Case #3873

Written by Michael Baron on . Posted in Uncategorized

Michael and Pat came to me with an interesting problem.

‘You know,’ Michael said, ‘over the past decade we’ve had a pretty good run in farming. With the tax write offs and Section 79, we’ve built our machinery up to close to two million dollars, we’ve added new buildings with the five hundred thousand dollar accelerated depreciation.’

‘But now, we have an estate tax problem, because our estate is too large. We don’t want the government to tax us on our farm on money we’ve already paid taxes on but we don’t have a plan to cover this possibility. We don’t want to buy life insurance or long-term care insurance because we think it’s a waste of money.’

As with most things people tell me, I have to filter these through my head a little and make sure I heard right.

‘Now, Patty and Michael, you two have built an estate of over ten million dollars and you have estate tax issues? You also were able to build some portion of this estate with tax-free dollars due to depreciation and Section 79? If you were to sell everything off today – machinery, land, etc. – what do you think your taxes would be?’

Mike and Patty thought and said ‘Well, it would probably be about forty percent on two million dollars of machinery, capital gains taxes of twenty-three percent on the land’s growth – I suppose all in all, it would be close to one and a half million to two million dollars!’

I replied ‘If I understand you right, if you sold, you’d pay over one million five, but if you die and the kids sell or inherit it, you said it would only be just under five hundred thousand?’

When they looked at it from that angle, they conceded the estate taxes were the lesser of two evils – and sometimes that’s as good as it gets with IRS!

I asked ‘My next question is this – what did you originally pay for the land and what’s it worth today?’ They answered ‘It was between two hundred and five hundred dollars an acre and now it would be worth about twenty-five hundred per acre.’ I asked them if they thought that was a good deal and Mike beamed and said ‘Best investment I ever made.’

‘So Mike, you weren’t able to deduct the costs of the principal payments but you like the idea the land is now worth five times what you paid for it – even though it wasn’t tax deductible?’ ‘Yes, that’s right,’ he replied. ‘Best investment ever.’

‘So, Mike and Patty, life insurance is exactly like buying land for two hundred dollars and acre and having it guaranteed to be worth twenty-five hundred an acre.’

‘Just like land, you can’t deduct the cost of the land. On the other hand, you won’t pay any interest either. If the land was a good investment – best investment ever made ‘quote unquote’ – does it make a difference to your estate it they get twenty-five hundred in land or twenty-five hundred in cash? Seems to me, you have enough land, but what you don’t have is enough cash – and now the kids are going to have to sell some of the land to come up with the cash. You lose the land, you lose all the future income from the land, and you lose the kids’ inheritance. Is that a problem?’ ‘Yes, it sure would be,’ Mike and Patty replied.

‘In addition, you love tax advantages like Section 79, accelerated depreciation, etc. but did you know that the difference between the premiums paid and the death benefits is non income or estate taxable to your estate – set up correctly?’

‘It seems to me – and correct me if I’m wrong – but if I can buy property – in this case cash property – and pay ten to twenty cents on the dollar and not have your estate or children pay taxes on the guaranteed gain, that ranks right up there with buying two hundred dollar land, doesn’t it?’ ‘I see your point’ Mike admitted.

Mike and Patty had talked to another planner. The other planner suggested an LLC to lessen their estate tax problems. Over the next ten years, they were to give away twenty-five percent of their estate – and along with it twenty-five percent of their income to their children, as that’s how LLC’s work. Plus, paying considerably more for accounting and legal fees over the years. They could lose up to one-third of their retirement income. Whereas using insurance they would use only eight percent of their income and rest easy at night knowing they were covered and hadn’t lost their retirement income. It’s an easy choice when you understand all the tax advantages!

“Keeping the Family Farm in the Family”
Great Plains Diversified Services, Inc.
1424 W. Century Ave., Suite 208
Bismarck, ND 58503-0917
Telephone: 701-255-4079
Fax: 701-255-6106
Toll Free: 1-800-373-4078

Michael Baron is not an attorney. Information given through written, verbal, or electronic means by Michael Baron or Great Plains Diversified Services, Inc. is not to be construed as legal advice. An attorney, tax advisor, or other registered advisor is needed for the completion of the estate planning process. An attorney must be consulted for legal advice and the drafting of legal documents.