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Got farm? How you can best leave an estate to your heirs

By ANN HINCH
Assistant Editor

LEBANON, Ind. — It’s not a strange position for farmers: An older couple notices time is going by faster and while they want to make sure their land and assets go to their progeny, they’re not sure how to do that or if shelling out for an expensive lawyer is worth it.

During his talks at last week’s Farm World Expo in Lebanon, attorney John Schwarz gave attendees some general advice about securing their estates for heirs and keeping as much value in them as possible. As a farm kid from Stroh, Ind., who now does double duty farming and lawyering in Angola, Schwarz said he understands farmers deal with issues the average person may not.

For example, even a small farmer might own 1,000 acres – at $4,000 an acre, the land alone is worth $4 million, which is not a situation common to many middle-class non-farmers. Throw in a modest house, vehicles and equipment needed to do the farming, livestock and personal assets, and that value can creep toward $5 million.

Schwarz said farmers are tough to convince about putting together an estate plan: they either figure they can safely put it off for a while (“Next year’s always going to be there”) or since they inherited the farm from their parents, they figure it’ll work the same way when they die, for their children.

“What worked in the (19)50s, ’60s and ’70s does not work now,” he pointed out, adding laws and times have changed.

Farm values have increased, taxes have increased, people are living longer – and there are fewer children who want to take over a farming operation. Schwarz himself is the only one of five kids who have interest in keeping his parents’ farm going.

What will happen to the operation, he asked, if his parents pass away without setting up an estate plan or tax shields, and the IRS and Schwarz’s four siblings come looking for their shares of the farm’s value? Or, as Schwarz put it: “How am I going to buy those kids out?”

It happens all the time – he related a case in which a client had to pay more than $700,000 in taxes after her parents died, and had to sell the farm to do so. In her case, he said her parents definitely would have gotten their money’s worth to pay a lawyer to set up an estate plan to protect their assets.

The first thing Schwarz asks a client is their end goal. Do they want to farm until they die and pass the operation on to their children? What if not all children want to farm and they still want to leave an equitable inheritance to the non-farmers? Do they want to transfer the farm to a child or other heir and spend their golden years somewhere warmer?

Most, he said, have a mix of farming and non-farming children and would like to leave something to all of them. The first financial hurdle those children will encounter after the death of both parents (there is no tax if someone dies and leaves everything to the living spouse) is the federal estate or “death” tax.

“The good Lord’s got to call you home – then the IRS shows up,” Schwarz quipped.

Historically, the estate tax has been 40-50 percent of its value. On an inheritance in 2009, $3.5 million would be exempt, but the remaining value would be taxed at 45 percent. In the 1,000-acres example above, he said that tax payment would be well over $500,000 – which likely means the farm would have to be sold just to pay the tax.

Next year, there is no estate tax, but in 2011, Schwarz said unless Congress takes action to change it, there will only be a $1 million exemption and a 50 percent tax on any value over that. Plus, he said the state of Indiana wants to claim its inheritance tax, as well.
There are a variety of ways one can protect most or all of their estate from having to be sold for taxes or non-farming children after their death. “Everyone has an estate planning toolbox,” Schwarz explained.

For example, both parents can legally divide the value of the estate so that when the first dies, that portion is put into a tax-exempt trust – he said such trusts can usually be tapped to some degree by the surviving spouse to pay for farm maintenance. When the second parent dies, their share briefly goes into an exempt trust, as well, before all goes to the heirs.

Or, the parents might wish to set up a limited liability company (LLC) and give each child one share, dividing the rest between each parent, with no one person holding a majority. Establishing an LLC reduces asset values by 30 percent – a $4.5 million estate becomes worth $3.15 million.

Parents may also have life insurance policies. Schwarz said this is especially helpful if they want to leave something to non-farming children, since it provides ready cash and helps the farming child to keep from having to sell off assets or land.

“Fair’ doesn’t always mean ‘equal,’” he pointed out, referring to deciding how much to leave to non-farming children as opposed to a farming child.

If the farming child has invested time and money in the operation and the others have not, the parents may decide that child is entitled to a higher value inheritance than the others – this is a personal decision parents have to make.

Life insurance is expensive, especially for older people (those who are insurable). The firm sponsoring Schwarz’s talk at the Expo, Farm Legacy, specializes in selling whole life insurance to seniors 60-86. The premium is financed by the value of the estate and cash value builds up in the policy until death and payout. Proceeds from that disbursement will pay the premium fee.

Schwarz said parents could also set up a buy-sell agreement to sell the farm to their farming child(ren) while the parents are still living; establish a provision that gives the farming child(ren) 10 years to buy out non-farming siblings; or make gifts to heirs to reduce the value of their estate before they die. He said a gift with value of up to $12,500 each year, per person, is tax-exempt.

Readers may direct questions to Schwarz in care of this publication. His advice, however, does not constitute an attorney-client relationship and readers wanting to set up an estate plan should consult an attorney or CPA in their area.

To learn more about Farm Legacy, visit www.farmlegacy.us or call 260-413-8173.

8/12/2009