9 minute read
5 Questions About The Basic of Estate Planning
from LAND Summer 2024
Q&A
5 Questions About
BASICS OF ESTATE PLANNING
A Q&A with Tiffany Dowell Lashmet
Story by Lorie A. Woodward
With the aging of Baby Boomers, one of the largest generations in U.S. history, the nation is poised for the largest exchange of wealth, including land, in its history. As a result, estate planning is—or should be—a topic of discussion for families across the country.
Obviously, estate planning is not a one-size-fits-all proposition because no estate and no family is the same. Some estates are relatively small and simple, while others are vast and complicated. With that said, some basic concepts are foundational for those who are embarking on the process.
I sat down with Tiffany Dowell Lashmet via a livestream presentation on the topic of estate planning. As an attorney who is an Associate Professor and Extension Specialist for Agricultural Law with Texas A&M AgriLife Extension, she is constantly on the move and hard to catch. If that’s not enough, she also authors the award-winning Texas Agriculture Law Blog, hosts the Ag Law in the Field Podcast, and is actively involved in her family’s multi-generational farm and ranch in eastern New Mexico and the Texas Panhandle.
The information below is for educational purposes only and should not replace the advice of an attorney licensed in your jurisdiction.
1. Why is estate planning important?
TDL: Estate planning is just what its name implies. It is the process of deciding how you want your assets to be managed and distributed after your death, or if you become incapacitated. While it’s not anyone’s favorite thing to think about—in fact, statistics tell us that only about 50 percent of Americans have a will and only about one-third of farm, ranch and agribusiness owners have one—it is vitally important.
Why? If you die without a will in place, the laws of intestacy in your state will come into play. Each state’s laws are slightly different, but they are all essentially formulas for the division of a person’s assets if they die without a will or estate plan.
Intestacy laws are a one-size-fits-all proposition that do not consider the wishes of individuals or their families, so it is unlikely that the statutes will distribute your assets as you would. By not having a will or an estate plan, you have given up all control of your probate assets and increased the likelihood of conflict between your heirs. In addition, probate will take longer and cost much more.
When it comes to estate planning, my best advice is to complete a will even if you do nothing else. As a colleague of mine often tells people, “Die with a will. It’s easier on everybody.”
2. What are the basic steps in creating an estate plan?
TDL: For my presentations, I’ve divided the process into five steps. The first is “Design a Flight Plan,” which is a collection of all the information and documents necessary for someone to be able to step in and conduct all your affairs. This is important from an estate planning purpose, but also from a life planning purpose if you were to be injured or otherwise incapacitated for any period.
The information to be gathered includes the location and access information for your Safety Deposit box, your will and other legal documents, deeds, insurance policies, banking, investment and billing information, a list of personal property and debts, passwords, your birth certificate and Social Security card among other things.
The second step is to “Determine Your Goals.” Identifying your top goals for your estate in communication with your heirs will establish the decision-making framework for your estate and will influence the timing of property transfer. For instance, “keeping the land in the family” will need different provisions and preparations than “selling the land and dividing the proceeds equally.” The first question an estate planning lawyer should ask is what your primary goals are.
Third, I suggest “Develop a Business Succession Plan.” In their laser focus to transfer land from one generation to the next, many farming and ranching families lose sight that the land is also home to a business. It is important to evaluate and discuss what a successful operation looks like for the succeeding generation and if the pieces have been put in place to allow the next generation to succeed as businesspeople. This may include determining who can fill which roles and what additional training may be needed to allow them to be prepared to do so.
The fourth step is “Draft Estate Planning Documents,” which is where you, working with an attorney, draft, review and sign all the documents necessary to implement your estate plan.
Finally, I suggest “Draft and Implement the Estate Plan.” This is the step where you, working with the appropriate team of professionals including your attorney, your accountant and your banker as well as your family, put together the final plan that will govern the estate. Because life and circumstances continually change, I recommend reviewing the documents annually to ensure that they are current and reflect your wishes.
3. In addition to a will, are there any other documents that are necessary?
TDL: While the parameters and specifics of each of these documents differ by state, the following list includes documents that everyone should have in place.
Everyone needs a durable power of attorney, which allows you to appoint someone to handle your business affairs if you become incapacitated and a medical/healthcare power of attorney, which is a document designating a person to make medical decisions on your behalf if you cannot.
In addition, everyone needs an advanced directive, commonly known as a “living will.” This document provides instructions to your physician on whether to provide or withhold artificial life sustaining procedures in the event of a terminal illness or irreversible condition. Discussing your wishes with not only your physician but your family can be helpful, and even comforting, if hard decisions must ever be made.
Depending on the circumstances, some people may also need a document providing for the care of dependents such as minor children or special needs adults, an in-home Do Not Resuscitate Order (DNR) or trust documents.
4. What taxes come into play as an estate is passed to heirs?
TDL: Everyone is subject to federal estate tax, which is a federal tax levied on assets transferred at death. Everyone has a lifetime exemption, allowing you to pass assets at or below that value without paying an estate tax.
For 2024, the lifetime exemption is $13.61 million per person or $27.22 million per couple. The estate tax is based on current market value and anything over $13.61 million is taxed at a 40 percent rate. In 2026, unless Congress acts, the lifetime exemption is set to change to $5 million per person, which will likely be closer to $7 million when adjusted for inflation.
It’s important to note that tax is not owed on property left to a surviving spouse, but that does not mean there is no need to worry. While no tax is immediately due if property passes from one spouse one to the other, the surviving spouse will then hold the entire value of the estate at his or her death. This can be a problem for families with assets near or over the exemption amount who haven’t prepared.
My best advice for anyone who is even close to the lifetime exemption limit to talk is to an attorney and accountant—tomorrow. There are many avenues for managing the estate tax burden, but they must be put into place before death.
As a side note, surviving spouses can take advantage of “portability,” which allows them to add any amount of the lifetime exemption that their spouse did not use to their own lifetime exemption. For example, if a spouse died in 2024 and the initial estate was worth $3.61 million, the surviving spouse could “claim” the unused $10 million and increase his or her lifetime exemption to $23.61 million.
To do that though, the surviving spouse must file IRS Form 706 within nine months of their spouse’s death.
In addition to federal estate tax, some states levy an in-state estate or inheritance tax. Twelve states and the District of Columbia impose estate taxes and six states have inheritance taxes. Maryland has both.
Estate taxes and inheritance taxes are different. Estate taxes are generally paid by a decedent’s estate before assets are distributed to heirs and are thus based on the estate’s overall value. On the other hand, inheritance taxes generally are remitted by the recipients of a bequest and are based on the amount distributed to each beneficiary.
5. Are there any special considerations for landowning, particularly farming and ranching, families?
TDL: I mentioned it previously, but it bears repeating. Passing a working farm or ranch to the next generation is more than just passing the assets, it’s passing an entire business. Family discussions and planning need to reflect that reality.
The other big issue that often comes into play is capital gains taxes, the taxes owed when a person sells an asset such as land that has appreciated over time. For long-term assets, those held for more than a year, the tax rate ranges from 0 percent to 20 percent, while short-term assets, those held for less than year, correspond with income tax brackets.
For multi-generational landowners, which includes many agricultural families, the “stepup basis,” is an important issue within the framework of capital gains. Step-up basis is the adjustment of the value of an appreciated asset for tax purposes upon inheritance.
Here’s how it works. If Grandma bought the farm for $50 per acre in 1950 and it’s now worth $850 per acre, Grandma would owe capital gains taxes on $800 per acre if it is sold today. But if Grandma died in 2004 and the land was valued at $500 per acre when it was passed to the family at the time of her death, because of the step-up, they would owe capital gains taxes on $350 per acre ($850 per acre market value–$500 per acre step-up value = $350 per acre) if they sold it today.
With step-up, the value is based on a cost basis rather than the purchase price, which as you can see can be a significant difference. Step-up is generally available if the assets are transferred at death, but not if they are deeded to another person while the owner is living.
Estate planning is just what its name implies. It is the process of deciding how you want your assets to be managed and distributed after your death, or if you become incapacitated.
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