Rutgers New Jersey Agricultural Experiment Station [Later Life Farming]

Module 9c: Federal and State Estate Taxes

Estate planning is a critical part of the financial planning process for farm families. No matter how large or small your farm operation and other estate assets, you want to be assured that your assets go where you want them to go when you pass on. You also want to minimize estate taxes and provide for minor children, survivors (e.g., a spouse), and dependents.

Many people procrastinate in planning their estate. One reason is that it is viewed as a "chore" to do when one gets older. The process can also seem overwhelming if decisions that need to be made and appropriate tools are not well understood. It is also uncomfortable to think about death and talk to our families about "sensitive" topics like money and our own mortality.

A critical part of estate planning is federal and state taxes. Bottom line: the government wants a share of your assets. Estate tax is the federal and state (e.g., NJ) tax on a person's total assets, minus specified deductions, at the time of death. Inheritance taxes are based on the relationship between the donor and the recipient of estate assets. For example, in New Jersey, there is no inheritance tax on amounts received by "Class A Beneficiaries" (e.g., spouses, parents, children, and other lineal descendents).

Under current state law, New Jersey estate tax can be assessed if more than $675,000 passes to a person other than a deceased person's spouse or a tax-exempt charity. The Federal estate tax exemption in 2009 is $3.5 million but future estate tax laws are very uncertain and are expected to go through a major re-write in 2009 or 2010. To keep up to date with how estate tax laws will affect you, consider obtaining professional advice from an attorney with expertise in estate tax planning once the "dust settles." Update your personal estate plans as needed.

An important term, with respect to the calculation of estate taxes, is "basis." This is the value assigned to an asset from which a taxable gain or loss is determined. Often, an investment's basis is its original cost. When someone inherits assets that have risen in value over the years, the tax basis is generally its value on the date of the owner's death, rather than what the owner paid for the asset. This is referred to as a "stepped–up basis."

In summary, farm families typically hold large amounts of illiquid assets such as farmland. For this reason, as well as the impact of future estate tax law changes, professional assistance is recommended. You can lower the cost of a legal consultation by preparing net worth and income and expense statements in advance and making a written list of your questions and concerns.

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