By TIM HEARDEN
Whatever Congress ends up doing with the estate tax, farmers and ranchers can shield themselves from its impacts by planning ahead, an expert advises.
By using a trust mechanism that's available to everyone, a farming couple could protect a larger portion of the family's estate from taxes, said Terry Francl, senior economist for the American Farm Bureau Federation.
Farm owners can also gift a certain amount of property to their heirs each year, which over time reduces the amount of assets that can be taxed at the owners' deaths, he said.
"There are many types of legal remedies," Francl said. "For example, you can give stock to charities and so on. You get a charitable deduction and don't have to pay capital gains on them ... There's a lot of alternatives."
The options remain as Congress has entertained numerous proposals for estate tax reform this year, the latest of which is a bill by Rep. Earl Pomeroy, D-N.D., that would freeze the estate tax at 2009 levels.
Currently, the estate tax is set at 45 percent for estates worth more than $3.5 million or $7 million for a couple. If Congress does nothing, estate tax rates will revert in 2011 to pre-2001 levels, with estates worth more than $1 million taxed at 55 percent.
Francl said he became more familiar with estate planning while handling affairs for his father-in-law. Perhaps the most useful tool, he said, is a trust, which helps a person "avoid doubling up the value of the asset into the surviving spouse's estate," he said.
For example, if a couple owns an estate worth $7 million and the first spouse dies, leaving the entire estate to the surviving spouse, he or she can exempt only $3.5 million when he or she dies, Francl said.
In a trust, the first spouse's portion goes directly to heirs, and the surviving spouse avoids federal taxes under the current rate because his or her half is $3.5 million, Francl said.
"If you go to any estate planning lawyer, that's the first thing they'll say you're going to do," he said, referring to a trust.
Farmers and ranchers may also consider an alternative ownership structure such as a limited liability company, Francl said. Or they can gift their assets prior to their death, he said.
For instance, if a couple starts in their 50s giving assets worth $4,000 a year to each of their three children, the amount of assets protected after 20 years is significant, he said.
Francl urges people to see a competent lawyer that is familiar with estate rules and "proceed to develop a will and an estate plan to deal with these kinds of issues."
"It's an enormously complex area and issue," he said.