Prepare for an estate tax increase
For the last several months I have been attempting to raise awareness on the need for each and every farm family to address long term care planning. Bottom line is this; if you have assets and would like to pass them down to your family fully intact, you need to do something to guarantee that this happens. If you don’t have much or just don’t care, then do nothing. It is really just that simple folks. Either you get it or you don’t.
It is now time to move on and address more timely topics. As I write this, the collective body of overinflated egos that we send to Washington are quite busy standing in front of any TV camera they can. Bloviating and spewing out the talking points of their respective parties concerning the end of the Bush tax cuts and the impending fiscal cliff.
As farmers you are most likely well aware that this is about much more than just a possible increase in income tax rates for high earners. Yep, once again the ever changing amount of assets you can pass down to your family without incurring any federal estate tax is in question. No matter what the windbags come up with this time; I think it is safe to say that as anything that is as political as this is, it will not remain a fixed amount forever. Round and round she goes, where she stops… nobody knows.
The real dilemma is that this is more than just an inconvenience. Particularly when coupled with the
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recently skyrocketing land prices. It really doesn’t matter how foolish or overinflated the latest sales have been. The IRS is going to value the land in your estate at what a willing buyer would pay a willing seller and we all have a good idea what that is.
With the 2012 exemption amount at $5,000,000 per person and 35% rate over that amount, many families are okay… for now. But, should it go back to the $1,000,000 and 55% levels, it will have a devastating effect on nearly every working farm in the upper Midwest. Many observers feel it will fall somewhere in the $3,000,000 range, but who the hell really knows for sure and for just how long whatever they come up with hold.
I think it is equally safe to say that the federal estate tax is not going away and that the amounts that are exempt from taxation will be a constantly moving target. Unfortunately, that just gives many of you a very convenient excuse to do absolutely nothing to address the issue.
What I am recommending to my clients is that they plan on some sort of tax being levied and make arrangements to keep the value of their estates as low as they can and have arrangements in place to pay such tax as is due and payable when they pass. In a fairy tale world, there would be no estate tax, and we could just consider the families that heed this advice to have been over-prepared. Should the real world sneak back in, these very family farms as they had the foresight to plan and prepare, will be the ones who will be able to weather and survive whatever the government decides to throw at them.
On the subject of taxes, it is once again income tax season and next month I will touch on some IRA options that allow you to get a significant amount of money invested into IRA’s, thus reducing your ultimate tax bill and putting away some cash profits for yourself in the process.
Dennis Foster has advised family businesses on estate and financial planning since 1991, and can be reached at 605-887-7069. His column is published the first Friday of each month.