New Estate and Gift Tax Law will be Good for Farmers

Late on January 1, Congress enacted "The American Taxpayer Relief Act of 2012." I won't go into great detail about the act (there is a lot about it we still don't actually know and will have to wait for the analysis of people more capable than I am), but will point out the highlights of the Estate and Gift Tax provisions which are of considerable importance to Estate Planning.

The Act preserves the $5 million per person ($10 million per married couple) "unified"estate and gift exemption, indexes for inflation, and makes the concept of "portability," a permanent feature

The Act preserves the 2012 levels of a $5 million per person exemption, maintains the "unified"estate and gift structure (meaning the $5 million threshold applied to total transfers, whether by gift during lifetime or inheritance on death), and indexes them for inflation. The Act also makes the concept of "portability," which was added in the 2010 extension for the first time, a permanent part of the tax structure. What "portability" means is that for married couples, the $5 million credit can be allocated or "shared" between them at any time, including after death. This effectively eliminates–in most cases–the need for those "clunky," inconvenient, "AB Trusts" ("his and hers"), and all the allocations and adjustments we were constantly making in those plans. This should have the effect of greatly simplifying the planning process in all but a few instances. The only real, substantive change in the law is a (modest?) increase in the rate (which will only apply after the $5/10 million credit has been used up).

For the first time in the past 12 years, planners will be able to tell clients what to expect in this area. As we move forward in 2013, I expect that many of our clients will be looking at much simpler estate planning devices.  I think that is a plus

Most importantly, the Act makes the current Estate and Gift tax laws permanent. One of my colleagues asked me, what does "permanent" mean? I think that is a fair question. In 2000, the so-called "Bush Tax Cuts" were implemented and because of internal machinations in Congress, were built around a 10-year "sunset." This meant that unless Congress acted during the 10-year period, the laws would automatically expire on December 31, 2010. In a demonstration of the "brinksmanship" for which our modern Congress has become so famous for, in late December of 2010, they "extended" the law for 2 more years.

But when they extended the general tax laws, they made unanticipated major changes to the Federal Estate and Gift tax. This was in every way a good change. But it was "temporary," because it was part of an extension, again due to expire recently on December 31, 2012. The new law does not have a "sunset" provision. This means that until Congress acts by legislation to change it, it is permanent. That is as "permanent" as any law gets these days. My personal view, and what I have been able to glean from reading other sources, suggests that Congress has no appetite to make future major changes to this area, for a number of reasons. So, what we now have is some consistency and something on which we should be able to rely for the foreseeable future.

The new "permanent" rules will be a good thing for farm succession and estate planning. We will now be able to deal with farmland issues and trust funding in a simpler and more straight-forward manner. The permanent exemption levels means that we will have more "headroom" to work with farm families to preserve the unprecedented "wealth" that has accumulated as land values have skyrocketed.

For the first time in the past 12 years, planners will be able to tell clients what to expect in this area. As we move forward in 2013, I expect that many of our clients will be looking at much simpler estate planning devices. I think that is a plus.

 

Read more...

Navigating the Michigan General Property Tax Qualified Agricultural Property Exemption

The Michigan General Property Tax grants two significant exemptions from the levy of taxes by school districts. They are the qualified agricultural property exemption, and the personal residence exemption (see, The Michigan Property Tax Personal Residence Exemption, in Michigan Estate Planning Blog). The agricultural exemption is obviously important to farm clients. However, the personal residence exemption is also important the two interrelate in some unexpected ways. It will be well for a farmland owner to familiarize her/himself with both exemptions and their quirks.
Exemption From School Tax
Both of these exemptions provide essentially the same relief from real property taxation; exemption from the school tax. Because the school tax is generally the largest of taxes levied in a particular locality, this is an important exemption. In the case of farmland owners, there is some real fairness to this in a land-value based tax system. A single farmer may own 100's or even 1000's of acres of land, all subject to Michigan's ad valorem land – based tax. A typical non-agricultural homeowner generally will own their home, but a fractional amount of acreage. Yet each has essentially the same statistical family, and therefore each sends the same statistical number of students through the local school system.
Classification
Land that is classified as "qualified agricultural land" in Michigan is automatically exempt from the school tax. With the personal residence exemption, the homeowner must qualify by demonstrating that they intend to live there permanently and must file an Affidavit of Personal Residence with the local assessor. The mere classification of land as residential has no bearing on the exemption (other than only residential classified land qualifies, of all other conditions are satisfied). An owner of qualified agricultural - classified land does not need to file anything. However, if the land is not classified by the local assessor as "qualified agricultural land," and the owner is conducting agricultural activities on it, there is authority under the statute for the owner to file an Affidavit. In the case where an Affidavit needs to be filed, it must be done by the same May 1, deadline as the personal residence exemption.
Ownership
Another difference between the two exemptions is that, unlike the personal residence exemption, the land may be owned by a corporation, partnership, LLC, Trust or similar entity and still qualify for the exemption. A transfer of farmland to one of these entities for estate or succession planning will not rescind or otherwise harm the exemption. However, the law indicates that if there is a personal residence on the agricultural property, the owner-occupant may not claim a personal residence exemption on another property.
The local assessor may allocate properties that are in "mixed – use," applying a percentage of exemption to the parcel. This can be tricky. The ad valorem tax nature of the tax means that the allocation must be made based on the value of the particular percentage of the property being used, rather than a straight geographical determination. In other words, a 40-acre parcel may have a commercial facility occupying 1 acre. It is not correct to assume that the parcel remains 98% (39/40) exempt. Rather, a fraction of the value of the commercial facility divided by the overall value of the 40 acre parcel would be the correct way to determine the amount remaining qualified and therefore exempt. This is a lot more subjective and perhaps lends itself to a certain amount of uncertainty and lack of clarity.
It is also problematic, in my view, that the guidelines published by the Michigan Department of Treasury ("State Tax Commission Qualified Agricultural Property Exemption Guidelines"), define "agricultural use," but they do not define other uses such as "commercial / industrial" use, even though they make reference to it. One question this leaves open to interpretation is what the effect is of incidental non-farm related use and how much and how often an agricultural facility must be used for activity (e.g., temporary storage of agricultural commodities for a commercial operator).
Practical Concerns
I
have often said here (and elsewhere) that farmers and farming are unique businesses and landowners. There are a lot of things going on with most farmland parcels. In addition to the "qualified agricultural property" tax classification, farmland is also often subject to Farmland Development Agreement Liens (so-called P.A. 116 Agreements), FSA agreements, wetlands agreements, and conservation easements. Transfer and conveyance of farmland often triggers issues regarding the Michigan Land Division Act, and "uncapping" issues.
More often than not these days, I find myself beginning my conversation with farmers in the "apology mode," explaining that unfortunately, what seemingly used to be relatively simple matters of the proverbial "quit claim deed," have now become very complex real estate transactions. I am not saying that all these rules, liens, taxes and exemptions make transactions unfeasible or impossible. But I am saying that it is important that all the proverbial "I's" and "T's" are dotted and crossed.
A
typical farm real estate transaction today involves analysis of many issues. In addition to correct legal descriptions and title evidence, we need to determine tax code parcel identification codes to see that they are accurate; P.A. 116 Agreement numbers (if applicable) and expiration dates, and whether a transfer is required; whether the proposed parcel transfer will itself qualify for P.A. 116; whether the transfer of a parcel involves a "division" or is exempt, whether a parcel contains a personal residence on which a personal residence exemption is being claimed; just to name a few of the issues. When transfers occur, we need to file a Property Transfer Affidavit and where applicable, an Affidavit of Agricultural Use to exempt the transaction from and "uncapping" transfer.
Unfortunately, gone are the days when a simple deed from one party to the other would suffice. Competent, experienced professional assistance needs to be sought when there are farm real estate transactions.

Read more...