By Paul G. Neiffer
Farm couples can be worth about $11 million and not owe any federal estate tax. However, farmers in Washington state are subject to a state estate tax which starts at a little more than $2 million of net worth and the tax rate reaches 20 percent at $9 million (the highest in the country). With an acre of land worth close to $20,000 in the Columbia Basin, it only takes 100 acres of land to hit this level.
However, the state exempts certain farm assets from this tax. The rules on this are complex and beyond the scope of this column, but most active farmers should be able to escape the Washington state estate tax on farm assets with proper planning, assuming they are actively farming the ground.
Most farmers (and other business owners) have already filed their income tax return this year. However, this is a great time to get started on your estate tax/succession planning for the remainder of the year. There are several steps that can be initiated now to help make this process smoother and more efficient than waiting until the last few days of the year.
First, most farmers and business owners prepare an updated balance sheet for the bank to show the value of their business assets and liabilities. Now is a great time to take that balance sheet and update to reflect all of the other assets you may own that were not listed. For example, personal assets and investments and the estimated proceeds from life insurance.
After updating the listing of assets and their related values, you should then make sure to reflect the ownership of each of these assets. Based on this ownership, we can then determine if appropriate discounts are in order.
For example, if a farmer owns 1,000 acres of good farmland worth $10,000 per acre and the ownership is in his/her name, the estate tax rules indicated we must value this at $10 million. However, if the land is held in some type of limited liability entity, or LLE, then we can usually discount this by at least 30 percent and the value for estate purposes would be about $7 million.
Once appropriate values are in place reflecting these discounts, run projections to determine if you may owe federal or state estate taxes. If so, what steps are you reviewing to take to minimize the tax?
Next, the farmer or business owner should closely review all of their estate and succession planning documents to determine if they are up to date. These documents include, but are not limited to:
We find many farmers will get some succession planning work done including appropriate documents and then stuff them in a drawer never to be looked at again. These documents are part of the ongoing succession planning process and need to be reviewed periodically.
Last, now is a perfect time to review assets you may want to gift this year to take advantage of the $14,000 per donee annual exclusion.
If you have three or four children with six to 10 grandchildren, it is fairly easy to gift away $500,000 of annual gross value. However, once the year is gone, it is too late to go back to make the gift.
Now is the time to review the appropriate assets to give and it is much easier to make the gift now than wait until the holidays when everything slows down.
Proper succession planning is an ongoing process and I hope we have given a couple of ideas on steps that you should take right now to keep the process going. Don’t wait any longer.
[panel title="About Paul G. Neiffer:" style="info"]
Paul G. Neiffer is an agribusiness certified public accountant and business advisor specializing in income taxation, accounting services, and FSA planning related to farmers and processors at CliftonLarsonAllen LLP in Yakima. The company also has offices in Kennewick. He grew up on a farm in Walla Walla County and recently bought a farm in Columbia County.
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