Opportune time for farm families to develop estate plans

CHICAGO — Farm families now have an opportunity they shouldn’t miss to transfer assets to family members.

“We now have the highest exemption and the lowest tax rates in history,” said Angelo Tiesi, Certified Financial Planner for Kirkland & Ellis, LLP, Chicago. “This is the perfect storm for estate planning.”

The current tax laws will be in effect through 2012.

“The next 18 months are the perfect opportunity to do estate planning,” Tiesi said during a recent meeting hosted by the Chicago Farmers.

From 2001 to 2009, the federal estate tax laws included a $3.5 million exemption and a maximum tax rate of 45 percent. In addition, the gift tax during this period was also at a 45 percent tax rate and a $1 million exemption.

“2010 was a strange year because the estate tax was repealed for one year and I never thought we would get to this,” Tiesi noted.

“The estate tax was optional in 2010, which meant people could elect to use the $5 million exemption or elect out of the estate tax,” he explained. “But if you elected out of the tax, the heirs of your estate received the assets on a carryover basis, so when they sell the property they will have to pay higher capital gains taxes.”

With the passage of the 2010 tax law for 2011 and 2012, the legislation set the estate tax and gift tax exemption each at $5 million and both have a maximum tax rate of 35 percent.

“The gift tax at $5 million is unprecedented,” Tiesi said.

“You could gift $5 million and put it in a trust and if it grew at 4 percent for 20 years, that’s $11 million. You don’t want to wait to use this exemption because the $5 million plus all the growth that occurs in that trust will pass to your heirs free of estate taxes.”

Unless another tax act is passed, in 2013, the rules will go back to the prior law that included $1 million estate tax exemption and a 55 percent tax rate.

“I don’t think we’ll go back to the $1 million exemption, but the gift tax exemption at $5 million is at risk,” Tiesi said. “Both you and your spouse have $5 million, so you can transfer up to $10 million, which is a way to solve estate tax liabilities over the next 18 months.”

The 2010 tax act introduced a new concept for estate planning.

“Portability is the ability to transfer your unused estate tax exemption to your spouse and before portability if you didn’t use your estate tax exemption, it was gone forever,” he said. “This is a very good thing, but don’t rely on portability for your estate plan.”

In addition to the lifetime gift tax exemption, there is also the opportunity for people to use the annual gift tax exclusion.

“The annual gift tax is at $13,000 for an unlimited number of people, and if you’re married, it is double,” Tiesi explained. “And the annual gift tax doesn’t count against your $5 million exemption.”

One of the first things farm families should do to start their estate plan is the list all the things they own.

“Then determine how you own it — individually, jointly or in a trust,” Tiesi said. “Also determine the evaluations. You don’t need an exact dollar, but you do need approximate evaluations.”

Tiesi prefers to involve all the family’s advisers in the estate planning process such as a CPA and financial adviser.

“All of you need to work together to make an estate plan work,” he added.

“You also need to plan for incapacity and determine who will take the reins during that time. You can use trusts or power of attorney to handle this.”

Developing the succession plan is important to compensate the children that are not participating in the farming operation.

“People say they want to treat kids equal, but if you have a family business and they’re not all participating in the business, you can forget about equal,” Tiesi said. “The best you can do is equitable.”

Transferring assets into a trust provides a lot of benefits to the beneficiaries of the trust, according to Tiesi.

“Some of the benefits are creditor protection, protection if there is a divorce and the ability to appoint an investment adviser,” he said.

“Your spouse can be the beneficiary of the trust. Typically, we set these up as a dynasty trust. In Illinois, you can put money in a trust and that trust will never be subject to estate tax in perpetuity as long as there is money in the trust.”