Better to Keep Than Give


By Marcia Zarley Taylor
DTN Executive Editor

DENVER (DTN) -- Just as it pays to monitor your blood pressure or cholesterol levels, it's worth checking the health of your estate plan. Besides changes in your wealth or the status of your personal situation -- marriages, divorces, births and deaths of heirs -- new state and federal tax laws can trigger 180-degree reversals in strategies.

"Farm estate planning is radically different from what it was only five or 10 years ago," said Roger McEowen, a Washburn University law professor and tax director for CliftonLarsonAllen in West Des Moines, Iowa. Back then, federal taxable exemptions jumped all over the map and made it virtually impossible to conduct long-term planning. Recall that estates as small as $2 million were subject to tax in 2006, a worry for those with highly appreciating farmland.

Then the Tax Act of December 2010 made permanent a $5 million federal estate tax exemption, indexed annually for inflation, and adjusted the tax on estates above that level to 40%. What's more it also made the exemption "portable" between spouses, so if the first to die didn't maximize that exemption, the second spouse's estate could tap the unused amount. That suddenly meant couples didn't need to go to the expense of "equalizing" the size of their estates to get maximum exemption relief.

If you haven't reviewed your estate strategies since 2011, here are several items worth discussing with your estate planners.

Why gifting is out of vogue. So few farm estates top the current $5.45 million exemption for deaths in 2016 ($10.9 million for couples) that it isn't necessary for most farm or small business owners to reduce the size of their estate for tax purposes anymore, McEowen pointed out. Instead, what matters most is qualifying your highly appreciated assets -- particularly land -- for a "step up" in basis at the owner's death. In effect, that means a lifetime of capital gains can be forgiven if the heirs sell the property.

Watch "transfer on death" accounts. More than two dozen states have tried to simplify estate planning by giving farmland the same "transfer on death" treatment as you'd get on bank or brokerage accounts. These are legal forms you sign so your beneficiaries get title to the property without going through probate. This property gets counted in the estate and is eligible to receive a step-up in basis. Just be sure to include it in the estate.

How executors will have new duties. Starting June 30, IRS will begin requiring executors to report the tax basis of inherited property to all heirs as well as IRS. The purpose is to create a paper trail, so when that inherited property is later sold, appropriate capital gains taxes are paid, McEowen said.

The problem is that CPAs and tax lawyers worry the process will be messy, since final valuations and even a complete inventory of all assets may not be finished by the new IRS deadline. (The agency wants executors to file these mandatory reports within 30 days of filing Form 706, the estate tax report that must be filed within nine months of death, if not sooner.) In cases where assets are omitted from this report after a statute of limitations, the heir's tax basis in the property will be zero.

"It's not typical for it to take several years to settle a farm estate, but it does happen. These added duties could be a real hassle in the process," McEowen said. "It's a mess."

To ease the burden on your estate's executor, make sure you keep a current inventory of all your assets, including farm equipment, real estate, personal valuables, savings and brokerage accounts. For more details on the reporting requirement, go to…

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