Estate planning for farmers and ranchers can involve many pitfalls for the unwary.
First mistake: some farmers think they don’t have to do anything because the federal estate tax exemption is so high, and their net worth is well under the limit. However, just because the estate tax exemption has doubled until 2025, does not mean they don’t need estate planning. The article “5 Estate Planning Mistakes You Don’t Want To Make” from Ag Web takes readers through some big mistakes that have been made by farm families in the past.
As far as we know, the estate exemption will only be this high for a limited period of time. When the Tax Act expires in 2025, the exemption will be back down to $5.5 million per person and $11 million for a couple under current law. Moreover, there is a Senate Bill out currently that would impose a separate California state estate tax on estates over $3.5 Million for individuals and $7 million for couples.
Second, farm families can make a huge mistake when they insist on treating their children the same. Fair does not always mean equal. Think about who is working on the farm, and who is not. Who is going to do a better job maintaining the family legacy, and who has already left to live in another state? Be mindful of the difference in your children’s values, and talk with them, both individually and in a group, so they know what your intentions are.
Third, you cannot simply title your property so your kids and your spouse own it together and it passes to them when you die. Although it sounds nice and simple, it’s a huge mistake. People think they want to do this to avoid probate, but it creates many other problems. For one thing, if you just add names on property and there is no bill of sale, you create a taxable gift. Perhaps more concerning is that the gift means that children will receive a carryover cost basis in the property, meaning they could be taxed on a very large capital gain if they later sell (which could have been avoided if they inherited the property instead).
Fourth, the plan to “sell off the farm, when I retire” plan is a terrible tax burden to place on yourself. If you sell the last crop and auction off the equipment, there will be a big income tax bite. Farmers tend not to pay a lot of income taxes. They sell this year’s grain next year, and they deduct next year’s expenses this year. They buy equipment in December and then depreciate it, but then when you do a retirement sell off, you get all the taxes that you’ve been pushing away all at once.
Fifth is the one that dooms so many families, both farmers and non-farmers alike. You can’t simply copy your neighbor’s estate plan and hope it will work. Every family is different, and no matter how small your town, everybody does not know the exact details of everybody else’s business. The farmer down the road may do a lifetime gifting that works for them—and lands your family in an un-fixable situation.
Estate planning is very precise, and every family has its own needs. Talk with an estate planning attorney who has experience with farm families and succession plans.
Reference: Ag Web (Jan. 15, 2019) “5 Estate Planning Mistakes You Don’t Want To Make”
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