2011 brings new changes to federal estate taxes. Much to the surprise of many, including myself, Congress actually came through at the 11th hour and enacted changes to the federal estate tax that provides relief for farm families. I’ll admit that I was wrong in my prediction this would not happen. However, I was probably only half wrong since the changes are only effective for two years. So, in essence a band aid was put on by Congress.

I still believe that over the next few years some very hard choices will need to be made by our leaders. It is no big secret that this country is spending more than it takes in. Thus, the question is will Congress be able to uphold the recent changes it enacted. I suppose only time will tell.

The 2010 Tax Relief Act lowers estate taxes for 2011 and 2012 by increasing the exemption amount from $1 million to $5 million (as indexed after 2011) and reducing the top rate from 55 percent to 35 percent. The $5 million exemption is per person, $10 million exemption for married couples. Therefore, many more family farms will 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.”

Why? Well, first is that as stated above the changes are temporary. Second, land is generally the largest asset held by farmers. It’s also generally the asset that appreciates the most. Even modest gains in land prices can result in millions of dollars in appreciation. As time goes on, asset appreciation will take more and more farm estates over even the new lofty exclusion amount.
Lastly, the federal estate tax is only one of the evils out there lurking to drain assets from a farm estate. Your farm estate may not be subject to the federal estate tax, but rest assured there are other obstacles.

I have a fear that many farmers will grow complacent in light of the relief granted by Congress. I cannot stress enough the necessity for you to review your farm estate plan and consider the following:

•Federal estate taxes: Pencil out what your farm estate is worth, and then run some scenarios based on appreciation of land and other assets. Also, factor in what happens if Congress decides to go with a lesser exclusion amount in the future. In addition, ask yourself if your estate plan gives trustees or heirs any flexibility in addressing federal estate tax liability. In other words, if there is a tax liability, does your plan allow certain assets to be sold first in order to pay the tax.

•State taxes: Some states have an inheritance tax, others have an estate tax, while others call the tax something else. No matter what form it comes in, it can be expensive.

For example, Indiana has an inheritance tax that levies $92,250, plus 10 percent of net taxable value over estates above $1.5 million dollars. Find out what tax your state levies on an estate, as well as the amounts, and crunch the numbers.

•Probate fees: Depending on your state, probate can be a long and very expensive process. The fees tend to vary, but figure on about 3-6 percent of the farm estate. 

Also, time equates to money, and I’ve heard of estates being tied up in probate for over a decade. Ask yourself if your estate plan utilizes a trust or other mechanism that avoids the probate process. If not, then why? If you have a trust, do you understand what it does? Has it been properly funded?  

•Long-term care: We all know that long-term care can be extremely expensive. 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 various 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: 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 these people? Does my estate plan factor in insurance needs?

•Divorce: I tell clients all the time that a good estate plan needs to address what happens if an inheriting child finds themselves in a divorce. Do the parents want half or more of the assets given to that child lost through the divorce? Of course not. Thus, it is extremely important to take the necessary steps to guard estate assets from future divorces. 

As you can see, there is a lot more to be weary 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 we address these issues in future articles starting next month. 

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.