By Mitch Adel
There are few instincts more powerful than the desire to keep what you earn, and to pass on the fruits of your labor to the next generation. Unfortunately, for Ohio farm families, the process can have significant financial pitfalls. When handing over a farm to your heirs, it is critical to manage the tax implications — courtesy of the state of Ohio and the federal government — that define the ever- changing terrain of estate and inheritance taxes.
This is a particularly noteworthy year with regard to these issues, as both the Ohio and federal estate taxes are set to undergo significant changes at the end of 2012. For farmers and their families, those changes are a mixed bag: While the Ohio estate tax is scheduled to expire at year- end, the threshold for the federal estate tax is set to drop dramatically, exposing more farms to a significant tax burden. Currently, the federal statute applies to estates worth $5 million and above. On Jan. 1, 2013, the new criteria will likely kick in, and the estate tax will apply to estates worth $1 million and above.
To complicate matters further, both the state Legislature and Congress will be under significant pressure to put new laws in place before the scheduled changes go into effect next year. This underscores how vital it will be to create or update your plan to cover all of the potential scenarios and ensure the best possible situation for a sur- viving spouse and children.
One way to avoid paying the federal estate tax is by gifting up to $5 million (typically to a family member) between now and the end of 2012. A similar strategy applies to state taxes: It is possible to avoid much of Ohio’s estate tax obligation if you make a gift of the property. A caveat in the state law is that there is a three-year window following the gift during which the gift will be “pulled back” and taxed as part of the giver’s estate in the event that he or she passes away. After those three years are up, the Ohio estate tax no longer applies.
When gifting assets, even if no federal estate tax is due, you must file a federal gift tax return (for gifts of more than $13,000). Families receiving the gifts may have to pay capital gains tax if the assets are sold at a later time, but the financial hit is signifi- cantly less punitive than the alternative.
Understandably, many farming couples ap- proach their estate planning with the intention to leave their spouse everything when one partner passes away. Unfortunately, without the right planning, such a strategy can double the tax burden on the surviving spouse and the heirs. One way to avoid this is by creating a living trust while the husband and wife are both still alive, maxi- mizing the tax benefits and minimizing the tax burden for all parties involved.
Pay on time
Federal estate taxes must be paid within nine months of death, or significant pen- alties will be incurred. This is one big reason why many farms ultimately end up being liquidated. Much of the cost can be avoided, or at least accounted for, by planning ahead. Whatever your strategy, knowing any unavoidable costs upfront will ensure your family is prepared to pay them within the defined time frame.
With many complex and evolving issues in play, Ohio’s farm families can benefit from the professional advice of an estate planning and elder law attorney, working in concert with family members, accoun- tants and financial planning professionals. Bringing all parties together is the best way to create a comprehensive plan that works in everyone’s best interests. In today’s vol- atile political and economic climate (par- ticularly during an election year), nothing is set in stone. Such uncertainty makes it all the more critical for Ohio farmers to be informed and prepared. Having a plan will keep your farm and your family’s long-term security on solid ground.