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Estate Planning for the Private Landowner After the Fiscal Cliff

Private landowners should be aware of how the fiscal cliff deal will impact their estate planning in order to ensure they can keep their working lands working!

The American Taxpayer Relief Act of 2012, or the fiscal cliff deal, was passed by Congress on January 1, 2013 and signed into law by President Barack Obama the next day. The Act provides much needed certainty in the area of estate planning despite its lack of significant estate tax reform. 
 
On January 1, 2013 the Bush era tax cuts were due to sunset, which would have reinstated old laws that would have resulted in various estate tax hikes. One of the most notable would have been a reversion to the $1 million federal estate tax exemption with any excess taxed at 55%. Not only would this have been devastating to farmers and ranchers who seek to pass their land to future generations, but it also would have been unworkable for many Americans.
 
The Act successfully prevented many of the extreme estate tax hikes and made the new provisions permanent. However, if Congress seriously seeks tax reform in the future, the rules may change again.
 
Private landowners should be aware of a few of the provisions in the Act that affect their estate planning.
 
First, the Act sets the federal exemption for the gift and estate tax and generation-skipping transfer (GST) tax at about $5 million ($10 million for couples), but increases the top rate to tax amounts in excess from 35% to 40%.  This means that if your estate is valued over the threshold amount you will be paying a higher estate tax than in recent years. The good news is that the threshold is staying at the same level, instead of dropping significantly and subjecting many more taxpayers to estate taxes.
 
Second, the Act maintains the unified treatment of estates, so the $5 million exemption applies to both lifetime gifts as well as bequests at death. This is important if you are looking to create a trust or make lifetime gifts of property to reduce the value of your estate at death.
 
Third, the Act maintains the portability rule. This means that a surviving spouse, after the death of their spouse, can acquire any unused portion of the deceased spouse’s exemption and add it to their own exemption. This is a helpful estate planning tool, but should not be used as a substitute for estate planning in general.  
 
Fourth, both valuation discounts and grantor retained annuity trusts (GRATs) have been maintained by the Act and remain viable tools for reducing estate taxes.
 
Fifth, individual and capital gains tax rates have mostly remained the same, except for higher-income taxpayers. The Act adds a 39.6% tax bracket for single taxpayers earning over $400,000 ($425,000 for head of household and $450,000 for married taxpayers). Taxpayers in the 39.6% tax bracket now face a 20% tax rate on dividends and long term capital gains. Click here for more information on the new tax brackets.
 
Finally, in terms of conservation easements, the Act has retained the estate tax exclusion for up to 40% of the restricted value of the land protected by the easement. The exclusion, under IRC section 2031(c), is capped at $500,000 and may be further reduced in cases where the easement reduces a property’s value by less than 30%. You can take advantage of this exemption if you have a conservation easement already on your land, further reducing the amount you will pay in estate taxes.
 
  
This article is intended to be an overview of some of the estate tax policies, but should not be considered legal or tax advice. Please use the Private Landowner Network’s Conservation Yellowpages to find attorneys, CPAs, land trusts and programs in your area!