Changes to Federal & Ohio Estate Taxes will help Ohio Farm Families

One worry which was taken off the minds of  many farm families was the threat of the federal estate tax reverting to a $1 million dollar exemption in 2013.  This worry was eliminated with the estate tax provisions of the fiscal cliff legislation titled American Taxpayer Relief Act of 2012 in January 2013.  Farmers now can breathe easier with respect to the federal estate tax. To top it off, the Ohio legislature had also voted to repeal the Ohio Estate tax beginning January 1, 2013.  These article examines these changes and how they may impact Ohio farm families.

Federal Estate Tax Changes

The American Taxpayer Relief Act permanently sets the federal exemption for gifts and estates at $5 million instead of dropping to the aforementioned $1 million level. This amount will be indexed for inflation.  The IRS has announced the 2013 limits will be $5,250,000 up from its 2011 level of $5,125,000. It should be noted that this legislation included the word “permanent.”  This is significant as many fiscal agreements made by Congress since 2001 have contained a phase out date.

The legislation also allows for portability or the transfer of the unused exemption of a deceased spouse to the surviving spouse.  To gain this portability, the executor of an estate must properly file the deceased’s estate tax return within nine months. Once the filing is completed, the remaining exemption is transferred to the spouse of the deceased, who can then use it for her or his estate or lifetime giving. Married individuals should file an estate tax return so that their spouses can receive the exemption, no matter their wealth at the time of death.

The rate for taxing amounts in excess of $5,250,000 has increased from 35% to 40%.  But for many, this was an acceptable compromise since it was scheduled to increase to 55% in 2013 (with an exemption of $1,000,000).

Ohio Estate Tax

As of January 1, 2013, the Ohio estate tax has been repealed.  Governor John Kasich signed the provision into law on June 30, 2011 as part of the state’s budget package.  Previously, the value of any estate over $338,333 was taxed at 7%.  This limit of $338,333 was one of the lowest limits in the nation making estate planning for farm families often a tricky process.

Review your Estate Plans.

With more favorable estate tax limits at both the federal and state levels, there have been concerns expressed by attorneys that farm families should not get lulled into a false sense of security.   In the past, it was the fear of paying the estate tax which often prompted the family to visit their lawyer, accountant, and other planners to talk about farm succession and estate planning.  Farm families should take this opportunity to visit their professionals to review their plan especially to make sure that they will not exceed the limits in the future. Families should also have a plan B for if the Ohio Estate Tax returns under future governmental leadership as well as plan for long-term care, retirement, and succession.

Could the Federal government be following Ohio’s lead in eliminating the Federal Estate Tax or is this “Election Year” posturing?

By David Marrison, OSU Extension Associate Professor

The federal estate tax is currently set at 35% on estates over $5.12 million. If nothing is changed on January 1, 2013 the estate tax exemption will drop from $5.12 million to $1 million and the estate tax rate will jump from 35% to 55%. In his 2013 budget proposal, President Obama is supporting a $3.5 million estate tax exemption and 45% estate tax rate.

At the close of March 2012, Senator John Thune, Republican from South Dakota introduced the Death Tax Repeal Permanency Act S. 2242, which would permanently abolish the federal estate tax. This act would repeal the federal estate tax, repeal the federal generation-skipping transfer tax and lock in a $5 million lifetime gift tax exemption and 35% gift tax rate The Senate bill mirrors House Resolution 1259 which was introduced by House Representative Kevin Brady, a Republican from Texas.

Many farm organizations have been advocating the repeal of the Federal Estate Tax due to its effect of these businesses being able to be transferred to the next generation. National Cattlemen’s Beef Association President J.D. Alexander stated in a recent press release, “The death tax is detrimental to the farmers and ranchers who live off the land and run asset-rich, cash poor family-owned small businesses.”

According to a study by Douglas Holtz-Eakin commissioned for the American Family Business Foundation, repealing the death tax could create 1.5 million additional small business jobs and decrease the national unemployment rate by nearly 1% Holtz-Eakin is the former director of the non-partisan Congressional Budget Office.

Remember, this is an election year so there is not much hope that any action will be taken on the Federal Estate Tax until after November.

What Can I Do?

So what can farmers do? As with any legislation, take time to exercise your right to talk to your elected officials. Let them know how the changes to the federal estate tax could affect your farm. More importantly, schedule an appointment with your attorney to make sure your estate plan is up to date. Be proactive not reactive! To contact your elected officials, go to the House of Representatives website at: http://house.gov/ and search for your local congressman using the Zip code search engine and your State Senators at: http://senate.gov/ and search by state. You can also access and monitor the progress of Senate Bill 2242 and House Resolution 2242 at these sites as well.

Federal Estate Tax Exemption Limits Set To Drop in 2013

By David L. Marrison, Associate Professor

At the end of 2010, President Obama signed “The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.”  Most will remember that this bill extended many of the Bush era tax cuts.  What many do not remember is that this legislation also made some significant changes to our federal estate tax laws. And quite frankly, this is the one area that concerns me the most when I think of the future of many of our farms across Ohio.

The estates of every U.S. citizen are subject to the federal estate tax upon their death.  However, a certain potion is exempt from the tax. In 2012, this exemption is $5.12 million.  Therefore, in 2012 if the value of the net estate – meaning the gross estate reduced by allowable estate tax credits and deductions – does not exceed $5.12 million, then the estate will pass to the heirs free from federal estate taxes.  Any amount above $5.12 million is subject to a 35% tax.  The increase to a $5 million exemption was a welcomed relief as individuals developed their estate plans.

The increase to the $5 million exemption is short lived as the increase only applies to 2011-2012.   Congress must revisit the estate tax laws before the end of 2012, otherwise we will revert to pre 2001 exemption levels.  This means that on January 1, 2013, the federal estate tax exemption will drop all the way down to $1 million and the estate tax rate will jump up to 55% (Ouch). This could affect hundreds of farms, small businesses and recipients of oil & gas lease payments.  It is not hard for many of our farms to be valued at over $1 million dollars.  Can you afford to pay a 55% estate tax on the value above $1 million?  This could be a nail in the coffin for many small farms trying to transition their farm to the next generation.

So what can I do?  I think it is imperative that farmers exercise their right to talk to their elected officials.  Let them know how the changes on the bonus depreciation measures and the federal estate tax could affect your farm.  More importantly, schedule an appointment with your attorney to make sure your estate plan is up to date.  Be proactive not reactive!

Contacting Your U.S. House of Representative

Go to the House of Representatives website at: http://house.gov/ and search for your local congressman using the Zip code search engine and your State Senators at: http://house.gov/ and search by state.

 

Family Business Meetings–Helping Farms Communicate

by David Marrison

Tommorrow, I will be teaching at the Kentucky Cattlemen’s Convention about communication issues for farms in transition.  Poor family communications are at the center of many farm transition and estate transfer problems.  One way which farm families can improve communication is to hold family business meetings.  Chris Zoller of Ohio State University wrote a nice factsheet on tips for successful business meetings and it can be found at:

http://ohioline.osu.edu/bst-fact/pdf/3612.pdf

What other strategies have you found to improve family communication?

New Rules for Estate Taxes

by Jim Skeeles & Chris Bruynis, OSU Extension Educators

Congress passed new legislation in December affecting estate taxes, but only for 2011 and 2012, reducing federal taxation of large estates. This legislation affects families with an individual who dies in 2011 or 2012 and has assets more than one million ($1M) or an individual that gifts more than $1M dollars during this period.

With this law change, an individual can pass on a total of $5M worth of assets with no federal estate or gift tax due. Further, if the net worth of an individual’s estate combined with the total counted amount given exceeds $5M, the federal estate and/or gift tax rate has been reduced to 35%.

Also upon the death of the first spouse, the surviving spouse now receives the unused $5M exclusion of the deceased spouse. Since the surviving spouse also has her exclusion of $5M she now can transfer assets totaling $10M, either by giving them away, the assets going through her estate, or a combination of the two.

Since the federal estate tax and gift taxes are “unified”, the $5M exemption is for the combination of the value of the estate and total value of “counted” gifts over a lifetime. For instance, if the value of one’s estate is $5M and counted gifts of $1M were made over that person’s lifetime, for a total of $6M, then the amount over the exclusion, the $1M, would be taxed at 35%.

However, if the estate value is $1M with counted gifts being another $1M, the unused exclusion that could be passed onto a surviving spouse would be $3M [(5M exclusion – 1M used for estate – 1M used for gifts = 3M available to be passed onto surviving spouse) + 5M exclusion of surviving spouse = 8M available exclusion to surviving spouse].

Any assets given per person per year that total over $13,000 (has increased from $10,000 originally since indexed for inflation) count against that individual’s $5M unified exclusion. Each time a gift is over $13,000 per person per year the giver is required to file a gift tax return listing all such gifts with their income tax return for that year.

If the total counted gifts accumulate to more than $5M during one’s lifetime, gift tax will be assessed at 35% for the amount exceeding the $5M, to be paid along with income tax. If that occurs, there will be no estate tax exclusion left so estate taxes will be assessed at 35% on any countable assets in the estate.

These estate tax and gift tax changes will give a reprieve to those with estates over $1M, but only for the next two years. Those families with large estates who live into 2013 will have to give away assets to lock in these provisions. Keep in mind that if you are going to “give” assets through a trust and have them qualify for the exclusion that the assets have to be truly given and no strings can be attached. That means that assets must be truly given away or given to an irrevocable trust with someone else being the trustee.

Ohio House introduces bill to repeal Ohio estate tax

This was posted on Peggy Hall’s AG Law Blog yesterday.  Good update

Ohio House introduces bill to repeal Ohio estate tax

Posted: 24 Jan 2011 02:13 PM PST

A bill introduced in the Ohio House of Representatives proposes a complete repeal of the Ohio estate tax.  Representatives Grossman and Hottinger introduced H.B. 3 on January 11, 2011. The bill is simple:  it amends the estate tax provisions currently in Ohio law to state that the tax provisions apply only to estates of persons who died before January 1, 2011. Regardless of when the bill would become effective, persons dying after January 1, 2011 would not be subject to the estate tax. The bill also removes the estate tax return filing requirement for estates of persons dying after the January 1, 2011 date.

The Ohio estate tax is a graduated tax on a person’s gross taxable estate, less deductions and exemptions.  An estate valued at less than $338,333 pays no tax due to credits and exemptions included in the law.  Estates between the value of $338,334 and $500,000 pay a 6% estate tax while estates over $500,000 in value owe a 7% estate tax.  The state receives 20% of the estate tax revenue and the local government of the decedent’s residence receives the remaining 80% of the tax.  Ohio is one of 17 states that have an estate tax.

How is agriculture affected by the Ohio estate tax?  It’s not uncommon for a farm estate to be valued at the taxable threshold of $338,334.  However, qualifying farm properties that elect the special use valuation option in the estate tax law can further reduce the taxable amount of the estate up to an additional $500,000.  The special use valuation election provides that qualifying farmland will be valued at the lesser Current Agricultural Use Valuation amount; qualifications for the election relate to keeping the farm in the family.  Sound planning and proper use of special use valuation thus can reduce the Ohio estate tax burden for farms that intend to continue the farm business after the loss of an active farm family member.

The idea to repeal the estate tax is not a new one; several prior attempts have not met with success.  A bill identical to current H.B. 3 was proposed last year, but the bill never made it out of the House Ways and Means committee.   Will the change in Ohio’s elected officials yield different results?  The current House Ways and Means committee will hear sponsor testimony on the H.B. 3 at its hearing on January 26, 2011.

International Farm Transition Network Conference Coming to Ohio

The International Farm Transition Network will host their annual conference July 20-23, 2010 at the Sheraton Suites in Cuyahoga Falls, OH. This three day meeting will bring together agricultural professionals, farmers, citizens, and service providers to discuss and learn about exciting projects in farm transition. 

During the conference, participants will hear panel discussions on farm labor, beginning farmer and farm succession research, and farm policy, and listen to interns, apprentices, and retiring farmers discuss their needs related to farm transition.  Registration is still open!  For registration, agenda, and more information, please visit: http://www.cvcountryside.org/farmland/IFTNConference.php