Shelters reduce estate tax burdens

We are all aware of the term “urban sprawl.” Many of you already know of its impact on the value of your farm and agricultural property. In the area of the country where I live, unfortunately, many people are unaware of the problem or are in denial of the upward spiraling of real estate values.

While this problem might not directly affect them or their spouses, it may very well have a sudden adverse impact on their children or next of kin.

Consider the case of Mr. and Mrs. X who live in my county. They inherited several hundred acres about 12 miles from the center of town. This was “way” out in the country back in the 1960s when he inherited the land from his parents. Now, they are elderly and have done no estate planning, except for a simple will back in 1970.

The fair market value of their real estate has climbed from the inherited basis of $40,000 to approximately $6 million in 2007. Not only are they close in proximity to a major interstate highway, but they are just a rock's throw from a new major upscale shopping center.

I further discovered to my horror that the property was solely in the husband's name. This made matters worse. They have an archaic estate plan that wastes the wife's “unified credit” available to shelter $2 million from taxes.

There are many good methods that Congress has allowed us to use in legally sheltering and revaluing the farm and small business from the onerous burden of estate taxes.

Technique 1: Use the “unlimited marital deduction.” Section 2056(a) of the Internal Revenue Code allows spouses to give during life or bequeath at death an unlimited amount of wealth to the other spouse. Absolutely no tax should be due to the government upon the death of the first spouse to die. Remember this for our next article in which we will be discussing the by-pass credit shelter will and trust.

The unified credit Congress allows us each year is currently $2 million in 2007 and 2008. In 2009, it will elevate to $3.5 million. This means that each citizen of the United States can leave an unlimited amount of wealth to their spouse and $2 million total to their other relatives or friends with no tax imposition in 2007 and 2008. Therefore, it would be wise in the case I have mentioned for both spouses to own the real estate jointly in their separate estates so they can both shelter a total of $4 million from estate tax. In this case, Mr. X should convey one half of his farm to his wife for a value of approximately $3 million. Due to the unlimited marital deduction, no gift tax will be due.

If Spouse No. 1 dies in 2007 or 2008, $2 million will be sheltered and the balance will go to the surviving spouse tax free. Only upon the death of the second spouse will there be an estate tax due. At that point, the second to die spouse also has $2 million remaining in unified credit. This would effectively keep $4 million of value of the real estate out of the government's account and in their children's account.

Without further planning, $2 million remains subject to tax. We will discuss these methods in a broader discussion in future articles. This is only a brief introduction to some ideas that I hope you will consider with your qualified estate planning attorney and C.P.A.

Technique 2: Use the special valuation available to farmers and small business owners. Code Section 2032(a) of the Internal Revenue Code allows the estate of a “farmer” to value the real estate on the basis of its current use instead of its actual fair market value which is commonly known as “highest and best use.”

The maximum amount of reduction in value available to the agricultural user in 2007 is $940,000. Your land may qualify for a special-use valuation if it is devoted to actual agricultural purposes and is not idly awaiting the call from the real estate broker to inform you of a potential buyer.

There are a number of detailed requirements that the petitioner must establish in establishing the qualification for the special use valuation allowed by 2032(a). They are too numerous to complete in this article and that is where we will take up next.

In the mean time, consult with your local estate planning expert and begin seeking ways to shelter your estate from needlessly paying too much tax. God bless you and America.

Mark Tippins is an Auburn, Ala., attorney licensed in Alabama and Florida. For questions or comments, he can be contacted at [email protected] or (334) 821-3670.

Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.