Fears of Estate Tax Exemption Boogeyman Subside

After the recent presidential election, the likelihood of the estate tax exemption being cut is much less of a concern, says ag attorney John Schwarz, but there are other issues that still need to be addressed.

Last year, he wrote a column about the repeal of the federal estate tax exemption and how certain estate and succession planning steps needed to be considered. Since the election, however, many experts say there’s no chance the estate tax exemption will be cut. 

As a refresher, an individual can currently shield $13,610,000 from the federal estate tax, or $27,220,000 for a married couple. Pre-election fears were that the current law would sunset January 1, 2026, reverting the amount that could be shielded to $6,800,000 per person with “adjustments for inflation,” or around $7,500,000 million per person.  

Now, the most likely scenario is that the law will be renewed for many years and the exemption will continue to climb as it has for more than a decade. The Repeal Boogeyman has melted away like the Wicked Witch of the West being doused with water in the Wizard of Oz.

Now that the Repeal Boogeyman has been vanquished for what could be a very long time, let’s take a look at some of the other factors and situations that can create major financial harm to farms, even to the point of bankruptcy.

Long-Term Healthcare

This is an expense that can decimate a farm operation. Most farmers can point to a farm in their community that had to be sold to pay the nursing home.  While the nursing home costs likely did exceed the individual’s finances, it’s a sure bet that Medicaid estate recovery had a part to play.  

If a person applies for Medicaid, they must spend down their cash assets in order to qualify, which means their estate is cash poor. If Medicaid pays for a long-term healthcare facility, after the person dies, it can file a lien against their estate to be paid back for those expenses. In that case, the estate’s assets — which almost always include land — must be sold. 

Lawsuits and Penalties

Another area that can sink a farm faster than the federal estate tax is lawsuits and environmental penalties. Volumes could be written about all the things that can go wrong on a farm, leading to ever-increasing jury awards against the business.

If the farm/ranch semitruck causes an accident, they could be staring down a multimillion-dollar lawsuit, and it is not out of the question for the amount of damages claimed, plus the jury verdict, to be in the tens of millions. A farmer simply cannot have enough insurance to protect against lawsuits arising from a serious injury or death.  

Another example is if a large fertilizer spill enters a waterway and causes a fish kill in a lake. Not only will there be a fine and massive cleanup cost, but if you ruin the fishing or recreational activities on a lake surrounded by residents, you’ll be hearing from those folks as well via lawsuits. 

Legal Entities

Bad things are going to happen if you farm long enough; it’s just a matter of how bad, and when. Is the farm structured properly to withstand bad legal weather blowing in? Does the farm utilize legal entities? If not, they should. I’ve seen farm operations survive lawsuits only because of the use of multiple legal entities. 

If a farm/ranch is using legal entities, are they doing what they need to do to keep a plaintiff’s lawyer from “piercing the veil” of the various companies to get to the farmer/rancher personally? In most states, if you don’t have a company minute book, hold regular meetings, pass resolutions, and so forth, the door can be opened for the farm/ranch to be sued personally along with their company. 

Routinely, people show up at my office with a minute book that has not been updated for years — sometimes decades — or with no minute book at all. Sadly, in these cases, having a legal entity gives a false sense of security. 

Wills and Trusts

With the increased value of farm estates, heirs are more likely to contest a will or a trust if they feel slighted by what they receive. Few things are more disheartening than having put time and expense into generating a farm estate plan, only to see it undone by legal action contesting the plan. Most people don’t expect anyone to contest their will or trust, but it only takes one disgruntled heir to bog an estate down in expensive litigation for years. 

Some states allow for “pre-mortem validation,” where a copy of a person’s will and/or trust is provided to heirs, who have a certain time limit — while the person is still alive — to contest it. If they do not, then they cannot contest after the person’s death. 

Unless the federal estate tax is eventually repealed, farmers will need to keep it on their radar, especially if the farm asset values are near or above the exemption level. But, for the vast number of farms in this country, there are greater evils lurking that can sink the farm operation.

EDITOR’S TAKE:

Talk with most farmers and the one tax they fear most is the “Death Tax” or as it is otherwise known – the Estate Tax. More farms have been ripped apart and sold in the past because the tax exemption was so small and the family could not pay the taxes without selling off the assets. That is why many farmers cheered when the exemption was raised to its current level. However, as the article points out, there are several other boogeymen lurking in the shadows. I could go on for a long time about the need for real Long-Term-Care Insurance reforms. Unfortunately, even if a person can qualify, the ever-increasing premiums can be problematic. Also, the inability to purchase a policy that will adequately cover an extended stay can be a challenge. The other scenarios discussed in this article are also very real problems facing farmers/ranchers. They must be vigilant in order to avoid potential threats to the longevity of the farm/ranch operation. You can help them protect their truck with CAD Protect – a plan designed specifically to cover farm/ranch use!