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.

In the last article (Farm World, March 25) we discussed the federal estate tax. You may recall that generally this rate is in excess of 45 percent.

You may recall that we discussed that starting in 2011, the exemption amount (amount of the estate not susceptible to the tax) drops to 1 million dollars. Thus, many more farms will soon be at risk of having substantial estate tax liabilities.

However, not all is lost as several tools in the estate planning toolbox allow for farming operations to reduce federal estate tax liability. Probably the easiest way to reduce the estate tax is merely dividing assets between a husband and wife.

For example, the husband takes ownership of half the farm assets in his name, and the wife does the same.

When the first spouse dies, their half of the assets goes into a trust and they are able to use their federal exemption to shield some, or all, of their half of the assets.

The surviving spouse can continue to earn an income off of the assets that have been placed into the trust.

In addition, under certain circumstances, the surviving spouse can also dip into the assets of the trust if need be. Since each person is allowed an exemption, the splitting of the assets enables the estate planner to utilize both the husband’s exemption and the wife’s. This essentially doubles the amount of the estate that can be shielded from the estate tax.

If not, then at the passing of the first spouse all the assets transfer to the surviving spouse, and only one exemption can be used.
Sometimes clients think that the splitting of the assets puts them at risk for losing such assets in the event of a divorce. Indiana, and many other states, follows the “one pot theory” and thus all assets are split evenly unless certain factors are present.

Simply put, the splitting of the assets for estate tax purposes does not generally put either spouse at a disadvantage should a divorce occur.

In 2011, just by re-titling the ownership of assets between a husband and wife can increase the amount of their estate shielded by exemptions from 1 million to 2 million dollars (1 million per spouse). With the tax rate on each million dollars being almost 50 percent, such an easy step can save around half a million dollars in taxes. We’ll discuss more 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 focuses his practice on agricultural law and legal issues important to farming communities. He can be reached at 260-665-9779 or 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.