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Is My Estate Large Enough to Warrant Effective Planning?

March 1, 2010

Nebraska families have seen the value of their land skyrocket in recent years.  Farms that were purchased years ago for hundreds of dollars per acre are now selling for thousands.  This dramatic increase in value affects us in many ways, including subjecting many farm and ranch families to Federal Estate Tax.

The law on the books today states that individuals who pass away after this year with estates greater than $1 million will be subject to Federal Estate Tax.  Given the current prices of land, many farmers and ranchers are currently above this threshold.  Without proper estate planning, farm families may have to pay an enormous amount of estate tax to the IRS. 

However, the bad news is likely to get worse.  Leading economists and financial experts agree that the value of US dollar will continue to decline for many years to come.  The US is racking up staggering deficits.  According to the White House, the budget deficit for 2010 will be $1.565 trillion.  The total national debt is over $12 trillion. (That is $12,000,000,000,000.)  Other experts project that the US is on the hook for $99 trillion to pay for the government’s unfunded pension and health care liabilities.  This is more than 7 times the size of the entire US economy.

How do these debts affect Nebraskans?  The US government is relying on a gradual dollar devaluation to shrink its monstrous debt and to encourage exports. But this strategy for recovery will come at a cost to landowners in Nebraska.  The devaluation of the dollar will cause land values to rise even further, and can create an enormous Federal Estate Tax problem that will be inherited by our children.

For example, if John and Sue currently have an estate $1.5 million, which some may even consider a modest size operation based on today’s land values, and both John and Sue die next year with no estate planning in place, John and Sue’s children would owe approximately $210,000 in tax.  That tax bill is nothing to sneeze at.

But what if John and Sue are 55 years old and they live to their life expectancy?  If their estate experiences average historical inflation (approximately 3.5%), their children would inherit a tax bill of more than $1.7 million dollars based on current law.  If the devaluation of the dollar continues as a result of the government’s plan for economic recovery, and the estate increases at 6%, then John and Sue’s children would owe nearly $4.5 million in tax.

The federal government considers ag families wealthy enough to impose a severe Federal Estate Tax, and the tax problems will likely increase because of the government’s gradual devaluation of the dollar.  If your estate plan has not been reviewed or updated recently, contact an estate planning specialist.  More than ever before, farm and ranch families need to take advantage of every estate tax planning tool available in order to minimize or even eliminate estate tax paid to the IRS.

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