You may be wondering how the fiscal cliff package will affect your farm business. One area is the change in the estate tax laws. Here's a recap of the main changes.
The new bill permanently maintains the $5 million per person exemption level – and will adjust that amount for inflation each year. Since the exemption is per person, a farm owned by a husband and wife has a total $10 million exemption. The estate tax rate for anything above the exemption has increased from 35% to 40%.
These new laws are better than what many expected. Many thought the exemption level could dramatically drop – to $2 or $3 million. It would have fallen to $1 million if Congress had done nothing. There is a setback, however. The tax rate for estates valued above the exemption has been raised from 35% to 40%.
What happened this time was favorable for most farmers – but the real lesson is that Congress ultimately controls the exemption levels and rates. In a single day, they can change the rules – costing farmers millions of dollars as they pass their farms to the next generation. We can take responsibility for what we can control – our own response to the situation.
We have some certainty now about what the estate tax laws are going to look like – at least for the next few years. This means that starting – and completing – a legacy plan is more important than ever. The best time to start your plan is when you're able to make clear decisions about the future of your family farm because you know what you can expect from the laws.
There was a lot of uncertainty around the estate tax laws this past year, but now it's time to take action. The bigger issue is that the fiscal cliff deal didn't reduce government spending. Until that's fully addressed, we may see new or increased taxes just to pay the nation's current bills. The current, more favorable estate tax laws are an opportunity to prepare your estate plan before any more changes happen.
Darren Frye grew up on an innovative, integrated Illinois farm. He began trading commodities in 1982 and started his first business in 1987, specializing in fertilizer distribution and crop consulting. In 1994, he started a consulting business, Water Street Solutions to help Midwest farmers achieve success through financial analysis, insurance, commodity marketing, and legacy planning. The mission of Finance First is to get you to look at spreadsheets and see opportunity, to see your business for what it can be, and to help you build your agricultural legacy. Contact Darren at firstname.lastname@example.org.
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