What is in this article?:
Before the end of 2012, you and your spouse may transfer farm assets up to $10 million (reduced by any taxable previous gifts) to your children or even grandchildren. Such transfers to the next generation are estate, gift and generation skipping tax-free, relieving the burden of paying significant estate taxes for the next generation of farmers, who may be asset rich but cash poor.
Since family farmers often intend to keep the farm and farms assets within the family, basis issues would not be relevant until the farm is sold and capital gains need to be calculated.
There is important news for farm families with less than $5 million in assets — particularly those with second marriages.
There is a misconception that couples, who own $5 million or less in farm assets, do not need to think about the new gift, estate, and generation skipping tax law. There are likely a lot of out-dated formulas based on pre-2010 rules in estate plans which affect the estates valued under $5 million more than any other.
One of the fundamental estate planning tools for couples is to have language in their plan that upon the death of the first spouse, a family trust would be funded with the unused lifetime exemption amount, which today could be $5 million and in 2013 will be back to $1 million.
Why do you care? The language in the new law shifting the first $5 million of the first-to-die spouse’s estate into the family trust will, in turn, in many estates leave no assets to fund the marital trust for the primary benefit of the surviving spouse. There has been a valid reason to use this technique in the past, as it ensured both spouses’ lifetime exemptions from estate taxes are not wasted. However, we have seen some of the unintended consequences of such formulas and the issue is even more compelling now with the new law.
If the surviving spouse and beneficiaries are the same for the family trust, which may be fully funded, and the marital trust, which might receive no assets, and the surviving spouse is the trustee of both, then the outcome may be no big deal. However, if the family trust beneficiaries are children from a prior marriage and the access by the surviving wife is more stringent with no assets available to fund the marital trust to which she has better access, then such a scenario will likely leave a second surviving spouse in an unintended bind.
It is important to understand what your beneficiaries will receive at your death and pursuant to your gifting plan. Ask your CPA or attorney to provide an example with dollar amounts of your current net worth of how much and in what form (outright or in trust) each beneficiary receives pursuant to your estate plan. Then consider whether it reflects your intent.
After 2012, farmers will only be able to give $1 million during their lifetime or at their death free of estate, gift and generation skipping tax. An excellent opportunity to pass on significant farm assets to the next generation and reduce a large estate tax burden expires at the end of 2012. Now is the time to act.
Co-author Lillian Dee Davenport of Little Rock, Ark., is an attorney and senior vice president of trust services at Delta Trust and Bank (www.delta-trust.com). She is licensed to practice law in Arkansas and Texas. She may be e-mailed at email@example.com.
Co-author Lacey LaRue of Little Rock, Ark., is an attorney at Frost, PLLC (www.frostpllc.com). She is a 2006 graduate of the University of Arkansas at Fayetteville and a 2009 graduate of the Leflar College of Law at University of Arkansas at Fayetteville. She attended the University of Florida and received a LLM degree in taxation. Her practice centers on estate planning, taxation of businesses, and closely-held family corporations. She may be e-mailed at firstname.lastname@example.org.