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Death and taxes: Estate and gift tax exemption to expire soon

If you don’t plan to die before Dec. 31, you’d better read this:

The largest estate and gift tax exemption ever offered in history will expire at the end of this year. The exemption allows an individual to transfer up to $5.12 million to heirs without paying taxes. This exemption is part of the estate tax law that allows a $5.12 million to transfer to heirs tax free either as a gift or at death and a 35% tax rate on any amount over that.

What happens on Jan. 1? The estate and gift tax exemption drops to $1 million and the tax rate goes to 55%. There’s plenty of speculation about what Congress will do with these taxes next year, including a proposal to set the exemption at $3.5 million and a tax rate of 45%. But nothing is certain except that the current exemption rate will be gone.

The uncertainty over estate and gift tax laws should be enough to compel some farm families to action. The fast rise in land prices has inflated estate values for farmers who haven’t had to worry about inheritance taxes for a while. Now they do because the tax implications at death are immense.

For example, a $5 million estate settled this year involves no taxes, whereas next year, the same estate will face a $2.2 million tax bill. (Only $1 million is exempt from taxes and the remaining $4 million is taxed at a 55% rate.)

Time is slipping away to take advantage of this tax exemption. If you want to transfer land without heavy tax consequences for your heirs, you need to act now. And because there are drawbacks to the exemption, you need to meet with financial and legal advisors to determine if this action is best for you.

Note: This is the editor's letter that appeared in the September issue of Farm Industry News magazine.

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