Category Archives: Tax and Legislation

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.

 

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.

Ohio changes transfer on death deed to an affidavit process

This blog was just posted early this morning by Peggy Kirk Hall (attorney and director of the OSU Agricultural & Resource Law Program) on her OSU AG Law blog located at: http://ohioaglaw.wordpress.com/

Here is her blog:

Since 2000, Ohio law has allowed property owners to avoid the probate process with a transfer on death deed, a deed that automatically transfers real property to a designated beneficiary upon the death of the property owner.   Under a new Ohio law, such transfers now require the preparation of an affidavit rather than a transfer on death deed.  The new law also allows those who hold “survivorship rights” in property to transfer their rights upon death, which the previous law prohibited. 

The changes occurred in S.B. 124, which became effective upon the governor’s signature on December 28, 2009.  The Ohio State Bar Association’s Real Property Law Section proposed the changes to simplify the transfer on death process and remove confusion over the rights of those holding survivorship deeds. 

See the bill and its changes to Ohio Revised Code Chapter 5302  here.     The Legislative Service Commission’s analysis of S.B. 124 is available here.   Visit this website for a good summary of the law.

Ohio Ag Manager Newsletter Posted

I just posted the January edition of the Ohio Ag Manager newsletter at: http://ohioagmanager.osu.edu  This month’s newsletter features this Blog (and our OSU Extension Ag Law Blog) as well as our article on the 2010 Federal Estate Tax is in Limbo which was posted here first earlier this week.  Producers should also check out the tax management articles as they do have an impact as families make their succession and retirement plans.  I highly recommend you read Dr. George Patrick’s article from Purdue University at: http://www.agecon.purdue.edu/extension/pubs/taxplan2009.pdf

Federal Estate Tax in Limbo for 2010

 It is 2010, and there is officially no Federal Estate Tax.  Why and for how long?  While the House recently passed a bill to reinstate the federal estate tax in 2010, U.S. Senators failed to reach a deal to temporarily extend the estate tax into 2010.  The extension proposed by the House would have kept the 2009 estate tax levels in place.  If the bill passed in the House becomes law, the first $3.5 million of an estate will be exempt from federal estate tax and the estate tax rate on the taxable portion of an estate would be 45%.  Senate Republicans want a permanent extension to a $5 million exemption and an estate tax rate of 35%.  If no compromise can be reached, we may continue with existing law.

Under the Economic Growth and Tax Relief Reconciliation Act of 2001, the federal estate tax exemption increased during the past decade from $1 million to its 2009 level of $3.5 million and the maximum rate decreased from 55 percent to 45 percent.   In 2010, there is a full repeal of the federal estate tax.  Starting in 2011, the federal exemption is scheduled to revert back to $1 million.

The lack of movement by Congress could cause a huge TAX headache for many of Ohio farm families if someone dies before a compromise can be reached.  This is mainly due to the fact there will be only a limited step-up in basis. Under current federal estate tax laws (prior to 2010), the assets of the deceased get a step-up (or step-down) in basis to the fair market value at date of death (or 6 months later).   The step-up simply means when heirs sell an inherited asset, they only owe capital gains tax on the asset’s appreciation from the day the asset was inherited to the date of sale rather than from the day the asset was originally purchased by the decedent. 

In 2010, if the federal estate tax remains repealed, the step-up in basis is limited to $1.3 million for the overall estate, plus $3 million for assets transferred to a surviving spouse.  The Executor will be able to add this extra basis to the existing basis of the property.  This means that Executors or heirs will have the added complexity of determining the prior basis of the property, which might go back many years or even generations. 

With the value of many of our farm estates, the lack of full basis step-up could trigger larger capital gains for farm families who inherit farm assets.  As a reminder, tax liability due to capital gain is not triggered until sale of the appreciated asset. If the asset is inherited this tax will not be assessed until later when and if the asset is sold.  It also may pass through another estate settlement (before it is sold) which may allow for the full step in basis if Congress passes legislation to allow such (as was allowed prior to 2010).  The tax assessed on capital gain is calculated on only the appreciated amount and currently is at a much lower rate (10 to 15%) than the federal estate tax rate.

So what is on the horizon?  It appears the full repeal of the federal estate tax in 2010 may be very short lived in 2010.  Senate Finance Chairman Max Baucus, D-Mont., and House Ways and Means Chairman Charles Rangel, D-N.Y., have said they will try to repeal the repeal and get the federal estate tax reinstated retroactively for 2010 after the New Year.  This will cause confusion, uncertainty and possibly very large tax headaches for those families who have someone pass between Jan 1, 2010 and whenever Congress reaches a compromise.  Families in that situation who are inheriting estates exceeding $3.5 million (or for whatever $ level the new federal estate will be) may be surprised when they owe a large federal estate tax bill if the law is changed retroactively.

This entry was written by David Marrison & Dr. James Skeeles, Extension Educator for OSU Extension and Russell N. Cunningham, OSBA Certified Specialist in Estate Planning, Trust and Probate Law (Barrett, Easterday, Cunningham & Eselgroth, LLP)