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Estate Planning for Ranchers
Gregory V. Gadarian, J.D. 1
I. GENERAL ESTATE AND GIFT TAX CONCEPTS
A. An annual exclusion is provided for gifts of $10,000 (or less) per donee.
B. A lifetime exemption of $600,000 is provided for gifts or bequests that are not
deductible.
C. Deductible bequests are bequests to a surviving spouse or a charity.
D. Estate tax rates.
1. The estate tax rates begin at 37% for estates in excess of $600,000 and
increase to 55% for estates in excess of $3,000,000.
2. A special 5% surtax is imposed on estates of $10,000,000 to $21,040,000.
E. A generation skipping transfer tax (GST Tax) applies to transfers to grandchildren. The GST
tax rate is 55%. A $1 million lifetime exemption is provided for the GST tax.
II. BASIC PLANNING TECHNIQUES.
A. Utilizing the Credit Exemption Amount.
1. Avoid 11 1 Love You .. wills.
2. Credit is for $192,800.
B. Special Rules for Ranchers and Small Business Owners.
1. Special Use Valuation allows property to be valued as a ranch or business
property. However, value can only be reduced by $750,000 under this rule.
2. Rule applies if property continues to be used for ranching by a qualified heir.
3. Installment payment of estate taxes is allowed for businesses (including
ranches). Installment period is 1 for 5 years. Amortizing principal over next 10
years.
C. Bypass Trusts.
1. $600,000 is placed in trust for benefit of the surviving spouse.
2. Income and principal can be sprinkled to family members.
3. Surviving spouse can serve as trustee.
4. Remainder passes estate tax free to children on death of surviving spouse.
D. QTIP Trusts.
1. Trust qualifies for marital deduction.
2. Assets pass to children on death of surviving spouse.
3. Used frequently in second marriages.
4. Election out of QTIP treatment allows postmortem planning.
Ill. ADVANCED PLANNING CONCEPTS
A. The Traditional Corporate Freeze.
1. Parents hold preferred stock and give common stock to children.
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Attorney, Tucson /lZ.
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2. The appreciation in the value of the business is reflected in the common stock.
The value of the preferred stock is frozen.
3. This type of planning was restricted by the 1987 and 1988 Tax Acts.
B. The Testamentary Freeze.
1. Parents hold common and preferred stock in the business.
2. Preferred stock is left to surviving spouse.
3. Common stock is left to children (or in a generation skipping trust).
4. Appreciation in value of family business after death of first spouse escapes
estate taxation on death of surviving spouse.
C. Minority Discount.
1. Property is valued for estate tax purposes at the amount a willing buyer would
pay a willing seller.
2. Valuation will reflect the fact that the decedent held a controlling interest or
minority interest in the business.
3. The parents• interests should be restructured so that each holds a minority
interest in the business.
D. Family Limited Partnerships.
1. Gifts or bequests are subject to tax on the 11 Value .. of the property transferred.
2. Limited partnership interests are traditionally subject to discounts for lack of
marketability and lack of control.
3. Transferring assets to a family limited partnership allows the discounts for lack
of marketability and lack of control to be applied to assets such as real estate,
stocks, bonds and other securities.
E. GRATS and GRUTS
1. Trusts which provide an annuity or unitrust payment to the grantor for a term
of years and the remainder to the Grantor's children (or other individual) are
GRATS and GRUTS respectively.
2. The value of the gift of the remainder is a present value calculation.
3. If the assets in the trust earn more than the IRS table assumes, then the
difference escapes estate tax and gift tax.
F. Charitable Remainder Trusts.
1. Similar to GRATS and GRUTS with an annuity or unitrust amount being paid
to the grantor and the remainder to a charity.
2. Tax benefits are (I) a current income tax deduction and (ii) avoidance of gain
on the transfer of assets to the CRT.
G. Generation Skipping Transfers
1. The GST tax provides for a $1,000,000 exemption for each taxpayer.
2. The parents should leave the assets in trust for their children The children cam
serve as trustees. Upon the children's deaths the property is not subject to estate
tax and passes in trust or outright to the grandchildren.
H. Life Insurance Trusts.
1. Proceeds of life insurance payable to the trustee of a life insurance trust are not
subject to estate tax or income tax on the insured's death.
2. The proceeds may be used to purchase assets from the insured's estate.
3. The life insurance trust can also be set up to hold the assets as a generation
skipping trust.
I. Defective Trusts.
1 . The creator of a trust or the beneficiary will be subject to tax on trust income
if certain types of .. defects.. are used in drafting the trust agreement.
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2. A Defective Grantor Trust causes the creator to pay tax on trust income even if
the income is accumulated in the trust for the benefit of the creator's children.
By paying the tax on the income the creator is in effect making additional tax-free gifts to
the trust.
3. A Defective 678 Trust causes a beneficiary to be taxed on the trust income
even if the income is accumulated in the trust. Most beneficiaries will have a
lower tax rate than the trust so this defect reduces income taxes.
J. Recent Tax Law Changes.
1. Income tax rates for individuals are 39.6% on ordinary income. The rates for
capital gain caps out at 28%.
2. Income tax rates for trusts hits 39.6% at $7,900
3. No alternative minimum tax for gifts to charities of appreciated property.
K. Legislative Proposals.
1. Increase in lifetime exemption from $600,000 to $750,000.
2. Indexing of lifetime exemption.
3. Indexing of annual exclusion.
4. Special treatment for small businesses.
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