Estate tax law worries farmers
JOHN BUCHANANTime is running out for Florida farmers to minimize their exposure to changes in federal estate tax law that take effect Jan. 1 and reduce the exemption from $10 million for a married couple to just $2 million — or even less for an individual.
Published: October 24, 2012
Published: October 24, 2012
In addition, the tax — created in 1916 to offset a decline in tariffs revenues precipitated by World War I — will be increased from 35 percent to as high as 55 percent.
"That is going to create a significant burden for families that own farms that don't have adequate capital to pay the taxes," said Jacksonville attorney David Goldman. "And what has generally happened to families that haven't done the proper planning is that the farms have to be liquidated to pay the tax within the required nine-month time frame. And in that situation, you don't know whether you're going to be in an up market or a down market."
As a result of the coming changes, veteran Gainesville agricultural attorney William K. Crispin said he expects more family farms will split their real estate titles in order to fracture ownership interests and the taxable value of the farm.
"That's one option," Crispin said. "How many options are available to a particular farm depends on a number of variables, including how many family members there are, their ages and their internal plans and financial objectives. So it becomes a rather complex puzzle that has to be reconciled pursuant to the provisions of the law."
Crispin, who grew up on a farm in Illinois and has practiced agricultural law for more than 30 years, said a common complication is family members who do not want to continue farming versus those who do.
"One of the chronic dilemmas those farmers face is how you deal with that and treat your offspring equally if they have different interests," he said. "And conversely, if they all want to continue farming, the question becomes whether you have the assets in place to be able to make that happen."
Further complicating that scenario, Goldman said, is the fact that a farm might be so fragmented that it becomes too difficult to manage as an asset.
"But a lot of that can be prevented," he said, "by creating a company where people inherit shares or membership interests in a business and not a little sliver of land that they might decide they want to sell, which means breaking up the property."
The good news, Crispin said, is that there are a range of vehicles available for accomplishing the family's goals.
The most important factor, he said, is to have frank, open discussions that define clear objectives.
"It's the internal discussion and decision-making that is the most critical factor," he said. "Then you take those decisions and conclusions to a professional who can offer good practical advice and create a plan."
Practical options include creating family or land trusts that can carry the title to the farm.
One common and safe practice is to create what's called a life insurance trust, Goldman explained. That means setting up insurance coverage outside the estate so that no income tax or estate tax is due on the proceeds. Then the insurance payment can be used to pay the taxes due after the death.
Another popular approach is gifting a piece of the business entity created from the farm, Goldman said. "And there are ways to reduce the value of the gift, which means more can be given away before any taxes are due," he said.
That's also going to change on Jan. 1, however, when the current $5 million gift exemption if reduced to $1 million.
"So there is a unique opportunity through the end of this year," Goldman said. "And that kind of approach allows you to deal with the issue as you choose to, rather than through the way that is forced upon you."
The overarching issue, Crispin said, is the need for comprehensive estate tax reform that recognizes family farms as a unique national security asset.
To be properly handled, the long-term financial interests of farms should be dealt with in a farm bill. But at the moment, since a gridlocked Congress has so far failed to pass a new farm bill this year, he is not particularly optimistic that will happen any time soon .
To try to make it happen, Crispin encouraged farmers to lobby their congressional representatives, as well as the U.S. Department of Agriculture and Florida Agriculture Commission Adam Putnam.
"Protection of family farms as a national security asset should be a priority for everybody," Crispin said.