Estate Planning for Farmers: Strategies to Keep the Family Farm and Business in the Family

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Estate Planning for FarmersStrategies to Keep
the Family Farm and Business in the Family

• John H. Howard, Esq.
• James Clark Associates
• 2421 Willow Street Pike
• Willow Street, PA 17548
• [phone]

jhoward_at_pennaglaw.com
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Estate Planning

• Distribution Planning
• Tax Planning
• Investment/Retirement Planning

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Distribution Planning

• Identifying Beneficiaries
• Distribution of Special Assets
• Timing of Distribution

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Tax Planning

• Identify the Goal
• Identify the Options
• Identify the Taxes Involved
• Balance the Pros and Cons of Each Option

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Taxes

• Income Tax
• Capital Gains Tax
• Inheritance Tax - Pennsylvania
• Estate and Gift Tax - Federal

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Estate and Gift Tax Basics

• 10,000 Annual Exclusion
• 675,000 Lifetime Exemption
• Unlimited Marital Deduction

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10,000 Annual Exclusion

• Each and every year, but not cumulative
• Unlimited number of recipients
• i.e. children, childrens spouses, grandchildren
• Both husband and wife can use

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Lifetime Exemption

• 675,000 in 2001

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Lifetime ExemptionIncreases

• Year
• 1997
• 1998
• 1999
• 2000
• 2001
• 2002
• 2003
• 2004
• 2005
• 2006

• Exemption
• 600,000
• 625,000
• 650,000
• 675,000
• 675,000
• 700,000
• 700,000
• 850,000
• 950,000
• 1,000,000

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Federal Estate Gift Tax Rates
Taxable Estate Marginal Tax Rate 675,000
to 750,000 37 750,000 to
1,000,000 39 1,000,000 to 1,250,000 41 1,2
50,000 to 1,500,000 43 1,500,000 to
2,000,000 45 2,000,000 to 2,500,000 49 2,5
00,000 to 3,000,000 53 3,000,000 and
UP 55 5 Surcharge between 10 million and
21 million
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Unlimited Marital Deduction
Husband At Death
Wife
Operation of Law
Beneficiary Designation
Probate
0 Federal Estate and Pennsylvania
Inheritance Tax at first death
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Lifetime Exemption Amount
675,000 Per Individual
Use It or Lose It
1,350,000 Per Couple
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Estate Tax Two StepStep 1 - Retitle Assets
Husband Wife Joint 0
0 1,400,000 675,000 675,000
(1,350,000) 675,000 675,000 50,000
Goal Use enough Applicable Exemption Amount of
first spouse to die so assets at death of
second spouse is under his or her Applicable
Exemption Amount.
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Estate Tax Two StepStep 2 - Tax-Wise Will
675,000 Assets
At death of 1st Spouse
Trust 675,000
Income to Spouse Principal to Spouse, if
needed Spouse can serve as Trustee, if desired
At death of both Spouses
Children
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Unified Estate and Gift Tax
Facts Husband and
Wife transfer assets valued at 800,000 to
son and daughter-in-law for 400,000.
Estate/Gift Tax Consequences
Fair Market Value 800,000 Selling Price
400,000 Gift 400,000 Annual Exclusion -
40,000 Lifetime Exemption Used 360,000
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Unified Estate and Gift Tax
Husband Wife Lifetime Exemption 675,000
675,000 Used Exemption 180,000
180,000 Remaining Exemption 495,000 495,000
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Federal Estate Tax Ag Rules

• Special Use Valuation 750,000 Limit
• Family-Owned Business Deduction 1,300,000
• Conservation Easement Donation 500,000

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Estate PlanningOther Tools to Consider

• Gifting
• Life Insurance Trust
• Family Limited Partnership

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Pennsylvania Inheritance TaxValuation of Farmland
FMV 625,000 Act 319 Value 100,000 Differe
nce 525,000 Tax Rate 4.5
Tax Savings 23,625
Act 319 also known as Clean Green
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Lifetime Transfer of Business and Farm

• Rent farm and equipment
• Partnership
• Sell farm and equipment
• Gift farm and/or equipment

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Lifetime Transfer Considerations

• Retirement income needs of parents
• Cashflow ability of children/farm operation
• Income taxes
• Gift taxes
• Fairness to all children

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Income Tax Consequences of Selling Farm

• Capital gains
• Step up basis at death of spouse
• Principal Residence Exclusion - 250K/500K
• Installment Sale Method
• 1031 Exchange - avoid tax by purchasing land with
  sale proceeds
• Charitable Gift Annuity
• Charitable Remainder Trust

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Transfers at Death

• Option to purchase to on-farm heir
• Purchase price FMV or Farming Value
• Cash Buyout versus Term Buyout
• Interest Rate
• Estate Tax consequences
• Inheritance Tax consequences

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Like Kind Exchange

• Like Kind Property
• Business or Investment Property
• Deferred Exchange
• Partnership Ownership of Real Estate Problem

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Charitable Remainder Trust

• High Capital Gains
• Charitable Minded
• Family Members not part of Succession Plan

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Charitable Remainder Trust

• Contribution to Trust
• Current charitable income tax deduction
• Periodic payout to Farmer of 5-10
• Distribution to Charity at Death
• Wealth Replacement?

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Questions