Now that most farmers have filed their income tax return, it’s time to start on your estate tax and succession planning for the remainder of the year. There are several steps you can take to make this process smoother and more efficient than waiting until the last few days of the year.
First, most farmers update their balance sheet for the bank to show the value of their farm assets and liabilities. From there, update the balance sheet to reflect all of the other assets you might own that were not listed. For example, account for personal assets and investments and the estimated proceeds from life insurance on you and your spouse.
When updating your list of assets and their related values, make sure to reflect the ownership of each of these assets. Based on ownership, we can then determine if appropriate discounts are in order. For example, if a farmer owns 1,000 acres worth $10,000 per acre and the ownership is in his name, estate tax rules indicate we must value this at $10 million. However, if the land is held in some type of limited liability entity, then we can usually discount it by at least 30%; therefore, the value for estate purposes would be about $7 million.
Once appropriate values are in place reflecting these discounts, run projections to determine if you might owe federal or state estate taxes. If so, what options are available to minimize estate taxes?
Next, review all estate and succession planning documents to determine if they are up to date. These documents include, but are not limited to:
- Wills: Have you had any major changes to your life situation (birth, death, marriage, etc.).
- Revocable living trust (RLT): Review this with your attorney or another adviser to see if there is a benefit from using an RLT to reduce probate costs or provide privacy.
- Appropriate power of attorneys and medical directives: These documents can technically be invalid in many states if they have not been properly updated.
- Buy-sell agreements: If land or operations are held in some type of entity, a buy-sell agreement must be in place in order to protect the family. Any major changes to operations and ownership should be reflected in buy-sell agreements.
Before year’s end, review the assets you might want to gift to take advantage of the $14,000 per donee annual exclusion. If you have three or four children with six to 10 grandchildren, it is fairly easy to gift away $500,000 of annual gross value.
Proper succession planning is an ongoing process—not a once-and-done endeavor you stuff in a desk drawer. Don’t wait any longer.