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Avoid estate tax traps

CHERYL TEVIS 09/19/2011 @ 3:11pm Cheryl has been an editor at Successful Farming since 1979.

Myron Friesen has seen the fallout when families fail to pave the way to a smooth transition with a well-designed plan. Friesen, who grew up on a Minnesota farm, co-owns Farm Financial Strategies, Inc., Osage, Iowa.

”Many families have some type of legal plan in place. But it's seldom proactive or formally designed to continue the farm operation,” he says.

Friesen says the two major questions he fields from families focus on how to:

● Reduce estate taxes

● Distribute assets

He says potential estate tax liabilities generally can be calculated.

“But it remains a challenge because we're shooting at a moving target due to changes in the law,” he says.

The current law passed last year offers opportunities to gift and use a $5 million federal estate tax credit.

“The credit typically is used at death, but can be used while living in the form of a gift,” he says. “This may be especially valuable now since the credit is scheduled to return to $1 million in 2013.”

He says an ideal asset to gift would be one likely to continue to appreciate in value. “Careful thought and planning must be given to the risks and rewards of using the credit during your lifetime and who you gift to,” he says.

Special use cuts taxes

Farm families also may shrink the value of their estate using special-use valuation (2032A) if the farming heir continues the operation and follows other guidelines. This estate shrinkage tool also may be valuable in determining fairness to non-farming heirs. See your attorney to learn if you meet other specific criteria.

Friesen says family members generally agree on methods of reducing taxes, but it doesn't guarantee a smooth transition.

“When the topic of estate distribution arises, then controversy begins to enter the picture,” he says.

When he works with families, he asks the owner generation what their goals are.

“If one goal is to keep the farm in the family and give the farm heir an opportunity to continue and expand the operation, then steps must be taken to make that goal possible,” he says.

In most cases, Friesen says this goal must be balanced with a plan to distribute assets to nonfarm heirs.

He finds that families differ in how to determine the share the nonfarm heirs should receive. “Some people attempt to calculate these numbers; others are willing to set a price,” he says. “There is not a right or wrong answer.”

He says the overriding objective is to identify Mom and Dad's goal and then document and fund it properly.

“Applying real numbers to each farm situation often can be very valuable in determining a realistic plan that can work for everyone,” he says.

Friesen says the key is selecting qualified advisers who meet families at their stage of planning and take them where they want to go in an efficient, realistic, clear-cut, and timely way.

To assemble this team, he suggests selecting for the following criteria:

● Knowledge of estate tax laws, distribution methods, and planning

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