Thanks to changes since 2001 in the federal estate tax, commonly called the “death tax,” some of the certainty can be mitigated if small farmers will face the unpleasant task of estate planning before the prospect of death throws a shadow across the barnyard.
According to the Internal Revenue Service, the federal estate tax is a tax on your right to transfer at your death. Property can be cash, real estate, stock or any other type of asset. Although it is an important source of federal revenue, there are quite a few misconceptions about how that tax is assessed and applied.
Until you know the truth about the federal estate tax, it is hard to plan properly for the inheritance of property and other assets within the family.
1 Only about two out of every 1,000 estates are subject to the estate tax. Only the estates of the wealthiest 0.2 percent of Americans owe any estate tax. In 2015, the tax is levied only on the portion of an estate’s value above $5.43 million per person, or $10.86 million per married couple, according to a March 2015 article by the Center on Budget and Policy Priorities, a nonpartisan research and policy institute that analyzes federal budget priorities. The exemption amount has grown from $650,000 per person in 2001 to the $5.43 million per person level in 2015.
2 The taxes are assessed only on the value that exceeds the exemption amount, so the tax rate, capped by statute at 40 percent or less, averaged 16.6 percent of the value of the estate in 2013, according to the Urban-Brookings Tax Policy Center. And there are many large and generous loopholes that can lower either the overall value of the estate for tax purposes or reduce the tax burden against the estate.
3 Few small family-owned farms and businesses owe any estate tax at all. In 2013, only 20 total small businesses and small farm estates nationwide owed any estate tax, according to the Tax Policy Center. And those 20 estates owed just 4.9 percent of their value in taxes, on average.
4 Among a set of targeted provisions designed to reduce the tax burden on farms and other family-owned business, a special provision allows farm real estate to be valued at farm-use value rather than fair-market value of nearby property, which reduces the potential impact of estate taxes on the transfer of farm property to the next generation, according to a United States Department of Agriculture article from May 6, 2015.
5 Avoid creating a false sense of security by relying on the exemptions and loopholes to protect your heirs when they inherit the farm. Many farmers may rely on the farm property as their savings account and do not establish any other savings or investment accounts that can readily be liquidated to pay possible federal estate tax, if so assessed. By failing to consider the possibility that the value of their property might be higher than they previously thought, and preparing for that possibility by putting cash aside to help their heirs cover the tax, farmers may be jeopardizing the very property they are trying to save.
No one looks to the future with a goal of leaving their heirs owing more money than they inherit. But most people do not want to face the unpleasant businesses of preparing for a time when they themselves will no longer be available to oversee the transfer of their property to the next generation. Planning is key to the successful transfer of farm properties from one generation to the next.
Seek out an estate planner or attorney who is up-to-date on the tax policies and legal requirements for farm succession to help you prepare for the inevitable.
Randy Lyons is vice president and Investment Client Advisor for Arvest Bank in Springfield, Mo.
