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Estate tax bite could skyrocket next year

Ask an ag economist about the estate tax situation, and he may ask if you want the good news, worst possible news or so-so news first.

“The good news is that, right now, there’s no estate tax,” says George Patrick, a Purdue University ag economist. “If you settled the estate of a farmer dying today, you presumably wouldn’t pay federal estate taxes.”

That’s because Congress let the law governing estate taxes expire without acting. That eliminated estate taxes for 2010 only.

However, if Congress takes no action, estate taxes in 2011 will revert to those in effect 10 years ago. That’s likely the worst possible news, the ag economist relates.

“Limits on exemptions before estate taxes kick in are lower than those that recently expired,” he explains. “Plus, rates for taxation would be higher than rates that expired.”

Key Points

• There are no estate taxes in effect at the current time.

• Unless Congress acts, the estate tax reverts to levels of 10 years ago for 2011.

• Some ag economists believe Congress will act, but when and how are unknown.

Closer look

Based on earlier legislation that attempted to ease the burden of estate taxes, the exclusion amount was $2 million in 2008 and $3.5 million in ’09, Patrick reports. The term “exclusion amount” refers to the portion of the estate not subject to federal estate tax. For example, if an estate was settled in 2009 and total value was under $3.5 million, heirs didn’t owe federal estate tax.

Meanwhile, the tax rate in 2004 was 48%. It fell back to 45% last year.

However, here’s what happens unless Congress intervenes. Beginning Jan. 1, 2011, the exclusion drops back to $1 million, while the taxation rate rises back to 48%.

Most ag economists see a double-whammy. “Not only will exclusion limits be much lower, but valuation of property is likely to be considerably higher than 10 years ago,” Patrick says. “For example, land valued at $3,000 in an estate settled 10 years ago might be appraised at $5,000 per acre today. So you would have a much bigger estate, but a much smaller exemption and a higher tax rate.”

Third option

So what’s the so-so news? Congress could act, reinstating estate taxes, but modifying them so that exemption levels don’t drop as low and/or taxation rates don’t rise as high as would happen automatically. It would certainly be better news than no action at all, Patrick believes.

So what will the future hold? “We expect Congress will act before 2011, but we don’t know when, and we don’t know what Congress might do,” Patrick says.

“There will likely be some sort of estate taxes. Many people would complain loudly if there was no federal estate tax. The government also has a very large debt to worry about. In the big picture, what federal estate tax brings into the treasury is a small percentage, although it’s still a sizable sum.”

One thing you can do if you’re planning your estate today is allow your executor flexibility, Patrick says. “Maybe you set up your will so that the executor can establish a bypass trust if it makes sense, but isn’t required to do so,” he concludes.

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REAL OR NOT? This year’s zero federal tax on estates will likely prove as elusive in the long term as this reflection in a pond. Reality probably returns in 2011, either with the very stringent estate taxes of a decade ago or a plan modified by Congress.

This article published in the April, 2010 edition of INDIANA PRAIRIE FARMER.

All rights reserved. Copyright Farm Progress Cos. 2010.