Estate, business planning
December 17, 2012
"I'm here to spark something in you to act or prepare for the future," said Brian Kirby, partner in the law firm Linquist-Vennum, based out of Sioux Falls, SD. Kirby was a featured speaker at the South Dakota Cattlemen's Association's 64th Annual Convention and Trade Show held in Huron, SD, on Nov. 27-29.
The big topic of the day was the estate tax. As Congress makes a final decision on the death tax, ranchers are feeling the heat. By Dec. 31, the estate tax, as it stands now, will expire. What happens next?
"As of Jan. 1, the tax rate could be set at a $1 million exemption with a 55 percent tax rate," said Kirby. "I've also heard rumors that it could be $3.5 million with 35 percent tax rate. Who knows what they will do? As of now, the exemption is $5.1 million per person, so you can give away $10.2 million per couple, so why not gift it right now? You could save millions of dollars by thinking ahead."
With that in mind, Kirby said 90 percent of folks either don't have an estate plan or have one that is inadequate. He stressed the importance of planning your estate.
"Why plan your estate?" he asked. "The objective of an estate plan helps to have your property go where you want it to go. It minimizes taxes. It protects the fruits of your labor. It prevents the state from stepping in and deciding for you. It reduces probate cost. You've all worked hard to build your ranches; it would be foolhardy to just let it blow away in the wind."
Kirby explained the different ways ranchers can allocate their assets after their death.
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"A will essentially tells the story of who gets your assets and when," he explains. "It allows you to name your own personal representative, controls the time for distribution to beneficiaries and minimizes death taxes."
Gifting is one scenario that could be beneficial through 2012, for sure, said Kirby.
"You can gift $13,000 per year per beneficiary," he explained. "There are no limits if gifts are given directly to qualified charities or direct payment of educational or medical expenses. You may also give away $5,120,000 during your lifetime without you or the recipients having to pay any tax on the gift. These rates are for 2012 only; they are expected to be reduced."
A trust is another way to give away assets. A trust is a contractual arrangement by one for the benefit of another.
"A revocable living trust means you can change it as much as you want until you die," he said. "A sprinkling trust allows your kids to mature and receive your assets as they grow up. Incentive trusts can require your children to go to college in order to receive the money. You can also have irrevocable trusts where you can put life insurance in a trust to get it out of your estate. There is no income tax on an irrevocable life insurance trust; no investment is needed. This may be the right move for you."
If done properly, families can avoid the burdensome death tax. Planning ahead is key. Do you have a plan in place? Are you ready to pass on your farm or ranch?
"Note that all transfers of wealth between taxes are tax-free," he added. "A spouse may receive a percentage of the augmented estate based on length of the marriage: 1-2 years gets 3 percent; 10-11 years gets 30 percent; more than 15 years gets 50 percent."
What holds people back? Kirby said it's dealing with your own mortality.
"Your responsibilities and what you own dictates whether you need an estate plan," he said. "If you have a ranch, a kids, a spouse, you owe it to your family to get your act together. The fear of death can cause catastrophic problems if you don't deal with it. It's that simple; you've got to have a plan."