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

Estate Planning for Farmers: Strategies 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 (717) 464-4300. jhoward@pennaglaw.com. Estate Planning. Distribution Planning Tax Planning

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

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  1. Estate Planning for Farmers:Strategies 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 (717) 464-4300 jhoward@pennaglaw.com

  2. Estate Planning • Distribution Planning • Tax Planning • Investment/Retirement Planning

  3. Distribution Planning • Identifying Beneficiaries • Distribution of “Special Assets” • Timing of Distribution

  4. Tax Planning • Identify the Goal • Identify the Options • Identify the Taxes Involved • Balance the Pro’s and Con’s of Each Option

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

  6. Estateand Gift Tax Basics • $10,000 Annual Exclusion • $675,000 Lifetime Exemption • Unlimited Marital Deduction

  7. $10,000 Annual Exclusion • Each and every year, but not cumulative • Unlimited number of recipients • i.e. children, children’s spouses, grandchildren • Both husband and wife can use

  8. Lifetime Exemption $675,000 in 2001

  9. 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 Lifetime ExemptionIncreases

  10. 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% $1,250,000 to 1,500,000 43% $1,500,000 to 2,000,000 45% $2,000,000 to 2,500,000 49% $2,500,000 to 3,000,000 53% $3,000,000 and UP* 55% *5% Surcharge between $10 million and $21 million

  11. Life Insurance Other Assets Other Assets Life Insurance Jointly-Owned Assets Jointly-Owned Assets Unlimited Marital Deduction Husband At Death Wife Operation of Law Beneficiary Designation Probate $0 Federal Estate and Pennsylvania Inheritance Tax at first death

  12. Lifetime Exemption Amount $675,000 Per Individual “Use It or Lose It” $1,350,000 Per Couple

  13. 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.

  14. 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

  15. Facts: Husband and Wife transfer assets valued at $800,000 to son and daughter-in-law for $400,000. Unified Estate and Gift Tax 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

  16. Unified Estate and Gift Tax Husband Wife Lifetime Exemption $675,000 $675,000 Used Exemption 180,000180,000 Remaining Exemption $495,000 $495,000

  17. Federal Estate Tax Ag Rules • Special Use Valuation $750,000 Limit • Family-Owned Business Deduction $1,300,000 • Conservation Easement Donation $500,000

  18. Estate PlanningOther Tools to Consider • Gifting • Life Insurance Trust • Family Limited Partnership

  19. Pennsylvania Inheritance TaxValuation of Farmland FMV = $625,000 Act 319 Value = $100,000 Difference = $525,000 Tax Rate = 4.5% Tax Savings $ 23,625 Act 319 also known as “Clean & Green”

  20. Lifetime Transfer of Business and Farm • Rent farm and equipment • Partnership • Sell farm and equipment • Gift farm and/or equipment

  21. Lifetime Transfer Considerations • Retirement income needs of parents • Cashflow ability of children/farm operation • Income taxes • Gift taxes • Fairness to all children

  22. 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

  23. 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

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

  25. Charitable Remainder Trust • High Capital Gains • Charitable Minded • Family Members not part of Succession Plan

  26. 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?

  27. Questions

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