| Estate planning for farmers: Don’t take the federal estate tax lightly |
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We will continue with our discussion on estate planning steps that farm families should take so as to ensure their family, financial and farm goals are met.
The federal estate tax is probably the harshest tax that a family farm may be subjected to.
For 2009, the federal estate tax is 45 percent. Thus, I always advise clients that if proper planning is not performed in regards to the federal estate tax, Uncle Sam may inherit a large portion of their farming operation.
Let’s start off by examining how the federal estate tax works. To begin, there is an exclusion amount that shields a certain amount of an estate from the tax. For 2009, such amount is 3.5 million dollars. Thus, for the first 3.5 million dollars there is no tax. Some may say that such a high amount means they should not have to worry about the federal estate tax. However, after the exclusion amount goes to unlimited in 2010, in 2011 the exclusion amount drops significantly to $1 million with a maximum tax rate of 55 percent. Thus, even small farming operations may not be protected much by the exclusion amount in the near future.
It is important to realize that the federal estate tax applies to an estate, and not so much to individuals. For example, let’s say we have a husband, Jack, and a wife, Diane, who own a farming operation. Under the simple “all-American estate plan,” where the assets of one spouse pass to the surviving spouse, all of Jack’s assets would pass to Diane at his death. The IRS allows all of Jack’s assets to pass tax free to Diane. Thus, Jack really has no assets in his estate to be subjected to the federal estate tax.
Simply put, there is no federal estate tax at the death of the first spouse. However, the problem arises at the death of the second spouse. For example, let’s say Jack and Diane own 1,000 acres and have the assets that one would normally associate with such a farming operation. Depending on the land prices, values of machinery, their home, etc., Jack and Diane could have an estate worth around $5 million dollars. When Jack dies, all his assets pass to Diane tax free. Thus, at Diane’s death, her estate is worth $5 million dollars.
If Diane passes in 2009, after deducting the $3.5 million-dollar exclusion amount, Diane would have a taxable estate of 1.5 million dollars. Her estate would pay $675,000 ($1.5m x 45 percent) in federal estate taxes. Worse, if Diane passes in 2011 when the exclusion amount is only $1 million dollars, her taxable estate would be $4 million dollars. Thus, Diane’s estate would pay approximately $2,200,000 ($4m x 55 percent) in federal estate taxes.
As you can see, the federal estate tax is something that should not be taken lightly. Unfortunately, starting in 2011, it will become more of an issue for Hoosier farms. A little planning can save millions of dollars. We’ll discuss the options for minimizing the federal estate tax in the next article.
John J. Schwarz, II, is a farmer and attorney in Steuben County, Ind. He can be reached at 260-665-9779 or jschwarz@cresslaw.com |
| 3/25/2009 |
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