There are few instincts more powerful than the desire to keep what you earn and pass the fruits of your labor to the next generation. Unfortunately, for families across Ohio, a lack of estate planning could leave your loved ones grappling with a financial loss as well as an emotional one. When passing a farm or estate to your heirs, it is critical to understand the state and federal tax implications and plan your legacy in a way that accounts for the evolving landscape of estate and inheritance taxes.
This is a timely issue, as both the Ohio estate tax and the federal estate tax are set to undergo significant changes at the end of 2012. Currently, the Ohio estate tax assesses approximately 7 percent on estates valued at more than $338,333 while the federal rate is closer to 50 percent but only on estates over $5 million. While the Ohio estate is scheduled to expire at the end of the year, the threshold for the federal estate tax is set to drop from $5 million to $1 million, exposing more families to a significant tax burden.
To complicate matters further, none of these changes are set in stone. Both Congress and the Ohio State Legislature will be under significant political pressure to pass new laws before the scheduled changes take effect, and both the federal and state statutes may remain as-is or change only slightly. This underscores how vital it will be to create or update your plan to cover all the potential scenarios and ensure the best possible situation for a surviving spouse and children.
Strategies to protect and preserve your assets: Gifting
There is a narrow window of opportunity to reduce federal estate tax by up to $5 million at your death if you gift before the end of 2012. Typically, you would gift to a close family member and file an obligatory federal gift tax return for any gifts of $13,000 given to a single person. Although there is normally no gift tax due during your lifetime unless all gifts exceed the federal exemption level ($5 million in 2012), capital gains taxes may be due when the assets are later sold.
Gifting is a tricky proposition and should not be undertaken without expert legal and financial advice.
Understandably, many couples approach estate planning with the intention of leaving their spouse everything when they pass away. Unfortunately, lack of understanding and poor planning can effectively double the family’s tax burden. For many, a living trust is the best option to maximize tax benefits and minimize the tax burden for all parties.
Farmers who are “asset rich and cash poor” face a difficult situation with regard to estate taxes. Their children may be forced to liquidate the farm to pay estate taxes and face significant penalties if they are unable to pay within nine months of death. This can be avoided or mitigated by planning ahead and by engaging tax-savvy advice after death.
With many complex and evolving issues in play, Ohio farm families can benefit from the professional advice of a trusted and experienced estate planning and elder law attorney, working in concert with family members, accountants and financial planning professionals. In today’s volatile economic climate, complete with election-year politics, nothing is certain. That uncertainty makes it even more critical to be informed and prepared with a plan to keep your estate and your family’s long-term security on solid ground.