When a farmer dies, his or her spouse has a lot to think about. In farm families, the loss of a spouse not only means the loss of a loved one, but also the loss of a business partner.
Hopefully, most farm couples have previously met with their lawyer and completed estate planning documents. During the estate planning meeting, the lawyer probably talked about what would happen upon death. However, what the lawyer said probably didn’t seem important at that time. So, how does the administration of a farm husband or wife’s estate really work?
Probate vs. non-probate?
It is important to understand the difference between probate and non-probate assets. Some assets are distributed to heirs by the court (probate assets), and some assets bypass the court process and go directly to the named beneficiaries (non-probate assets).
Depending on the type of assets owned, it is likely the probate process can be entirely avoided. If someone owns primarily investment assets (bank accounts, investments, life insurance, etc.), a beneficiary designation can be listed on each of the assets. However, even if someone owns farm business assets (cattle, machinery, growing crops, feed inventories, etc.), a revocable living trust can be used to hold these assets during the person’s lifetime and to transfer these assets without probate to the proper beneficiaries upon the person’s death.
How does probate work?
First, there are documents that can be used in certain circumstances that do not require any papers to be filed with the court to transfer assets upon death. For example, probate is unnecessary if the asset owned by the decedent has no beneficiary designation and totals less than $50,000 in value. Then, all that is required to transfer the asset is to complete a “transfer by affidavit” form. The form is not filed with the court; it is simply presented to the asset holder to claim the asset.
In addition, probate is unnecessary for an asset owned jointly with someone or owned as survivorship marital property with a spouse. Then, all that is required to pass the asset to the surviving owner or spouse is to complete a “termination of decedent’s interest” form. The form is only recorded with the Register of Deed’s Office.
Second, if assets need to be transferred through the decedent’s last will and testament, there are two types of probate estate administrations used, specifically called informal administration and formal administration. Generally, a circuit court judge presides in formal administration, while the county’s register in probate supervises informal administration.
Formal administration must be used if the decedent’s last will and testament requires formal administration or has contested issues. The probate process usually takes at least nine months and can take as long as two years. One reason for the delay is that creditors are allowed three months to file claims against the estate. In addition, the personal representative must wait to receive a closing certificate from the Wisconsin Department of Revenue in order to close an estate.
What about taxes?
Most everyone is aware that while an individual is alive, he or she reports his or her income to the IRS on Form 1040 for federal income tax purposes. When someone dies, the IRS treats the deceased individual like a new person called an “estate.” The estate reports its income to the IRS on Form 1041.
In addition to income taxes, the estate may owe federal estate tax. The value of assets owned by the decedent on his or her death determines the amount of federal estate tax. No estate tax is due on property distributed to a surviving spouse. In addition, in 2020, the first $11,580,000 of assets are exempt from estate tax.
Most people are aware that certain assets receive a stepped-up basis upon death. For example, if someone paid $10,000 for his or her farm real estate (the cost basis) and sold it for $100,000, the individual would be taxed on the $90,000 of gain. However, when someone dies, his or her cost basis gets adjusted to a date-of-death fair market value. As such, if the individual in the preceding example owned the land on the date of his or her death and his or her heirs sold it, there would be no taxable gain since the cost basis “stepped-up” to the fair market value.
Many people do not understand that not all assets receive a “stepped-up basis.” Income in Respect of a Decedent does not receive stepped-up basis. IRD refers to untaxed income that a decedent had earned or had a right to receive during his or her lifetime. Sources of IRD include land contract payments, distributions from retirement accounts (individual retirement accounts, 401(k)s, etc.), annuities and other income.
Should a lawyer help me?
The time and expense related to the administration of a farmer’s estate often depends on the estate size, type of assets owned, form of ownership, tax issues, complexity of creditor’s claims, marital property issues and whether there are other farm business issues to be dealt with. Billing methods by attorneys differ. Some lawyers charge by the hour; others charge a fixed fee. By law, the attorney cannot base charges for services on a percentage of the estate’s value.
Most people do not know how to administrator an estate because it is hopefully a job that someone has do very few times during his or her lifetime. The best way to hire an attorney to assist you with a farm estate is to find one who is principled, experienced and has specific knowledge about both the legal process and the business of farming.
Schneider is a partner in the agricultural law firm of Twohig, Rietbrock, Schneider and Halbach. Birschbach is a certified public accountant at the law firm and is an estate administration manager. Call Schneider or Birschbach at 920-849-4999.