When I was in law school during the early part of the past decade, I was often told by my estate planning professors that Congress would not allow the estate tax rates, an exclusion amounts to sunset in 2011. During my first few years of practicing law, from time to time I’d hear the same thing from other estate planning practitioners and financial planners. Over the past year, the chatter became louder. So much so, that I find it analogous to a group of people watching a traumatic event unfold. You know what I mean, where someone in the crowd nervously exclaims “surely somebody will do something.”

Such is the case with Congress stepping in and adjusting the federal estate tax rates and exclusion amounts. So many people have gone from “Congress will do something” to “surely Congress will do something.”

I really hate to be a glass-half-empty kind of guy, but here’s my two cent prediction. Yes, Congress is going to do something, and that is let the current rates and exclusion amounts expire. Thus, all of us should begin planning for a skimpy exclusion amount of $1 million dollars and a maximum tax rate of a whopping 55 percent.
With one political party controlling the U.S. Senate, and the other party controlling the U.S. House, some sort of compromise between the two major parties will be needed. Sadly, there does not seem to be a lot of spirit of compromise on Capitol Hill nowadays. Also, I fully expect that Congress will focus on other issues such as high unemployment, the war in Afghanistan, etc. In addition, most of us farmers have always been land rich and money poor. In other words, a lot of farmers are worth millions, but surely don’t have the ability to live like a millionaire. Unfortunately, farmers will find themselves being lumped in with the “rich,” whoever that is, and not be given a lot of sympathy by the general population. In other words, we shouldn’t expect a lot of outcry from the general population for Congress to establish higher exclusion amounts (say, the $2-3 million dollar range) or cut back the estate tax rate. Based upon the above, I’d be surprised if even by this time next year we’ve seen Congress get something in place. Quite honestly, I would not be surprised if several years go by before something gets done.

Because it now appears Congress will not take any action, over the coming months, all farmers should take an inventory of their assets and determine how much their estate is worth. Keep in mind that land prices are on the upward march again. Thus, one should try not to undervalue their land assts. In other words, be reasonable in your assessment. 

Married couples should ask whether or not their current estate plan allows the first spouse that passes away, the ability to utilize their exclusion amount of soon-to-be $1 million. Remember, this exclusion amount is a “use it or lose it” benefit. If your current estate plan does not allow for it to be used at the death of the first spouse, and all the assets are passed to the surviving spouse, you’ve piled all the estate’s eggs in one basket. That means the surviving spouse now owns all the assets with only a soon-to-be $1 million dollar exclusion.

Farmers that are single or widowed should also take an inventory and ask whether their estate plan allows them to use the exclusion. In addition, these individuals, especially older farmers, should consider some gifting. A person, especially someone with health issues, may find it advantageous to partake in some gifting before 2010 ends, and then turn right around and do it in early 2011. Remember, you can’t gift anything when you’re dead. So, gifting is another one of those “use it or lose it” benefits. 

Once you figure the value of your assets, figure that any amount not able to be excluded will be taxed at a rate of around 50 percent.  If you live in a state with an inheritance tax, figure on the state coming in for a few percentage points of your estate value. After that, depending on your state’s system of probate, it’s likely that your heirs will shell out a few more percentage points of the estate for probate fees. Finally, don’t forget about funeral and burial expenses.

Depending on the size of your farm estate without proper planning it is not unrealistic to figure half, or more, being eaten away by taxes, fees, and expenses. The bottom line is that in the coming years it is going to get really expensive for a farmer to die. Even if Congress does end up expanding the exclusion amounts and reducing the maximum tax rate, I don’t think it will be much of a relief for farmers. The problem I foresee is that land and machinery values will accelerate upwards and outpace any relief, if any, Congress provides.

In closing, you need to take advantage of the upcoming cold winter months and assess your current estate plan, retirement plan, and potential estate tax liability. Rest assured that you have enough estate planning tools at your disposal to put a plan in place that keeps your estate intact. That way you can send back Congress’ lump of coal.

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.