New Estate Tax Laws Will Benefit Family Farm Succession Planning

Saturday, December 25, 2010

Someone recently asked me if I believe in miracles. I do now! On December 17, 2010, after more than 6 years of inaction, bickering, hemming and hawing, Congress, suddenly and unexpectedly, miraculously acted to create what I believe is likely to become permanent change to the Federal Estate and Gift Tax Laws.

Acting to "extend" the so-called "Bush Tax cuts," for two years, the Congress actually enacted some wholly new provisions in the Tax Code relating to Estate and Gift taxes. While most of the "extension" will be, in my view, a "wait and see" proposition during and after the next 2 years, the Estate and Gift provisions seem to me to have set a "new bar" for certain provisions, from which it will be difficult, if not impossible, for Congress to turn back. In this season of "joy," I say Hallelujah!

I have been saying to clients for a number of years that aside from philosophical views on taxes and tax policy, what we really need Congress to do is just give us some law that is consistent. Planning requires consistency and some semblance of permanency so we can rely on our planning to work. So the new provisions come as a welcome surprise and relief. Many of us have been calling for some "common sense" provisions like a reasonable figure for the size of a taxable estate, and indexing for inflation. They did that. Wow! I write another blog (linked in the header above), the Michigan Estate Planning Blog, and back in February, I wrote a rather scathing (for me, anyway) scolding to Congress for its inaction and gridlock in the name of partisan politics. I recently posted a new Blog, jokingly suggesting that Congress read my Blog. They seriously seem to have addressed all of the items on my "wish list." The highlights of the new law are:

  • The taxable estate figure (formerly known as "unified credit," now known as "exemption equivalent) has been set at $5 million
  • The exemption equivalent was "decoupled" under the "Bush Tax cuts," so while the estate tax amount was increased and eventually (temporarily) eliminated, the Gift Tax amount was inexplicably frozen at $1 million. The new law reunifies this so that both figures are now set at $5 million.
  • There is a new concept (referred to a "portability") which now allows a married couple to "share" their unused unified credit, I think effectively eliminating the need to create and maintain complex dual trust plans in many, if not most circumstances.

These developments are bound to help us in planning for farm families with multiple generations involved in the business. One of the big issues with agribusinesses is that they are generally capital intensive and cash poor. This means that while Uncle Sam is looking for payment of Federal Estate taxes on a multi-million dollar estate, the heir's ability to pay is hampered by the fact that the assets are capital which must be used in the operation. Giving us a $10 million threshold to work with will make family succession planning for family farms much more tenable.

At the same time, the portability feature will make lifetime planning simpler and therefore more effective, and will give added flexibility to make after-death adjustments to plans which may have been difficult or impossible under the old rules.

The nature of successful family farm businesses is that assets tend to continue to grow in value. Raising the Federal Gift tax threshold to the same $5 million mark as the Estate tax threshold makes lifetime gift planning much more effective, allowing substantial gift transfers of farm assets to the next generation before they appreciate significantly in value.

These new provisions were made retroactively effective as of January 1, 2010. In an uncharacteristic move, Congress not only made these fundamental decisions, but they anticipated some of the problems that might be caused by their inaction during the first 11 months of 2010. They appear to appreciate the potential unfairness of imposing a retroactive law people who had the misfortune to die before its effective date. For estates of individuals dying between January 1, 2010 and December 17, 2010, the administrators are given the right to elect between the prior 2010 law and the new law. And, in order to give these persons the time to analyze the effect of their election, the deadlines for filing Estate and Gift Tax returns and for making "qualified disclaimers" has been extended until 9 months after the December 17 date.

The details of the new provisions will undoubtedly come to light during the next several months and it will make for interesting times. Farm clients who have not done the Estate Planning they should do will now have an opportunity under the new laws to do so in a more palatable and simple manner. For those who have done their planning, this will be a great opportunity to review, upgrade and perhaps simplify their existing programs, while taking advantage of some of the new opportunities under the new rules.

We will likely be reporting on developments in the new law frequently over the next months. Stay tuned.


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