Farmers and ranchers who have not made arrangements for estate planning should run, not walk, to their tax advisors and determine if they should transfer assets to their heirs before year-end.
Failure to do so could mean millions of dollars in estate taxes to those heirs, says Rob Gunther, Frost PLLC, Little Rock, Ark.
Gunther, addressing the third annual Beef Financial Management Conference in Amarillo, Texas, said Dec. 31 is a key date for estate planning. A 2010 tax reform law that allows transferring up to $5 million from one generation to another without an estate tax expires at year-end.
“The exemption goes from $5 million to $1 million on Jan.1, 2013,” Gunther said. “Take advantage of the higher exemption now, while it’s available.”
Also in January, the estate tax rate is set to rise to 55 percent from the current 35 percent rate. Gunther says the changes could mean a $2 million cost per person or $4 million per married couple after the current law expires.
“We have heard some discussion that President Obama is considering a $3.5 million exemption and a 45 percent tax rate. That’s better, but it is still a $750,000 cost per person or $1.5 million for a married couple,” when the estate transfers from one generation to the next.
Gunther said some estate owners fear ceding assets to heirs for fear of giving up control of their operations. That doesn’t have to happen, he said. “Owners may continue to manage the estate. There are ways to do it.”
He said the 2010 Tax Relief Act also included “an unusual exemption portability option” that allows the exemption to pass to a surviving spouse.
Gunther said the method of transferring assets also should be considered and that cash transfer was not necessarily the best option. “Transferring assets that have rapidly-appreciating growth potential would be better,” he said. “Closely-held business stock could be a good option.”
Estate owners should work with tax specialists to determine the value of the estate and then decide whether “to gift it now and move future growth forward or to pass assets through the estate later.”
He said those with significant assets need to be serious about estate planning or be resigned to their heirs “writing a big check.”
Farmers and ranchers also should be aware of some income tax regulations that expire. Section 179, which allows small businesses to expense property (new or used) up to $139, 000 “as they purchase it,” remains in effect for 2012. That allowance has a threshold of $560,000. Equipment purchased above the threshold amount lowers the amount that can be expensed. Gunther said the threshold was added to prevent larger companies from using Section 179. The company also can’t create a loss through Section 179.
Bonus depreciation, writing off 50 percent of qualifying new property for 2012, also expires at the end of the year.
He said the Bush era tax cuts are also set to expire in January, which would push capital gains taxes from 15 percent to 20 percent. Maximum tax rate would go from 35 percent to 39.6 percent.
He said taxpayers making more than $200,000 a year will face higher Medicare taxes. And the employee payroll tax cut is set to expire.
Gunther said high income taxpayers face a greater chance of audit. In 2011, one in eight taxpayers with income more than $1 million was audited.