As 2011 winds down, we enter 2012 with many uncertainties regarding estate and gift tax laws. For 2011 and 2012, Congress placed a “band aid” by passing the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. That act, in part, increased the lifetime gifting amount from $1 million to $5 million. In addition, it also increased the amount of assets that can be sheltered from estate taxes to $5 million dollars. Also, it allowed for a portability of unused estate tax exemption, which means an executor of a deceased spouse’s estate can transfer any of the $5 million tax exemption that was not used after the death of the first spouse to the surviving spouse more easily.

Because the Act expires at the end of 2012, you can rest assured that changes will be forthcoming with the laws pertaining to estate and gift taxes. Many in the estate and financial planning fields are of the opinion that, because of the state of the U.S. economy and deficits, the amounts afforded under the 2010 Act will be pulled back.  

Although the federal estate tax gets a lot of attention, I always caution clients to not underestimate the impact on the taxes that are levied against an estate or heirs by whatever state the farm is located in. For example, Indiana levies an inheritance tax against heirs. Although the tax starts off rather light, after the first 1.5 million dollars in assets is taxed, the tax jumps to 10 percent. Thus, large farm estates can generate a very large inheritance tax to the heirs, easily exceeding half to a million dollars, or more.  

Also, one should always consider how much the probating of estate is going to cost the heirs. It is not uncommon, especially with large farm estates, to see attorney fees for the probating of an estate run into the tens of thousands of dollars. I’m guessing not many people are excited about seeing attorneys be paid considerable sums of money to probate a farm estate.

Simply put, from a standpoint of transferring a farm to the next generation, there are many forces out there that will act to siphon away value. I often wonder why, as farmers, we will purchase equipment, land, you name it, all for bettering our farming operations, which ultimately betters the chance of the next generation succeeding. However, when it comes to setting up an estate plan or retirement plan, a large portion of our farming community falls flat. It is a shame, because proper planning will pay for itself many times over.

From a yearly taxation standpoint, I fear a large segment of the farming community will be swept up by the “higher taxes for the rich” drum beat that we are hearing. In this era of higher commodity prices (yes, I recognize that is always subject to change) you can rest assured that net farm income will translate into higher taxes. You should ask yourself: am I leaving money on the table each year from a tax planning perspective. If you are like most farmers, unfortunately, that answer is probably “yes.”

From the standpoint of inter-family relationships, farming is a unique business. Rarely anymore do all siblings take an interest in being part of the farm. Often times, the farming children are outnumbered by the non-farming children. Take into account the fact that in-laws can become out-laws, and things really can get complicated. Can a plan be put in place that keeps farming heirs farming, but at the same time ensures fairness? Absolutely. It takes some thought and planning, but it is usually possible to implement a plan that ensures family harmony as well as the longevity of the farming operation.  

Because farmers are usually pretty selfless individuals, in that we’re almost always trying to put the next generation in a better position than we are currently in, last on the list for farmers is their own well-being in what my neighbor describes as “life after farming.” Questions like: “How do I maintain my lifestyle after farming”, “what happens if I have to go in a nursing home,” and “what happens if my health fails before I’m ready to retire” are only a few questions that need to be answered. Most of us never plan on dying, getting sick, or not being able to farm. So, these issues get pushed to the farthest of the back burner.  

On Feb. 21, I will be hosting a free seminar titled “Farm Estate and Tax Planning: Passing on the family farm during uncertain times” that will be held at the East Noble High School in Kendallville, Ind. I have asked farm Certified Public Accountant Mike Abel, from Fort Wayne, Ind., to be a speaker to discuss yearly tax strategies. In addition, we are lining up other individuals to speak on related topics.  The subjects discussed in this article will be addressed at this seminar.

If you are interested in attending, you can contact my office and we will send you information on the seminar. If you have specific questions or areas that you would like discussed, feel free to e-mail them to me. This free seminar will help educate farmers as to the issues they will fact with estate and tax planning, and then offer solutions to overcome such issues. In the meantime, I wish everyone a safe and joyful holiday season.

John J. Schwarz, II, farms 2500 acres with his family near Stroh, Ind., and is an agricultural law attorney and farm estate planner. He can be reached at 260-351-4440 or at John@Schwarzlawoffice.com Readers can find more information at www.farmlegacy.com

These articles are for general informational purposes only. If you have a specific legal question, you should consult an attorney. The views and opinions expressed in this column are those of the author and not necessarily those of Farm World.