Don't confuse estate taxation with estate planning

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Congress has finally passed the long-awaited tax reform package that makes major changes to the U.S. tax code and phases out the estate tax over a period of time.

Elimination of the estate tax should be good news for producers. However, my concern is that producers may confuse elimination of the tax with the need for estate planning. If you have a business, and you want to pass that business on to the next generation, you still need an estate plan to meet your goals.

Despite easing of the estate tax, estate planning must remain a priority. More agricultural operations have been lost due to poor estate planning than to the estate tax.

Life without a plan
One of my clients got a rude surprise a few years ago. His mother passed away without having completed an estate plan. There was no tax involved, but a portion of the farm had to be sold to buy out non-farming heirs who wanted their shares right away.

The mother had always told the son that he would receive the farm. The father had died when the son was a senior in high school, and the son stayed home to run the farm. Income from the farm paid college expenses for the other children.

The mom had met with me on at least two separate occasions to discuss her intention of giving the farm to the son. She also met with two different attorneys. Even though she met with a number of experts, she never completed her plan. Without a will, state law required that her assets be divided equally among the five children. Two of the siblings didn't want to own farmland, and wanted their shares right away. Since the son didn't have enough cash to buy the siblings out, a portion of the farm had to be sold.

Write a plan
What should you do? First, decide how your property will be divided after you're gone. Since you won't have to concern yourself with the estate tax in coming years, you should be able to create a simpler plan. You are not required to divide your estate equally among your heirs. You can choose to allocate assets based on need, as well as on the contribution that each family member made to the business operation.

Secondly, complete a will or trust document to put the plan in writing. If you want to control the distribution of your assets, you must have a legal document that details how your assets will be divided at your death.

Without a will, state law is used to determine how your assets will be divided - you won't have any choice in the matter. If you live in a state that requires an equal split between the spouse and children, your spouse may not have enough assets to meet family living needs. And, additional cost may be incurred to probate your estate since you haven't legally named an executor.

Your next step should be to protect the farming heir. One of the most common "plans" I see is that the farming heir will have the "opportunity" to buy out his brothers and sisters. If the farming child isn't in a financial position to buy the farm at your death, the farm could be lost. However, you can use a number of tools to ensure that everyone is treated fairly, and the farming heir has the opportunity to continue operating the farm.

Finally, discuss the plan with your children. No, you don't have to tell children the value of your estate. However, children will accept your decisions much easier if they hear it from you rather than some attorney after you are gone.

Most producers don't like writing a plan to dispose of their assets, because it reminds them that they will not live forever. Instead, producers prefer to plan for the future. But, you have worked hard to build a successful business operation. Take time to make an estate plan to ensure that your business will survive your death.

Darrell Dunteman, AAC, is an Accredited Agricultural Consultant and accountant with offices in Bushnell, Ill.



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