Periodically, we receive questions from readers regarding specific legal issues they have encountered. Below are a few timely questions and our response.

What is a charitable remainder trust? My wife and I decided to retire from farming, and we have no heirs or any successor. We are charitably inclined but do need an income stream during our lives, or at least for a period of years to secure our retirement plans. I have several charities in mind that I would like to benefit. Can you explain how this type of trust works, and if I can change beneficiaries along the way?  A charitable remainder trust (CRT) is a type of trust that will ultimately provide the charity or charities of your choosing with a significant gift after a period of time or upon the death of the grantors. The first step is to work with your financial adviser, accountant and/or attorney to run the numbers and see if this option makes sense. If it does, the attorney creates the trust. After the trust receives the assets (land, equipment, grain, etc.), the trust sells them, and there is no tax incurred at that point because the trust is charitable. So, the CRT may reinvest the full value of the sales proceeds. There are two types of CRTs: a charitable remainder unitrust, or CRUT, where the donor gets paid a percentage of assets in trust; and a charitable remainder annuity trust, or CRAT, where the donor’s payments are fixed. Your advisers can help you decide which option is best for you. They also avoid social security tax on the self-employment income from the crop sale. You can also change the charities you wish to benefit (just make sure that language is included in the terms of the trust.)

When people refer to the “bonus” exemption for federal estate tax, what do they mean? What is the current exemption amount, and when does the current law “sunset”? How do I plan when the future of the law is uncertain? Congress passed the 2018 Tax Cuts and Jobs Act (TCJA), temporarily doubling the lifetime gift, estate and generation-skipping tax exemptions to $10 million from $5 million. These numbers are adjusted to account for inflation each year. So, in 2018, the exemption was $11.18 million from $5.6 million. This year, the exemption amount hit its highest mark at $12.06 million.  As stated above, the 2018 estate tax exemption increase is set to drop back down to $5 million (adjusted for inflation) Jan. 1, 2026. That is why some refer to it as a “bonus exemption.”

If Congress does not successfully amend these provisions prior to 2026, its very reasonable to plan that the exemption will go down. One of the things I tell my clients is to develop a plan that is flexible enough to change down the road. There will always be changes in the laws, and you shouldn’t let proactive planning go by the wayside while waiting out Congress.

The value of the assets owned by the farming spouse at their date of death determines the tax that could be due to the federal government, if any. This year, the first $11.58 million of assets are exempt from estate tax per person. Thus, a farm family can accumulate approximately $23.16 million this year and be exempt from federal estate tax if tax planning is handled properly. Remember, no estate tax is due on property distributed to the surviving spouse. Federal estate tax would come into play at the death of the second spouse, if there are assets above the exemption amounts.

Further, certain assets get a “step-up” in basis upon death, including farmland — meaning that the value at the date of death is the basis that the person inheriting will receive. Thus, if that person sold the farm, they would have some relief from a hefty capital gain bill with IRS.

I have heard my farm accountant reference “portability” in the context of estate tax planning. What is portability, and why is it important? Do you foresee any changes in this area? When one of the spouses dies, the surviving spouse can make what is called a portability election. Thus, any unused federal gift or estate tax exemption can be transferred from the deceased spouse to the surviving spouse and added to the surviving spouse’s exemption amount. For example, if husband passes in 2022 with an estate valued at $6 million, there will be roughly $6 million to “port” to wife that may be used upon her death. This amount is sometimes referred to as the deceased spousal unused exclusion (DSUE).

Portability has been allowed since the American Taxpayer Relief Act of 2012. Portability must be elected in the estate of the first spouse to die by the due date of the Federal 706 estate tax return — nine months after the spouse’s date of death, or the last day of the period covered by an extension if one was filed. Just last month, the IRS issued a revenue procedure, Rev. Proc. 2022-32, which allows estates the ability to elect portability of a DSUE amount as much as five years after the decedent’s date of death. Fortunately, prior law made portability permanent. So, it would take a legislative change to remove the popular provision. It is not subject to the sunset discussed above. The IRS continues to propose regulation in this area. Consult your trusted advisers on these issues.  

Herbold-Swalwell is with Parker & Geadelmann PLLC. Email her at [email protected].