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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. [email protected] 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

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

[email protected]

estate planning
Estate Planning
  • Distribution Planning
  • Tax Planning
  • Investment/Retirement Planning
distribution planning
Distribution Planning
  • Identifying Beneficiaries
  • Distribution of “Special Assets”
  • Timing of Distribution
tax planning
Tax Planning
  • Identify the Goal
  • Identify the Options
  • Identify the Taxes Involved
  • Balance the Pro’s and Con’s of Each Option
taxes
Taxes
  • Income Tax
  • Capital Gains Tax
  • Inheritance Tax - Pennsylvania
  • Estate and Gift Tax - Federal
estate and gift tax basics
Estateand Gift Tax Basics
  • $10,000 Annual Exclusion
  • $675,000 Lifetime Exemption
  • Unlimited Marital Deduction
10 000 annual exclusion
$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
lifetime exemption

Lifetime Exemption

$675,000 in 2001

lifetime exemption increases
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
slide10

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

unlimited marital deduction

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

lifetime exemption amount
Lifetime Exemption Amount

$675,000 Per Individual

“Use It or Lose It”

$1,350,000 Per Couple

estate tax two step step 1 retitle assets
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.

estate tax two step step 2 tax wise will
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

unified estate and gift tax

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

unified estate and gift tax16
Unified Estate and Gift Tax

Husband Wife

Lifetime Exemption $675,000 $675,000

Used Exemption 180,000180,000

Remaining Exemption $495,000 $495,000

federal estate tax ag rules
Federal Estate Tax Ag Rules
  • Special Use Valuation $750,000 Limit
  • Family-Owned Business Deduction $1,300,000
  • Conservation Easement Donation $500,000
estate planning other tools to consider
Estate PlanningOther Tools to Consider
  • Gifting
  • Life Insurance Trust
  • Family Limited Partnership
pennsylvania inheritance tax valuation of farmland
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”

lifetime transfer of business and farm
Lifetime Transfer of Business and Farm
  • Rent farm and equipment
  • Partnership
  • Sell farm and equipment
  • Gift farm and/or equipment
lifetime transfer considerations
Lifetime Transfer Considerations
  • Retirement income needs of parents
  • Cashflow ability of children/farm operation
  • Income taxes
  • Gift taxes
  • Fairness to all children
income tax consequences of selling farm
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
transfers at death
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
like kind exchange
Like Kind Exchange
  • Like Kind Property
  • Business or Investment Property
  • Deferred Exchange
  • Partnership Ownership of Real Estate Problem
charitable remainder trust
Charitable Remainder Trust
  • High Capital Gains
  • Charitable Minded
  • Family Members not part of Succession Plan
charitable remainder trust26
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?
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