Estate Planning Update

ARTICLE – ESTATE PLANNING UPDATE FOR LANDOWNERS
Recent legislative action has provided us with a new gift and estate tax law for 2011 and 2012, although a temporary one. In a surprising move to many, congress and President Obama signed into law a modification of the “Economic Growth and Tax Relief Reconciliation Act of 2001“ Here is a table that shows the estate tax exclusion rates that began in 2001 and the new exclusion rates for 2011 and 2012
YEAR EXCLUSION FEDERAL ESTATE TAX RATE
2001 $675,000 50%
2003 $1,000,000 49%
2005 $1,500,000 47%
2007 $2,000,000 45%
2009 $3,500,000 45%
2010 Unlimited -------
2011 &2012 $5,000,000 35%
***2013 ***$1,000,000 ***55%

*** These will be the Estate Tax Exclusion rates in 2013 if no changes to current law are implemented.
In essence, exclusions simply are the amount of money or other assets that our estates can accumulate without the penalty of additional taxes being imposed at the time of our death. In this case, the exclusions listed above are for federal estate taxes. So, with the passing of this temporary modification, the 2011 and 2012 Estate Tax Exclusion has been set at $5,000,000 for each individual. Total assets of an individual estate that total less than $5,000,000 should not present any federal estate tax consequences in 2011 and 2012.
In addition to the new federal exclusion amounts for 2011 and 2012, there are new special rules for married couples. If one of the spouses were to die in 2011 or 2012 and did not use up the entire $5,000, 000 exemption, the amount of exclusion left may be used by the surviving spouse. The best way to explain this is probably with an example. Let’s say that Joe and Sally are married. Joe unfortunately dies in 2011 and leaves $1,000,000 in assets to Sally. Under the new rules, if Mary were to die let’s say in 2012, her estate can use both her $5,000, 000 exemption and also use the $4,000,000 exemption left over from Joe’s estate that had gone to Mary. Her estate then could leave a total of $9,000,000 in assets to her heirs without federal estate tax consequences. In the past, a married couple would need to set up a by-pass trust to accomplish this.
The discussion thus far in this article has focused on the temporary modification of the “Economic Growth and Tax Relief Reconciliation Act of 2001 and how it affects federal estate taxes. Another portion of the “Federal Gift and Estate Tax Law” focuses on the rules related to gifts made yearly and in total over a person’s lifetime.
• From 1/1/06 through 12/31/08, the annual tax free allowance for gifts from individuals had been $12,000. As of 1/1/09, this increased to $13,000.In other words; any individual can now “gift” $13,000 in assets (property, cash, or other assets) to any other individual(s) without filing a federal gift tax return and these gifted assets will not have any bearing on future estate or gift taxes.
(Ex.) I, as an individual, have 3 children. I give each $13,000 in cash in 2011. I do not have to file a Federal Gift Tax Return for 2011 and the monies given have no effect on my Lifetime Gift Tax Exclusion. (Please keep in mind also that there should be no tax liability to the receiver of these gifts.)
• For married couples, each is allowed to give $13,000 per year or $26,000 combined without adding to the gift tax exclusion and filing a gift tax return.
(Ex.) My wife and I have 3 children. We each individually give a $13,000 gift to each of our three children in 2011. Neither of us would need to file a federal gift tax return and the monies given have no effect on our Lifetime Gift Tax Exclusion.
Lifetime Gift Tax Exclusion – In addition to the annual tax free allowance for gift taxes, there is also a Lifetime Gift Tax Exclusion. This is the total amount of assets in one form or another that can be gifted away without incurring any federal gift tax during a person’s lifetime. In 2010 the lifetime gift exclusion was $1,000,000. For 2011 and 2012, the lifetime gift tax exclusion has been increased to $5,000,000, the same figure as the estate tax exclusion rate. Please keep in mind that when gifts are given to another individual in any one year and exceed $13,000, a federal gift tax return must be filed (IRS Form 709, United State Gift Tax Return) which will then reduce the Lifetime Gift Tax Exclusion and also the Estate Tax Exclusion amounts available.
As you can see, the current federal estate and gift tax laws are somewhat complicated. Changes made for 2011 and 2012 are significant and will certainly have an effect on local landowners and the estate planning decisions that are currently being made.
This article is written by Gary Hennip, Penn State Extension Educator and has been written for educational purposes only. These issues should be discussed with professional financial advisors and attorneys who have a good understanding of state and federal estate laws, the natural gas industry, and the implications that lease and natural gas royalty payments may have on local landowners.

IRS Section 2032A - Special Land Use Valuation

In my last post, I discussed in general, an alternative estate tax valuation (IRS Section 2032) of an ongoing farm operation. These bullet points with more specific information were found in a publication entitled Estate Planning and found at this website. (http://www.farmestateplan.com/).

For an estate to take advantage of section 2032A special land use valuation, it must meet several conditions. The considerations for qualifying are:

• The farm estate must be made up of "real property" used in farming that has a fair market value of at least 25% of the total value of the adjusted estate


• The farm assets, both real and personal, must make up at least 50% of the estate


• The farm real property must have been owned by the deceased (or a family member) for 5 of the preceding 8 years


• The real property qualifying for special land use must pass to a qualifying heir (usually a family member)


• For 5 of the preceding 8 years, the qualifying real property must have been farmed or materially participated in by the deceased or a member of the family


• The executor must file an election for 2032A, with an agreement signed by each person having an interest in the property, consenting to the liability for any estate tax recapture that may occur later

As I am reading this, it reminds me of another reason to consider estate planning for those in the northern tier who will be receiving large amounts of natural gas royalties and lease payments. If at the time of a landowner's death, no estate planning has taken place, then the opportunity to use IRS 2032A is less likey to be available. This is because of the first two bullet points listed above. It will be more likely that the farm real estate will make up less than 25% of the total value of the estate and total farm assets will make up less than 50% of the total value of the estate.

Federal Estate Issues and your Farm

Farm Estate Tax Deduction with 2032a - With the Natural Gas Phenomenon contiuing in many parts of Pennsylvania, questions regarding Estate Planning have become abundant. One question that I am hearing from some farmers is the question of Special Land Use Valuation. Basically, if my farm enterprize continues after my death, are there any Federal Estate Taxbreaks given to the inheritors of my farm? The answer is yes based on the Internal Revenue Code Section 2032A, Special Land Use Valuation.
The purpose of Section 2032A is to allow farmland to be valued as farmland. In essence, it establishes a productive value that is less than the farmland's fair market value. I will try to delve into the specifics of section 2032A in future blogs. In the meantime, if you would like more information, here is good resource.
IRS Publication 448 Federal Gift and Estate Taxes

P.S. Please keep in mind that section 2032A is related to farming enterprizes. This would not include future income derived from natural gas drilling and underground assets.

Estate Planning

Wow it has been 2 months since I have posted. In this post I would like to share some information on estate planning for landowners. The natural gas play in our area of northern Pa. is going to change the bank accounts and estates of many landowners. For information regarding estate planning, go to the Bradford County website( http://bradford.extension.psu.edu/) and click on (Estate planning for landowners with gas leases). Let me know what you think.

new milk futures update

AS of today, October 6, 2009 we have seen another uptick in the near term dairy futures market. Today October 2009 up $.04 to $12.84, November up $.27 to $14.27 and December up $.23 to $14.72. What price can a dairy producer expect based on these futures prices?
As any good extension educator will tell you, "It Depends" It does really depend on the individual basis that each farm has. If your basis (simple definition is the difference between the futures price and the mailbox price received) is $2.00 then you can plan $2.00 over the class III price. Same if your particular basis is $3.00. I would use at least three years worth of milk prices to begin to get an accurate picture of the farm's basis.

Dairy Update October 2, 2009

Lots of things happening right now in the dairy industry. Yesterday we heard that $350 million would be available to the dairy industry, $290 million of that going to direct payments through the US Secretary of Ag. Today there apparently is some hold up as to how payments would be distributed with California legislator Barbara Boxer arguing that payment should not be based on the MILC limits of 2.985 million pounds of milk production. Senator Casey and Senator Shumer would like to see payments with the same limits as MILC.
We will see where the arguments falls out.
Class III futures increased substantially today with October '09 up $.07 to $12.79, November class III up $.21 to $13.96, and December '09 up $.27 to $14.45.
Some of you may have seen on the news that a dairy producer in Pennsylvania is seeing the media clout of PETA with a video of the farm being widely distributed. Folks, lets not forget the importance of animal well being. Animal rights people seem to be now focusing on our dairy industry. let's make sure we don't give these folks anything to talk about in the media.

Good news to report. Total number of dairy farms taking advantage of dairy advisory teams in the three county area of Bradford, Susquehanna, and Tioga, is currently at 29. Wow, very impressive.
Finally, a 3rd round of herd retirements through CWT was announced yesterday. Dairy producers have until October 15th to have bids postmarked. A cap of $5.25 on bids will be applied again in this round of retirements. For more info, here is the website address, www.cwt.coop.

Profit team meetings

Dairy profit teams can help local dairy producers increase profits, find and correct bottlenecks on the dairy farm, and be an excellent sounding board for ideas. Thanks to funding provided by Pa Department of Ag and the Center for Dairy Excellence, the northern tier of Pennsylvania is home to many active profit teams that meet on a regular basis. Here is short video clip demonstrating how a local team may operate.

A little email humor

Here at Penn State Extension the email world seems to have taken over just about every part of our communication. With 40 and 50 emails a day, there is certainly a good chance that I miss one from time to time. Sometimes I miss responding to an important one because quite frankly I look at it one day, don't respond immediately and then forget it was ever there. These jokes fit in with this idea about how emails have taken over our lives.
You wake up at 3 a.m. to go to the bathroom and stop to check your e-mail on the way back to bed.
You refer to going to the bathroom as downloading.
You check your mail. It says "no new messages." So you check it again

Milk Futures as of June 9,2009

The volatility in the dairy market place continues to increase. This includes large price swings in the Class III futures markets. Take a look.

1. February 9, 2009 - price of June class III milk predicted at $12.47


2. March 9, 2009 - price of June Class III milk predicted at $11.44


3. April 9, 2009 - price of class III milk predicted at $11.68


4. May 8, 2009 - price of class III milk predicted at $10.55


5. June 8, 2009 - price of class III milk predicted at $9.92

July, August, September, etc same volatility.

Dairy farmers are currently very pessimistic about the dairy industry and rightfully so. There are various suggestions out there. Whatever changes might be made need to happen soon as our local farmers are losing equity very quickly.

MILC Update

Well, we have seen the first of the MILC payments being distributed for 2009. The first payment was for February milk and payed $1.51 per hundred weight of milk produced.The preliminary for March milk is above $2.00. Final calcualtions will be made as soon as the final figures come in for soybean, corn, and alfalfa hay prices. I will try to keep you updated as soon as I receive these final prices from NASS.