April 4, 2023
Why did you engage in estate planning, if you have? Your reason probably boils down to some variation of: “I care what happens to my farm and my family. I want to protect what we have built. The assets were hard to come by, and the opportunities are priceless. I want future generations to experience the culture of rural life.”
If you have not engaged in estate planning, what would motivate you to do so? The most common reasons I hear are avoiding estate taxes and protecting the farming heirs while being fair to the other children.
If you are putting off planning — why? Haven’t figured out how to achieve all your goals? Afraid of the cost or the time it will demand of you? Just don’t feel emotionally ready to deal with such decisions?
If you are married, don’t procrastinate! There is so much more that can be accomplished if you plan while you are both living compared to if you wait until after a death. You can do amazing things for each other if you plan ahead. Also, there are incredible tax savings available that cannot be recreated after a death.
If you have not done careful planning, when one of you dies, most, if not all, of your combined estate ends up owned by the survivor. Your assets held in joint tenancy, beneficiary assets like life insurance and IRAs, and your “simple will” cause the survivor to become the sole owner. Usually, no probate and no estate taxes. Seems easier than thinking.
But if you plan ahead, the one who dies first (decedent) would leave their share of the assets in trust for the survivor. That trust, written in the decedent’s estate plan, can give the survivor broad management authority. The survivor can receive any income they want, and any of the principal they need to live comfortably, like savings or life insurance proceeds.
What difference would the trust make for the survivor? Trust assets will be protected from catastrophic claims (i.e., if the survivor were sued as a result of an accident) and from mandatory spend-down if the survivor needs nursing home care. If the survivor remarries, trust assets cannot be given to the new spouse, and the trust can provide an incentive for the survivor to protect their own assets with a prenuptial agreement.
On the tax side
Beyond the personal protections that the trust would provide, there are tax advantages. Illinois law allows each of you to pass up to $4 million to heirs, tax free. But if the survivor owns it all (no trust), then everything over $4 million will be taxed at the second death. Instead, when the first dies and leaves assets (up to $4 million) in trust, it is considered a gift to the children.
However, the heirs don’t receive those assets until the survivor dies. For tax purposes, the $4 million was given to the heirs, but for practical purposes, those assets were left where the survivor could use them. At the survivor’s later death, the trust assets (plus any appreciation in value) will pass tax free, and the survivor can still leave an additional $4 million tax free. Planning ahead will assure that you together pass up to $8 million free of tax.
But there’s more. Let’s say you can see that your estate is likely to exceed $8 million. Many farms do. A subtle difference between state and federal estate and gift tax laws provides another opportunity.
Federal law for the next couple of years allows each of you to transfer around $13 million to heirs free of gift tax. With some common property ownership techniques, this figure can be increased to $15 million or even $20 million. Illinois does not levy a tax on gifts. Consequently, with a coordinated plan, you can transfer that much wealth during life, plus an additional $4 million as of the second of your deaths. Without gift or estate tax.
This is not a do-it-yourself project. There are many personal and tax implications to consider. How best to retain income from the gifted assets? How do you retain some control? Can you give it so your heirs don’t simply end up with the same or worse estate tax problems? Transfer the assets so they will be protected from your kids’ potential catastrophes.
But if the Illinois estate tax is a big problem for you, get busy now, while the two of you can solve it.
Ferguson is an attorney who owns The Estate Planning Center in Salem, Ill. Learn more at thefarmersestateplanningattorneys.com.
Read more about:Estate PlanningFarm Succession
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