Day By Day© by Chris Muir.


Wednesday, November 21, 2012

Estate Tax Will Ruin Family Farms - Here's How to Beat It

This article says the estate tax will make it impossible to pass a family farm or small business to your children.  This is true if you don't arrange your affairs to work around it.

I have some workaround ideas.  These are tricks the rich use to hold onto their stuff.  But anyone can use them.

First off, the WORST way (did I emphasize that enough?) to pass a piece of land to your descendants is fee-simple (i.e. by deed) to a number of them as individuals.  Then they all end up owning a fractional share of the land, which gets tied up by nobody agreeing what to do with it.  Also it drags the land through probate court.  Not good.

You want to transfer the equity to the children without transferring control until you die (or even then), and in the manner which best protects you and them legally from liability and from excessive taxation.  You want to avoid probate as much as possible.  You want to avoid people fighting when you die, too. Here's how.

  • Turn the farm into a corporation or a land trust.  Or a corporation that owns a land trust. Put the land in it, and sell to your children (or give them gradually over time) shares in the corporation and/or trust.  (in increments not subject to gift tax, if possible). You could make it part of their pay package as employees of the farm if you like, so that the productive children get more shares. You can maintain control over the farm, and you can also take out life insurance on yourself as an officer of the corporation so that any fees, taxes etc. on your death are covered by the insurance payout.  If you are rich enough you could even form a captive life insurance company so you are insuring yourself, but now I'm really getting fancy.  The corporation may hire someone to run the farm, if the kids can't do it.
  • Form a foundation and have the farm remain in that name, the children don't get to own anything but they get to control the farm.  Instead of equity they get salaries from running the farm. The farm remains a foundation "forever" and control of it is what gets passed down.  You could even make it non-profit, and then use some of the income to educate people in YOUR way of thinking.
  • Look into the wilderness land trusts that the eco-nuts are using, and turn one to your own purposes.  That'll larn 'em.  That's a variation on the one just above this one.
  • Strip the equity from free and clear land by forming another company in Utah or Nevada (which have good corporate privacy) to hold a mortgage on it.  But you own the company holding the mortgage.  I'm not sure this would minimize taxes but it would make the property less of an attractive target to lawsuits, as it appears to not have any equity. 
  • You can also sometimes avoid more liability by renting the house from one of your entities to another.
  • Consider instead forming a free church to own the land.  A free church is not a 501(c)3.  Please google this and research it thoroughly.  Although this would require you to hold services etc. it's a good way to not have to pay property taxes, if the land is free and clear.  Your dogma and your services could be whatever you feel is right. Let your conscience be your guide!  The residence would become your parsonage.  Just don't brag about not paying taxes.
Caveat: Get a lawyer to help you with this.  I'm not a lawyer.  These are just ideas.  You are going to need someone good with estates, taxes, real estate, and farming, who likes to use entities to protect people in business.  Don't just get the lawyer who did your auto accident.  This is a bunch of specialties, so be prepared to pay upwards of $200 an hour for this guy.  On the bright side, lawyer fees are deductible as a business expense in your new entity.

How do I know this stuff?  I was a title examiner and legal secretary for years.  Also was a real estate investor and on the board of a club for that, that educated them.  I've seen the things rich people (and not so rich people) do to shelter their property and avoid probate and taxation.  It's not rocket science, it's mostly using legal documents that other people used before, and drawing them up with your name on them instead.

Have fun playing with the REAL toys of the rich.  (Words in contracts.)

1 comment:

Penny Pincher Personal Finance said...

One more thing: I said both that you need a good lawyer and that it's not rocket science. These are BOTH true. It is just that the lawyer knows which contracts to use and put your name on.

Sort of like the plumber who tapped once with the hammer and presented a bill for $1000. Tap of hammer, $1; Knowing where to tap, $999.

That being said, educate yourself as much as you can before seeing the lawyer, and you will get better service and might even save some dough, having done your homework. But don't be a smartass or a pest. Let him do his job. This is another reason to get a good lawyer, so it's not someone who is letting you pay him to educate himself in how to do what you hired him for.