Don't Sell the Farm!

Over Thanksgiving Break, I was talking with a family of farm descendants. Their father died and his estate consists mostly of farm acreage. The appraised value of the land was considerably high and would subject the estate to a large amount of estate tax liability. Of course, there is little liquidity to pay any estate tax.

They need to consider whether the real property qualifies to use a special use valuation. The advantage is that the real property is valued at its farm use value rather than its fair market value. If the farm is located in Ohio and passes from the decedent to a qualified heir, such as a surviving spouse or children, it may qualify. The farm property must be devoted exclusively to an agricultural use. Also, the adjusted fair market value of the farm real estate must be at least 25% of the value of the decedent's adjusted gross estate.

Recommended Website: USA.gov

Another website that you might want to be aware of is USA.gov, which is the United States Government's official web portal. There is a section on vital documents and what to do if they are lost or destroyed. This covers everything from your passport to damaged U.S. currency. Other topics are benefits (with a benefit calculator included), government jobs and government auctions.

The Qualified Domestic Trust

As stated in our previous post, the unlimited marital deduction is disallowed for distributions to non-citizen spouses. There is an exception to this disallowance however. A Qualified Domestic Trust (QDOT) can be created whereby property can pass to the non-citizen surviving spouse and qualify for the marital deduction. The QDOT can be created post-death provided that the property is transferred to the trust or is irrevocably assigned prior to the estate tax return due date.

The Unlimited Marital Deduction

There is no estate tax liability for assets passing from a deceased spouse to the surviving spouse. Both Ohio and federal provide for an unlimited marital deduction for the transfer of property between spouses. This is based upon the view that the husband and wife are one economic unit.

The marital deduction applies to transfers during lifetime and at death. The deduction is only for U.S. citizens regarding property passing from one spouse to the other (the citizenship requirement is to ensure that the government can ultimately collect the estate tax from the surviving spouse's estate). This is one reason that estate planning attorneys want to confirm that husband and wife are both U.S. citizens (especially with Ohio's close proximity to Canada).

Technically, the marital deduction simply defers the estate tax and does not avoid it. While an outright bequest of decedent’s entire estate to a spouse will eliminate estate tax at the decedent’s death, the surviving spouse’s estate will be taxed on all of the assets transferred from decedent (that is unless the surviving spouse consumes or gifts away the assets). As a consequence, the marital deduction simply defers the tax to the second estate.

What Happens to the Exemption for Generation-Skipping Transfer Tax in 2011?

We are already Mid-November and nothing has happened legislatively regarding the federal estate tax exemption. Although the Generation-Skipping Transfer (GST) Tax is independent of the federal estate tax, legislative changes to the exemption amounts would likely occur at the same time. Since 2004, the GST exemption equaled the estate tax applicable exclusion amount. In 2009, the GST exemption was $3,500,000. In 2010, the GST was repealed, and in 2011 the tax will be back with an exemption amount of $1,060,000,indexed for inflation.

The GST tax is imposed on asset transfers to "skip persons". "Skip persons" are generally grandchildren and later descendants of the donor, if the donor's child, who is the parent of the donee is living.

The government's concern of generation-skipping transfers is best shown by example.

Rich Guy-àGuy's son-àGuy's grandson-àGuy's great grandson

V V V

First Estate Second Estate Third Estate

In the normal case, you would have 3 separate estates from which the government could tax. However, where Rich Guy's estate is placed in trust with son and grandson having right to income with principal going to great grandson, Rich Guy gets similar result and 2 generations of estate tax skipped.

Will the federal government act in the short term to change the GST exemption amount or will it go back to its 2001 level?

A Lunch with the Ladies of the Grandview Civic Welfare Club

I have waited months and months for the motivation to return from my blog hiatus. As it turns out, my inspiration is a 90 year old club in Grandview, Ohio. Yesterday, I had the privilege to speak to the members of the Grandview Civic Welfare Club. A perk of being a male speaker for an all-ladies club is gaining admission to one of their meetings. (They meet the second Wednesday of each month at the Grandview Heights Public Library). What did I observe? A concise and relevant meeting of a group that prides itself on helping the communities of Grandview and Marble Cliff. The club was recognized last month by Mayor Ray DeGraw when he presented the group with a proclamation, declaring October 13 as "Grandview Civic Welfare Day" in the city. While a proclamation is nice and well-deserved, these members appear to be motivated by serving their community. There is also the fun aspect. If you are ever at the Grandview Heights Public Library's lower level and hear laughter, chances are it’s the Grandview Civic Welfare Association.