|Dear Michael: I've heard so many people were doing things with their property before the end of the year due to the impending tax law change, but now, due to the favorable Unified Credit, a lot of people are wishing they hadn't done some things. Is any of this reversible? – Reset Button.
Dear Reset: There were a great many things done at the end of 2012. I would venture to guess that more people spent more time on considering their estate plan in the last two months of 2012 than was spent cumulatively over the past twenty years.
Of those who made changes, some are reversible, some are not.
Those that set up irrevocable trusts and placed their property into trust would have a difficult, if not impossible time, reversing these. Perhaps the biggest lost to these people is going to be the loss of step-up in basis. When you place property into a trust, the basis does not increase upon your death, because when you die, the trust goes on. I think many people may have felt like they needed to dodge a possible estate tax bullet, but now have put their families into a capital gains vice.
With capital gains rates set as high as 23.8% in 2013, many families are going to find the costs of selling real estate in years to come is going to come at a pretty penny – and an unnecessary expense due to panic planning.
Some people gifted property to their children directly. If they want to reverse this, the children can gift the property back. You nee to be very careful about this, as well.
When you gifted the property to you children, you likely used up some, if not all, of your lifetime credit. When your children give it back to you, they are going to be using some of their lifetime credit.
When they then inherit the property from you, they'll receive a stepped-up basis in the property which hopefully doesn't exceed the lifetime gift and/or the Unified Credit (one in the same) – less your prior gift – and have to pay estate taxes.
And looking forward, it may be easy for them to forget they gifted this property back to their parents – something IRS doesn't forget – and their children (your grandchildren) may be faced with estate taxes due to credit being used.
It's a travesty our leadership paints us into these corners by waiting so long to make such important decisions regarding estate planning. In 2010, we didn't know until December 17th. In 2012, we didn't know until December 31st. When you're painted into a corner and make forced decisions, there's bound to be mistakes made.
What I've found as an interesting sidebar to all of the intensity in estate planning at the end of 2012 is now that people feel like the pressure is off to do 'something', now they are not doing any of their normal planning. I get this feeling of 'whew, that's over – now I don't have to worry about planning until..' Everyone seems very unconcerned about estate planning now that these new laws were passed.
That's human nature, but that's like not having to worry about the huge hole in your roof now that the big rain storm is over.
What you need to be aware of are the issues that are still in front of you and still building.
We are going to see farmland continue to increase in value as long as there are profits being made in farming. Any investment asset will rise in value as long as the initial cost of the asset's return on investment (ROI) is higher than other comparable investments. In other words, if I can get 4% return on my farmland investment and 1% return on CD's, farmland will continue to rise in value.
With this continuing increase in value, families with farming children – and there seem to be much, much more of these in the past ten years – are letting their farming children get further and further behind the eight-ball as values rise. I'm still seeing Jr. has to buy the land at 80% of FMV from siblings, or pay a percentage of an appraised rate. There is no way in God's green earth a child farming is going to be able to pay their siblings the value of the land – even if it's at 80%! Every time you hear of a big land sale in your area, look at your farming child and say 'Well, his chances just went down because I didn't take the time to plan'.
The ultimate end of all of this huge increase in farmland values is that someday fifty percent of these children who just came back to farming in the past decade will not be able to afford to buy out the shares of their non-farming siblings. It's an old tune, but now paying the fiddler has gotten outrageous in the past ten years. Those who wait to solve the problem just lower their chances of a farming child or second generation farming.
Last but not least, there's no telling when the Department of Health and Human Resources is going to raise the look back period on gifts from five years. But with 48 cents on the dollar going to Social Security, Medicare and Medicaid, one has to believe that major changes are in the wind.