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Key Points:

  1. Death taxes remain a threat to farm families
  2. Even if you aren’t subject to estate tax, your loved ones benefit from careful planning
  3. With laws changing, keep your plan flexible

Death of the Death of the Death Tax?

There are many reasons to thoughtfully plan your estate. I like to emphasize the non-tax reasons for planning, but I still observe that the most common motivation for planning is the dreaded estate tax.

But much confusion exists. Bill and Mary Farmer have been hesitant to do estate planning: “The death tax was repealed, wasn’t it, by the 2001 Tax Act?”

Perhaps you can relate. Bill and Mary don’t want to spend time and money on estate planning if the estate tax has been or might be repealed. “After all,” they think, “if there is no estate tax to plan for our effort and fees will be wasted!” This is a big mistake.

Repeal of the estate tax

First, the estate tax has not been repealed. The 2001 Tax Act increased the value of what a person could pass free of estate tax. For many years, the tax-exempt amount had been $600,000. A 1997 tax cut started gradually increasing that exemption, and it was up to $675,000 in 2001…supposed to level off at $1,000,000 in 2006. The 2001 Tax Act came along and bumped that exemption immediately up to $1,000,000 (for deaths in 2002), with rapid increases to $1.5 million, $2 million (2007 and 2008), $3.5 million (2009), and finally an unlimited exemption in 2010; i.e., the federal estate tax disappears. This was prematurely called “the death of the death tax.”

The 2001 Tax Act expires on January 1, 2011 and the unlimited tax exemption will revert back to $1,000,000. One might say after a one-year death in 2010, the death tax will be resurrected in 2011! The idea in 2001 seemed to be that if the government could afford the repeal of the estate tax, new legislation would be passed near the end of the ten years—about now—making the repeal permanent (ya gotta chuckle—what tax cut is ever “permanent”?).

So, will that new legislation happen? One attorney1 answered this way: “Anyone who says they know what's going to happen between now and 2011 is clairvoyant or deranged.”

On March 13, the Senate voted 99-1 to permanently (there’s that funny word again!) reform the estate taxes to a $3.5 million exemption and a 45% rate. This was in conjunction with a budget, and will not be law until further legislation is enacted, approved by the House and signed by a President. Two other amendments that would have set higher exemptions and lower rates were defeated. Notice that no vote was even taken on the question of permitting or extending the 2010 temporary repeal.

I think we are witnessing the death of the death of the death tax. Forget about the death tax dying and being raised up in 2011—it now seems unlikely we’ll reach its temporary death (one-year repeal). Even if you plan to die in 2010, don’t procrastinate hoping the tax is going away!

Planning for more than federal death tax

Second, the state of Illinois taxes estates in excess of $2,000,000. While not so maddening as the 45% federal rate, Illinois’ tax rate starts at 9%. Good planning can minimize or avoid that tax as well, even if there is no federal estate tax to worry about.

Third, what if our dreams come true and both state and federal death taxes are repealed? There are many non-tax benefits that arise from or with the tax planning. A common tax planning technique for a married couple places at least half of the couple’s estate in a special trust when the first of them dies; the survivor can manage this trust and use the assets as needed. Even if there were no estate tax, many farmers like the non-tax benefits of such a trust: if the survivor were sued the lawsuit could not reach the trust assets; if the survivor remarries, the new spouse cannot access the trust assets; and if the survivor is failing in health, the children can help manage and protect this trust.

An event or a process?

Fourth, you should plan “in case I died today” but stay flexible for changing laws. Your relationship with your attorney should be ongoing. Traditional planning was sort of a dreaded “event”: you only go because you have to and the attorney terminates his responsibility to you as soon as you walk out with your documents. Estate planning works best if client and attorney make mutual commitments to routine updating, since one thing is certain: change!

It’s time to get started. Plan for the likely taxes. Build in non-tax benefits. Keep the plan flexible. Make your professionals commit to updating. Above all, don’t leave your farm to chance.

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(1John Scroggin, J.D., quoted in Wall Street Journal 10/10/07)


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Article authored by Curt W. Ferguson and originally published in the Prairie Farmer magazine, June 2008 issue

Copyright 2011, Dolan & Associates P.C.