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.

 

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Effective Estate, Succession and Business Planning for Farmers

Family Farm businesses are unique. Family farming may be the only industry where the owners live and work in the same place. Farm children grow up going to work with their parents every day. Many farm children ultimately become next-generation owners of the business.

But while they are family owned and oriented, most farming operations are also sophisticated and complex, capital intensive, multi-million dollar businesses. Farmers must be scientists, financial managers, personnel specialists, mechanics, and gamblers. They must also be well versed in land management, and government programs, including "Oil and Gas" lease issues and Wind and Alternative Energy leases and programs.

Family farm businesses are unique

Over nearly 30 years of representing family farm businesses, I have observed that an essential part of their success requires careful Estate, Business and Succession Planning. Because farm businesses are a mix of family and farming there are unique Estate Planning concerns that must be addressed. At the same time, because of the complexity of farm businesses, advisors must have a sound knowledge of the industry. Land use rules such as the Michigan Farmland Preservation Program (P.A. 116), the Michigan Land Division Act, the real estate and transfer tax rules for Agricultural property and homesteads, and Federal Land Programs need to be considered. When setting up a business entity such as a Corporation or Limited Liability Company (LLC), it is important to know not only what the tax consequences of such an entity will be to the farmer, but how federal and state government programs will treat them. It is also important to know how the Secretary of State will view the transfer of trucks and equipment within such entities. Finally, consideration must be given to ensuring that adequate and thorough insurance coverage will be maintained.

Every significant participant in the family farm should have a personal Estate Plan, including appropriate documents designating appropriate distribution of assets and management of their affairs in the event of incapacity. A good, comprehensive Estate Plan should include, where appropriate:

• Trusts,

• Wills,

• Durable Powers of Attorney and

• Health Care Designation of Patient Advocate

Every significant participant in the farming operation should have their own estate plan

Importantly, the advisor needs to truly understand how these tools should be integrated to coordinate with the overall business and plan.

In today's farm industry, it is not uncommon for a farm to have several entities which may own "operations," land-holding entities, equipment, and other valuable assets. Part of the plan may be to segregate or compartmentalize different assets or asset groups. This can help with the incremental transfer of assets to the next generation and can also result in more effective asset protection for the owners. Entities and related tools which should be considered are:

• Limited Liability Companies (LLC's)

• Corporations (often "sub-chapter S" corporations)

• Land Ownership Agreements

• Lease Agreements for Farm Land, Oil and Gas, Wind, and Solar energy

• Equipment Lease Agreements

Occasionally, more sophisticated arrangement, like Family Limited Partnerships and special trust arrangements may be called for, but most often they can be handled adequately with the above listed tools.

When planning to transfer assets to the next generation, there are numerous concerns that both generations have. These concerns can create tension between the participants before and during the planning process. However, experience teaches us that we are better off to address the concerns head on and have a plan in place than to simply bury our heads and "hope." The current owners are often concerned that the next generation is not ready to shoulder the significant responsibility, that their decision-making is often driven by less practical and more theoretical objectives. They are fearful of over-extension of debt and of decisions that are not informed by experience. The older generation often perceives itself to be more frugal than the younger generation.

The younger generation can at times feel unappreciated and feel that the older generation's hesitance is holding the operations back. And, often, they are not given any concrete assurance that they will eventually play a significant part and become an owner of the farming business.

Reality is often somewhere in between. Good succession planning will allow the older generation to transfer significant wealth to the younger generation, but retain substantial control over the operations. It can also assure desired income for retirement to the transferring generation. With proper planning, we can transfer wealth, reduce or eliminate taxation, and give the younger generation an incremental part in the business and—eventually—succession to ownership.

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LEGAL REPRESENTATION FOR THE FARM INDUSTRY

This Blog is sort of an ongoing “page” linked from my MICHIGAN ESTATE PLANNING and MICHIGAN BUSINESS LAW Blogs. You most likely arrived here by clicking on a link in one of these pages. If you got here on your own, welcome, and please check the links on the linkbar at the top of this blog to my other Blogs on ESTATE PLANNING, BUSINESS LAW, and ASSET PROTECTION. If you are a professional advisor (accountants, financial planners, bankers, insurance professionals and consultants) you may want to check my ISSUES FOR ADVISORS Blog which can be found from the ESTATE PLANNING or BUSINESS LAW BLOG. It is an archive of my “Issues For Advisors” quarterly Newsletter. I you wish to be put on my electronic mailing list for the newsletter, please shoot me an e-mail and I’ll add you.

I have had the very good fortune of working with many agricultural producers over my 25 plus years of practice, including farmers, large and small, family and corporate, including cash crop, dairy, poultry, beef, hog, timber and fruit farmers. I have also represented co-ops, farm implement dealerships, elevators, and crop insurance, seed and feed sales persons.

A substantial part of my practice as been agriculture related Estate Planning, Business Setup and representation, and Succession Planning for these clients. This has given me the opportunity to learn about and apply many of the state an federal laws related to agriculture.

These laws include, among others, Land Use laws such as Michigan’s Farmland Development and Open Space Preservation law (P.A. 116); Michigan’s “Land Division Act,” Michigan Law capping valuation increases under the Agricultural Use Exemption, The Michigan Right to Farm Act, Michigan’s Generally Accepted Agricultural Management Practices (“GAAMPS”), and others. I have also worked with federal and state law as it relates to farm businesses in the area of Federal set aside and entitlement programs, under USDA programs.

My general business focus has allowed me to understand the interaction between general business entities and how they are peculiarly related to farming operations including land ownership, and other issues, using corporations, partnerships, limited liabilities companies, cooperatives and occasionally other entities.

My focus on Estate Planning has helped me work with farm families who have special problems and concerns with “Passing Down The Farm” to children, including an understanding of the Federal Estate and Gift Tax, capital gains issues, and personal issues on how to “fairly” transfer assets to the next generation.

This page will be supplemented, from time to time with articles and commentary germane to farms and farming.

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