Estate planning for farmers strategies to keep the family farm and business in the family
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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

John H. Howard, Esq.

James Clark & Associates

2421 Willow Street Pike

Willow Street, PA 17548

(717) 464-4300

[email protected]


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Estate Planning

  • Distribution Planning

  • Tax Planning

  • Investment/Retirement Planning


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Distribution Planning

  • Identifying Beneficiaries

  • Distribution of “Special Assets”

  • Timing of Distribution


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Tax Planning

  • Identify the Goal

  • Identify the Options

  • Identify the Taxes Involved

  • Balance the Pro’s and Con’s of Each Option


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Taxes

  • Income Tax

  • Capital Gains Tax

  • Inheritance Tax - Pennsylvania

  • Estate and Gift Tax - Federal


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Estateand Gift Tax Basics

  • $10,000 Annual Exclusion

  • $675,000 Lifetime Exemption

  • Unlimited Marital Deduction


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$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


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Lifetime Exemption

$675,000 in 2001


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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


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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


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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


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Lifetime Exemption Amount

$675,000 Per Individual

“Use It or Lose It”

$1,350,000 Per Couple


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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.


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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


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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


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Unified Estate and Gift Tax

Husband Wife

Lifetime Exemption $675,000 $675,000

Used Exemption 180,000180,000

Remaining Exemption $495,000 $495,000


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Federal Estate Tax Ag Rules

  • Special Use Valuation $750,000 Limit

  • Family-Owned Business Deduction $1,300,000

  • Conservation Easement Donation $500,000


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Estate PlanningOther Tools to Consider

  • Gifting

  • Life Insurance Trust

  • Family Limited Partnership


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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”


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Lifetime Transfer of Business and Farm

  • Rent farm and equipment

  • Partnership

  • Sell farm and equipment

  • Gift farm and/or equipment


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Lifetime Transfer Considerations

  • Retirement income needs of parents

  • Cashflow ability of children/farm operation

  • Income taxes

  • Gift taxes

  • Fairness to all children


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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


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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


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Like Kind Exchange

  • Like Kind Property

  • Business or Investment Property

  • Deferred Exchange

  • Partnership Ownership of Real Estate Problem


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Charitable Remainder Trust

  • High Capital Gains

  • Charitable Minded

  • Family Members not part of Succession Plan


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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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