Estate Tax: Family Business, Farm, Ranch
The unified gift and estate tax credit is the lifetime federal credit available to each taxpayer to reduce the tax on taxable transfers that he or she makes during life and at death.
Prior to 2011 the gif tax credit schedule and estate tax credit schedule were not unified from 2004 through 2010. That is, the maximum gift before taxes were imposed was $1,000,000 which was only a part of the estate tax exclusion during that period. In 2011 the two were united and you could gift the full amount of the estate tax exclusion but only for 2011 and 2012.
The unified gift and estate tax exclusion for 2012 is $5.12 million (adjusted for inflation) or $10.24 million for couples. Taxable assets gifted or passed above these thresholds will be taxed at 35% if you die this year. By having a unified gift and estate tax exclusion you do not have to wait until death to use the exemption. This year an individual could gift $5.12 million and a couple $10.24 million without incurring the 35% gift tax, but you still must file the correct forms to notify IRS.
This gifting is often confused with the annual gift-tax exclusion which in 2012 is $13,000 for an individual and $26,000 for couples. To add to the confusion, the annual gift-tax exclusion is per gift and is not a total. That is, I can give as many gifts of $13,000 to as many individual as I desire or my wife and I could give as many gifts of $26,000 as we desire, as long as they are to separate individuals.
Admittedly not many of us have $5.12 million or $10.26 million estates and with land values at current reduced levels you might think only large farms and ranches may reach this number, but even a farm or ranch of 40 to 50 acres could reach the $5.12 million level fairly easy as well as many medium to large family businesses. Next year, the estate and gift tax exemption is set to return to $1 million ($2 million for couples) and the tax for taxable property over that amount increased to 55%. Will it, most likely not, but the one thing we can count on is the unified gift and tax exclusion will not remain at $5.12 million and most likely will not remain unified.
Numbers often mentioned is an estate tax exclusion of $3.5 million and gift tax exclusion of $1 million. This means that for purposes of transferring property 2012 is a window about to be shut. Assuming you don’t plan to die this year, we are talking about gifting of property.
The problem for small business is most families have no idea how much the family business is worth or how much it may be worth in the future. Then there is the problem of control and an inability to turn loose of control. But there are ways to transfer ownership without giving up control or losing income. The other question is does the next generation of family members want to be involve in the business or even have the ability to take control and survive? Extending ownership of a family business is a very difficult question and one without an answer sometimes until the very last moment, but the prudent business owner will not let this opportunity pass without significant investigation.
Family farms and ranches are usually somewhat more stable in selecting future ownership and why 2012 is an important benchmark. If future ownership can be qualified 2012 is the last year ownership may be transferred tax effectively. Again it is not always necessary to give up full control or income making the transfer, but any family with farm or ranch of 40 acres or more should consider now how much it might cost to pass ownership at death in the future.
Unlike standard businesses, most of the money available to the farm & ranch businesses is tied up in land, equipment, the next crop or all three. Estate tax is due within 9 months, and although there are delaying alternatives all are expensive. If you have not obtained enough life insurance and do not have enough cash on hand how will you meet the tax and do you really want to give up the cash? Starting the transition now may allow the farm to remain within the family rather than most or some of it remaining in the family.
Whether a nonagricultural family business, farm or ranch the window will shut December 31st, not considering your alternatives only available for the rest of 2012 is not a viable option for any family business.
Is now the time to have a conversation concerning your estate plans and how you may tax effectively maintain the family business, farm or ranch within the family. Time is not on your side, 2012 will be over before you realize, and we are not likely to see these tax rates again in our life time. A conversation with us today could save tomorrow. Please call us at 888 270 9870 or email This e-mail address is being protected from spambots. You need JavaScript enabled to view it. , today!
