As I am sure you know, for the year 2010 the estate tax has been repealed. But it is set to return in 2011 with only a $1 million exemption, although there are thoughts this exemption amount may be increased to $2 million or even $3.5 million. It is just too early to tell yet if or how Congress may change this.
You can get the farm out of your estate by simply gifting it to your son at this point. That will transfer title to his name. However, you would then need to file form 709 Gift Tax Return to report the value of that gift. The first $1 million you give in lifetime gifts will be exempt from gift tax, but the remaining $.5 million value of the farm would be subject to gift tax, which you as the donor would pay.
Once something would happen to you, the gifts reported on from 709 are included as part of your estate valuation, but at least you would have paid gift tax on $.5 million of that gift, and the gift tax paid will be credited to any estate taxes that are due. That would bring your son's estate tax liability down to paying estate tax on a value of $1 million rather than $.5 million. That tax liability would be $550,000.
So the only thing you could really do to help protect him here would be to either also leave him enough cash in your will to pay those additional taxes, or stipulate in your will that all estate taxes that are due be paid out of other estate assets other than the sale of the farm. There is just no way to avoid the estate taxes, but you can at least arrange for him to have enough cash to pay them or stipulate in your will that they be paid using other assets of the estate.
Thank you Mary
Hello again Mary,
The only reason that I suggested gifting the property to your son now was because you asked in your original question how you could get the farm out of your estate. Gifting it to your son does not really get it out of your estate for estate tax purposes, but it does give your son legal ownership to the property now which I thought was perhaps what you were wanting to do. If that is not the case, then there is no advantage to gifting him the property.
If you would decide to gift him the property, the entire gift of $1.5 million is included in your taxable estate when you pass away. But you would receive credit for the gift taxes already paid. The gift tax rate is the same as the estate tax rate, which in 2011 will be 55%.
So let's just use this as an example. If your entire estate including the farm is $6 million, if you now make a gift of the farm to your son and the farm is worth $1.5 million, you would pay gift tax on $.5 million and the tax would be $275,000. Now if something were to happen to you while the estate exclusion is set at $1 million, then your total estate would be the remaining $4.5 million you have in assets plus the $1.5 million you gifted, bringing your total estate back up to the $6 million. You would then deduct from that the $1 million exclusion, leaving you with a taxable estate of $5 million. At an estate tax rate of 55%, your total estate tax would be $2.75 million. You would take a credit against that for the $275,000 you paid as gift tax, leaving you with a balance due of $2,475,000 to cover your estate taxes.
You are correct that I had a typo in my third paragraph where I meant to say $1.5 million instead of $.5 million. I apologize for that typing error and hope I did not cause you too much confusion.
The simplest thing to do here may be just to make it a part of your will that any estate taxes which are due are to be paid using assets of the estate other than the farm. That way you will not have to worry about your son having to sell the farm in order to cover the portion of estate taxes that would be due on that part of your estate. The only other option would be simply to also leave him enough money to cover the taxes which would be due on the farm.