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How To Avoid Federal Estate Tax

Michael Fritton
Michael Fritton

With no signs of movement to eliminate or modify the federal estate tax, farm families are facing some serious changes to their estate plans. Sharp increase in land values has dramatically increased the value of many Hoosier farms. At the same time, the estate tax exemption is about to drop, exposing many farms to a massive tax burden. Mike Fritton, with Somerset CPAs, an Indiana firm which specializes in farm transfer issues, told HAT that, unless Congress acts, the estate tax exemption will drop from its current $5 million to $1 million. Fritton said Somerset has ways farm families can avoid the estate tax penalty, “There is an unlimited marital deduction that allows one spouse to leave their entire estate to the other spouse upon death, with no estate tax payment at that point in time.” This is because, since 1981, that deduction exempts from tax any property that the decedent leaves to their surviving spouse. Of course, any of that property which is still remaining in the surviving spouse’s hands at his or her death will be exposed to tax, but at least the couple gets to postpone any tax until the second death.


Fritton says another way to pass on the family farm to the next generation without a massive tax burden is to use some special trusts, “Either a bypass trust or a testamentary trust where, upon the death of the first spouse, a certain amount of assets are placed into a trust.” The surviving spouse is entitled to the income from this trust and, upon their death, the assets pass to the beneficiaries but are not included in the estate.  The is because the spouse will not be deemed to own the property in the Trust, and only property that the spouse owns at death is subject to the estate tax. So, whatever is left in the By-Pass Trust at the spouse’s death can go to the couple’s children or other beneficiaries free of estate tax.


There are several more ideas and recommendations on the Somerset Page.

[audio:https://www.hoosieragtoday.com//wp-content/uploads//2012/06/summersetwrap.mp3|titles=How To Avoid Federal Estate Tax]


You can also listen to a detailed discussion of this issue with Mike Fritton.