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Estate Taxes and Planning for Family
Forest Owners
Dr. Tamara Cushing
July 26, 2013
National Tree Farmer Convention
There are two camps when
you talk about estate
planning:
Those who are scared
or don’t want to talk about death
And those who see opportunity
And a chance to provide for the future
Why are you here?
O I don’t want my hard-earned money going to
the IRS
Why are you here?
O I don’t want my hard-earned money going to
the IRS
O I want my family to be taken care of when I
die
O I spent a lot of money and time in those
woods and I want the land to stay in forests
O Nothing else to do
Why I’m here
O Interested in keeping land in forests
O Interested in keeping your money out of the
fed’s pockets
O I love talking taxes
The disclaimers…
O Tax law is very complex
O Often hinges on details
O Always changing
O NOT tax advice
Agenda
Why plan?
Why not?
How to get started
How to lower estate tax
What exactly is my estate?
Cash and bank accounts
Stocks and bonds
House & belongings
Insurance policies?
Business assets
Land & trees
Estate Tax Basics
O All assets are valued as of date of death
O Valued at Fair Market Value
O Alternate Valuation Date
Why is estate planning important?
O Long planning horizon for forests
O Illiquid asset
O Appreciation of woodland assets above
inflation
O Surprise when valued after death
O Describes what happens to your property
when you are gone
Why people don’t plan
O “I don’t have enough assets to worry about”
O “Planning costs too much”
O “I don’t want to think about dying”
O “I don’t want to worry my kids by talking about my death”
“I don’t have enough assets to worry about”
O Are you land rich and cash poor?
O how would you know the answer to this?
O Land and timber are appreciating assets
“Planning costs too much”
O Valid argument but what is the alternative?
O 33% of estates surveyed in 1998 study paid federal estate tax
“I don’t want to think about dying”
O It is often quoted that two things in life are certain, death and taxes.
O Death is inevitable, we will all die one day. It is best that you have your family prepared for life afterward with as little hassle as possible
O This is the hardest part, opening the dialogue
“I don’t want to worry my kids”
O Chances are they’ve thought about it but are
uncomfortable bringing it up.
O Find a time to discuss with your family.
Everyone will benefit.
How do I get started?
O Determine your goals
O Continuity of forest management
O Keep in family
O Direction for management
O Restrictions on use (what are the implications
of this?)
O Minimize transfer costs
O Provide for dependents and heirs
What are your goals?
O Do all family members have the same goal?
What does the property mean to you?
O On a scale of 1 to 10
O 1 = financial asset only
O 10= priceless family heirloom
Talk Talk Talk!
O Communication is key
O Talk to heirs
O Understand (without judging) the choices
they are likely to make
How do I get started? O Form your planning team
O Consulting forester
O Tax planning attorney
O Accountant
O Executor
How do I get started?
O Collect information
O Value of your assets
O Future appreciation
O Basis of assets
Valuing your assets
O Value = quantity x price
O Inventory & current market prices
O Assets valued at fair market value on date of
death (in general)
O Fair market value – price which property
would change hands between willing buyer
and willing seller neither under any
compulsion to buy or sell and both having
reasonable knowledge of all relevant facts
More on valuation
O Estimate price appreciation by looking at
price trends and using knowledge of market
(consultant handy for this)
What is basis?
O A measure of an owner’s investment in a
capital asset
O Capital asset: generally property held by the
taxpayer
O Does not include inventory, depreciable
property
Why Do I Need Basis?
O Very important at the point of sale
O Will reduce your taxable gain!
O Also important for gifts
O Helps determine donee’s basis, gift tax due
Time of Sale
O Determination of taxable gain
O Sales price – basis - expenses
Determination of Basis
O Purchase
O Gift
O Inheritance
O Exchanges
Property received through inheritance
O Basis equal to fair market value
O At date of death or alternate valuation date
O If special use is elected, that value is used
O Results in a “stepped-up” basis
How do I figure out my basis if it was never done?? O Called a retroactive basis determination
O Requires research
O Will need to determine timber prices
O Volume estimation
Who do you want to inherit your property?
O Spouse
O Children
O Grandchildren
O Siblings
O Nieces & Nephews
O Friends
O Charitable or Conservation Organizations
O Your college?
Prepare a will
O Properly executed legal document directing
how to handle your assets
O Need solid legal advice
O Without one, considered intestate
Have a management plan!
O Tells heirs what your plans were
O Allows for continuity of management
How do I get started?
O Determine your goals
O Form your planning team
O Collect the information
O Talk Talk Talk
O Prepare a will
O Have a management plan
Changes to Estate Tax
O 2012: 35% $5.12 M
O 2013: 40% rate
O $5 million effective 2011
O Portability
O Indexed for inflation
O $5.25 M
OPermanent
How to lower estate value?
O Use both exemptions ($5.25 million each)
O Gifts ($14K)
O Charitable contributions
O Special-use valuation
O Many other tools, talk to your attorney!
Special-Use Valuation
O Allows land to be valued at its current use
rather than highest and best use
O Up to $1,070,000 reduction in value
Special-Use Valuation
O Must transfer to qualified heir
O Used as farm for 5 of past 8 years
O Must have participated in farm activity
O Value of property must be at least 25% of
total estate
O Combined value of real & other business
property at least 50% of gross estate
Postdeath Requirements
O Continued ownership
O Material participation
O Qualified use continues
Material Participation Rules
O Taxpayer participates more than 500 hours
during year
O Personal participation is substantially all of
participation for tax year
O Taxpayer participates more than 100 hours,
no one else participates more
O Taxpayer has participated for any 5 of past
10 tax years
Material Participation Rules
O Taxpayer’s aggregate participation in all
“significant participation activities” exceeds
500 hours during tax year
O All facts & circumstances indicate regular,
continuous and substantial participation
Material Participation
O Can combine spouse hours
O Formal records not required, appt book
works
O If fail to “materially participate”, considered
a passive activity
O Deductions from passive activities are
limited to income from passive activity
Recapture of tax benefits
O Special use rules apply to heir for 10 years
O Triggered when:
O Property sold to unqualified heir
O Property no longer in qualified use
O Lack of participation by heir
O Conservation easement?
Recapture consists of tax benefit plus penalty
There are choices…
O Land & Timber
O Land Only
Problems for Forestry
O Lack of awareness of value
O Lack of liquid assets
O Lack of planning
Keep in mind…
O Tax minimization
O Take into account all consequences, legal,
financial as well as tax
Bottom Line
O Planning is critical
O Essential to open lines of communication
O Understand your options
Parting words
O “…nobody owes any public duty to pay more
than the law demands. Taxes are enforced
extractions, not voluntary contributions.”
O -Judge Learned Hand, 1934
Dr. Tamara L. Cushing
www.clemson.edu/extension/forestry
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