camps regarding the justification of the FET. One side usually says the FET enables a redistribution of wealth, taxes those are most apt to afford it and keeps other taxes, such as personal income tax, lower.
The other side usually counters by saying the FET taxes money that has been taxed several times over, penalizes success and hurts small businesses and farmers. Either way, I think at least both sides can agree that the FET can, and most often does, have a large part to play in estate planning.
As an estate planner, I know full well the devastating effects that the FET can have on a farming operation. Seeing that the FET is about to get a whole lot worse, these effects will no doubt be magnified, starting next year. As a young farmer looking to someday take over his family’s farming operation, having to pay Uncle Sam half of the value of the estate would put me in the NFL.
No – not the National Football League; more like the Not Farming League. Maybe there are some young farmers out there who would forge on after seeing half their assets taken by Uncle Sam.
However, even if I could, after working my entire life to help get our farming operation to where it is today, I just don’t know if I could stomach it.
The good part is that it does not have to be that way. Simply put, generally the people who put together a thorough estate plan minimize the impact the FET has on their estate. Take George Steinbrenner, the late owner of the New York Yankees, for example. Because Mr. Steinbrenner passed away this year when there is no FET, his estate escapes the FET.
However, do you think for a minute that if Mr. Steinbrenner died during some other year, that half of the New York Yankees would be owned by the government? Probably not. I’m sure he had an estate plan long in place that minimized his estate’s FET liability.
Most of us have lived our lives being land-rich and money-poor. That’s usually the norm with farming. With ever-increasing land values, however, even a small amount of acreage in the right location makes you rich. I tell clients all the time, even with smaller farming operations, “Congratulations – you’re rich in the eyes of the IRS, and unless you do some planning, you’re going to be taxed like the rich.”
The question that I always ask myself is if famers are concerned about the FET, why don’t they plan more to minimize the taxes? The reason’s I’ve come up with are as follows:
Time: As farmers, we tend to live our lives relative to the crop year. Like an old farmer told me one time, “If this year doesn’t’ go well, ya just try it again next year.” In other words, we tend to always think about getting around to it, but it can wait until next year.
Well, starting next year things get a whole lot worse. We work in one of the most dangerous occupations in America (I’ve read once that only underwater welding is more dangerous). What makes us think we’ll live to see next year? Aren’t we all just one unguarded PTO shaft, plugged grain bin or other danger away from death every year?
Cost: Most people think estate planning is going to cost them an
arm and a leg. This is simply not the case. Depending on the size of the estate, a few thousand dollars – maybe more, maybe less – can get the job done.
What will cost you an arm and a leg? Not doing anything.
As an estate planner, I like to figure the FET liability of the client as if they passed away before they came to see me, and then estimate the liability as if they passed away after the plan is up and running. Safe to say, I can’t recall a time when the client’s savings did not far outweigh the cost of setting up the plan.
Complexity: Farmers tend to think that estate planning has to be complicated. This is simply not the case. As an estate planner, my job is to put a plan together that makes sense for the client and that the client understands. If someone does not understand the plan I put together, then I haven’t done my job as the estate planner.
Mistrust of attorneys: I could write pages on this one, but I’ll continue to try to be brief. First, there are some very good people in the legal industry, and I say that wholeheartedly. Just because someone has a law degree does not mean they have sold their soul.
An older attorney told me once that there were not many decent people in the legal business because all the decent people get out. Maybe there is some truth to this; but again, I’ve met fellow attorneys that are exemplary individuals. It is your job, as the client, to find these people by asking the right questions.
Ask questions such as: Does the attorney know agriculture? Does the attorney ever perform pro bono (free) services? Have they created farm estate plans? Do they have any prior disciplinary action against them? Do they focus in estate planning?
Don’t ever be afraid to “interview” your attorney and make sure you’ve selected an attorney with whom you’ll be happy.
Family Issues: Over the years, it has amazed me how many parents put off estate planning out of fear of anger or resentment from a child. Often, this occurs if the parents decide to leave more assets to the farming child(ren) than the non-farming child(ren).
I always remind clients that: there is no law stating how much, to who or if any of their assets they need to leave, and; fair does not mean equal.
Work out any issues your heirs may have while you are alive. If someone has their nose out of joint, a good estate planner can offer solutions to keep everyone happy. Otherwise, these issues will only get worse after the death of the parents.
In all reality, there are no good reasons for a farmer not putting an estate plan together that minimizes the FET. Death is certain, and so is the FET, but the amount of tax is uncertain.
Spending some time and money to put a plan together will either reduce the amount of tax or make it so there is no tax liability. In the alternative, doing nothing often is really expensive, but you won’t be the one writing the check to the IRS; rather, your heirs will.
In closing, I sympathize with the arguments that the FET can be extremely detrimental to a farming operation. Short of a divorce, I know of no other instance where a farming operation can be cut in half so quickly.
Although most farmers undoubtedly don’t agree with the existence of the FET, it doesn’t mean we have to simply roll over and play dead (no pun intended). A little planning will pay large dividends and help avoid the next generation being demoted to the Not Farming League. John J. Schwarz, II, is a farmer and agricultural law attorney and farm estate planner in Steuben County, Ind. He can be reached at 260-665-9779 or by e-mail at jschwarz@cresslaw.com
These articles are for general informational purposes only. If you have a specific legal question, you should consult an attorney. The views and opinions expressed in this column are those of the author and not necessarily those of Farm World. |
| 9/8/2010 |
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