Estate taxes can become a significant obstacle to achieving a seamless transition from one farming generation to the next.

Putting family dynamics to the side, the impact that the estate tax can have on a family’s transition plan is substantial.

Many national associations within the agricultural industry have lobbied for the repeal of the estate tax in its entirety.

As Congress has not relented to the pressure of total repeal, they have created some unique opportunities that will provide relief for those willing to engage in the process of estate planning.

This compromise on gift, estate and generation-skipping tax laws passed by Congress on Dec. 17, 2010, provides an unprecedented opportunity for farmers and ranchers to make tax-free transfers to lessen the impact of estate taxes in the future.

Nevertheless, time is short. By the end of 2012, this tax-free lifetime wealth transfer opportunity may diminish.

Background

The year 2002 is a good starting point. Should current estate tax laws go according to the plan Congress has laid out, we will once again be bound by the same estate tax rules that were in place during 2002.

In 2002, an individual had the ability to transfer up to $ million ($2 million for a married couple) in assets to the next generation without incurring any estate tax.

For estates larger than $1 million, the excess value over $1 million was taxed at a maximum rate of 55 percent.

As we progressed from 2002 to 2009, the estate tax exemption was increased over time until it reached a maximum exemption amount of $3,500,000.

The amount that could be gifted during one’s lifetime remained at $1 million from 2002 to 2010.

As of Jan. 1, 2010, the estate tax was set to be repealed completely. Although the repeal was never realistically expected to occur, congressional inaction led to the full repeal of the estate tax at the close of 2009.

If no changes to the law were made prior to the end of 2010, the estate tax was queued to be revived in 2011 and beyond at the same levels as 2002.

The 2010 Tax Relief Act

As 2010 came to a close, Congress worked to agree on a solution in order to avoid the reversion back to the 2002 estate tax levels.

Although no long-term plan was enacted, a short-term agreement was reached and signed into law.

For the first time in history, individuals now have the opportunity to gift up to $5 million during their lives or transfer $5 million tax-free upon their death (or any combination of the two).

The estate tax was also reunited with the gift tax, meaning that regardless of whether an individual wanted to transfer $5 million ($10 million for a married couple) during his or her lifetime or at his or her death, it was now possible to do so without incurring any estate or gift taxes.

The 2010 Tax Act created a tool that could be extremely useful for farm and ranching families who have real estate as their major asset.

Portability of the estate tax exemption is also a new development in the estate tax planning world. Previously, if one’s estate tax exemption was not used at the death of an individual, it was no longer available.

Now, if one’s spouse passes away without having used any or all of their $5 million exemption, it is available to be used by the deceased’s surviving spouse.

Thus, in effect, if one’s spouse passes away without using any of their $5 million exemption, the surviving spouse could have up to $10 million of exemption available to use for his or her estate.

It should be noted that, upon remarrying, the surviving spouse no longer has the option of using his or her previously deceased spouse’s exemption, but would have the option of utilizing his or her new spouse’s unused exemption.

Your opportunity

With the major changes in estate tax laws discussed above, there are now some significant opportunities you should consider while these new levels of gifting and estate tax exemptions are available.

Any high net worth individual (in this case anyone with a net worth of $1,000,000 or greater) should assess the value of their real and personal property (including cash and investments).

This will arm you with the information necessary to determine if gifting would be an effective technique to lower the value of your estate while the current exemption level is available.

In addition to moving the current value of the gift out of your estate, any future growth (in terms of value) of these transferred assets would also be moved to the next generation. The time is now to assess whether your family can benefit from the $5 million gift tax exemption.

Conclusion

Now is the time you should conduct a detailed review of your overall estate and consider how your estate may be affected under the current laws and what the impact of 2002-level exemptions and tax rates may have on your assets if you don’t take advantage of these current opportunities.

The investment of a few hours of your time and that of a qualified CPA and/or attorney could ultimately result in significant estate tax savings. Discounting this opportunity could literally cost you (or your family) the farm. 

Rob Gunther, CPA has extensive tax and consulting experience in agribusiness and closely held businesses with specific focus on the cattle industry.