We have two children – one who has been working with us on the farm for quite some time, but has his own farm operation as well. We also have a daughter. Up until the past ten years, we always had enough money in savings that we felt if the farm/ranch went to our son and our liquid assets went to our daughter that this would be a fair and equitable inheritance. However, the past decade the land has inflated ten times over, but our cash savings has not.
With the increase in land, we are likely facing estate taxes. What should we be concerned about? Is the change in administration going to help us on taxes?
– Two Big Headaches
Dear Two Big Headaches:
Regarding the change in administration, we can see President Trump was likely elected because President Obama had an agenda he wanted to push – which he did. Now, President Trump has tried to undo everything Obama did while in office in the first week.
President Obama pushed his agenda too hard and many Americans didn’t like it. So, we elected the most right-leaning nominee in history and now Trump is pushing entirely in the opposite direction. You’ll note, Obama became president because a lot of people didn’t agree with Bush’s policies, so the pendulum swung back to moderate liberal. Now we’ve elected Trump to countermand Obama and back and forth the pendulum swings – perhaps now to the highest levels ever seen.
Who is to say, if Trump pushes his agenda as hard as he has started that the country won’t grow tired of his politics too and so the political pendulum swings back again? The next election may be even further left than where Obama was if Trump angers enough people.
If Trump is successful in changing income taxes and estate taxes, wouldn’t his successor, if recent history is any lesson, come right back with his own agenda and return income and estate taxes to fit his/her agenda?
The best thing to do is take the current estate tax, deal with it as it stands now with roughly eleven million exempt, and hope you die at the right time. There are rumors George Steinbrenner knew he was dying in 2010, when we had no estate taxes for one year, and refused treatment so he would die in a year with no estate taxes. I don’t want you to go to those lengths, but timing is everything.
The other big problem you have is the inequity between your son and daughter and will certainly be exacerbated by the issue of how things are handled upon your death.
The law states estate taxes must be paid within nine months of the date of death or there is a twenty-five percent penalty and interest accruing thereon. As such, most estates are consolidated into two categories, much as you’ve done with your will, land and liquid assets. The liquid assets are generated from any savings, checking, stocks, bonds as well as grain held for sale, sale of equipment, life insurance proceeds, etc.
All of these proceeds are placed into its own tax entity, your estate.
The problem for your daughter is going to be this.
All of your legal debts need to be paid before they can settle the estate. Legal debts are funeral, internment, taxes due (both estate and income taxes) health costs proceeding death, and legal fees. Most estates have debts and most of them will have income taxes to be paid, as most farmers die with grain yet to be sold or crops in the field.
Guess which side all of these costs come out of – the legal fees, the estate and income taxes, the debts owed? Of course, most personal representatives are going to pay these costs from the checking account of the estate. They are not going to sell land or other farm assets to raise money for these costs.
However, the will states the daughter gets the liquid assets. What the will doesn’t say but what really happens is the daughter gets the liquid assets after all the expenses have been paid out; all the income taxes, estate taxes, legal fees, debts, and health costs, funerals, etc.
So now, how angry of an heir do I have who, in her mind, had to pay all of the costs out of her inheritance while her brother got his land, machinery, livestock, etc. without paying a dime of costs?
Most people don’t realize this is how estates are handled and would be aghast to find that one of their children had to bear all of the costs of the estate while the other walked away scot free.
How do you fix this inequity? Read “Two Big Headaches: When There is Inequity in Your Estate Plan, part 2”