It seems like most people fear estate planning as much as death itself. This is understandable, since estate planning combines two dreadful concepts – death and taxes. In addition, this situation is further complicated for forest landowners because they are dealing with an asset that is illiquid, requires special expertise to value, and may be difficult to divide among heirs. However, it is because of these reasons that estate planning is critically important for forest landowners.
The world of estate planning is much too complicated to address in a single article. Consequently, it is our intent to highlight the following important points for landowners to consider.
- An attorney knowledgeable in estate planning issues is usually the key team member in the planning. Additional assistance from a forester and financial advisor is also important.
- A Will is a critical element in most plans. In Idaho and Washington if one spouse dies without a will, the descendant’s assets are to be divided equally between the surviving spouse and the children.
- Living Wills, by themselves, do not generally reduce estate taxes.
- Currently, estate assets over $675,000 are subject to tax. This exempt amount will be gradually increased to $1 million by the year 2006. Estate tax rates are high with rates beginning at 37% and quickly escalating to 55%.
- Federal law allows an individual to transfer tax-free $10,000 (per year) of their estate to another individual. A married couple can transfer $20,000 per year to a desired individual. There is no limit as to the total number of individuals that the aforementioned amounts may be transferred to.
- A limited liability company (LLC) or limited liability partnership is an excellent estate-planning tool for most landowners. An LLC allows a landowner to gradually gift his/her forestland, while significantly discounting the forestland value for estate tax purposes. Typically, the estate value is reduced by 30-50%, which greatly magnifies the ability to reduce estate taxes and transfer assets to heirs. This planning technique is too complicated to detail in this article, but your estate-planning professional can further explain this approach.
- The conveyance of a conservation easement can help landowners preserve the character of their property while reducing estate taxes. A conservation easement involves a landowner foregoing his/her right, as well as a future owner’s rights, to develop a parcel. The transaction consequently reduces the value of the property and the resulting estate tax bill. There are also income tax benefits to this approach.
- The IRS has incorporated certain provisions within the tax code to help landowners keep property within the family. For individuals who qualify, special-use valuation and qualified business exemption rules can greatly reduce estate taxes.
- Landowners are highly prone to undervalue their forestland. This can be a costly mistake when developing your estate plan. It is generally necessary to utilize the services of a consulting forester and land appraiser when determining your forestland value.
This information is just a brief overview of a few essential points to consider during the estate planning process. It is not legal advice.
We never know what the future will hold. Time is of the essence – develop or review your estate plan NOW!