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Plan for possible estate tax changes

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KNOW YOUR OPTIONS: The federal estate tax is once again being debated in Congress. One way to avoid a situation where estate taxes suddenly rise is by making use of a disclaimer, where the receiver of the estate gift chooses not to accept it, allowing time for additional planning and options.
Tax Tips: A disclaimer is one option that farm families could consider.

Every so often, there are years when estate planning becomes the hot topic among farmers. With several proposals circulating in Washington, D.C., it appears that 2021 will be one of those years.

Today, each spouse has $11.7 million to use either to make gifts or pass assets on to the next generation through inheritance. All current proposals would reduce this number, with some retroactive to Jan. 1, 2021.

There also are discussions about making gifts of appreciated property taxable. The needle to thread for estate planners is to find ways to allow farmers to use their $11.7 million allowance if it remains available, while also following the estate planning Hippocratic oath of “doing no harm” should something change.

Use a disclaimer

One option that could be considered is for farm families to make use of a disclaimer. Under the tax code, there are ways where the person receiving the gift may disclaim it. In other words, the receiver of the gift can choose not to accept it.

For example, the donee is permitted to disclaim a gift within nine months of the date of the gift. If a farmer made a gift to a member of the next generation in November 2021, the individual receiving the gift would have until July 2022 to disclaim it. In that case, it is likely the gift would be deemed to have never occurred and be returned to the farmer making the gift. With proper planning, disclaimers can also be used in the context of trusts.

The bottom line is that farmers should begin getting their ducks in a row now as they consider any major estate planning strategies. Coordination between farmers, their accountants and attorneys will take time to structure and implement.

As the adage says, if you have six hours to chop down a tree, you should spend the first four sharpening the ax. And the disclaimer provisions could be a tool to reset certain estate plan changes if the final estate tax provision rules don’t work well with the revised estate plan.

Arezzo is a senior tax consultant for Farm Credit East.

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