Senior Partners - 8

Money-Saving Ideas for Small Estates

Elizabeth Williams
By  Elizabeth Williams , DTN Special Correspondent
Pre-planning can save small estates thousands of dollars in probate and administrative costs, according to Iowa attorney David Bibler. (DTN photo by Elizabeth Williams)

AMES, Iowa (DTN) -- Not all farm estates are super-sized. But even if your net worth falls below the $5.25-million-per-person federal estate tax exemption -- or the $4 million that triggers some estate or inheritance state taxes -- smart planning can save thousands of dollars in estate settlement costs.

An estate of $2 million would likely pay $4,000 in court costs to go through probate, in addition to attorney fees, said A. David Bibler, attorney in Algona, Iowa. At current farmland values, you can approach that size owning just one quarter section of good land, a house and some cash assets.

What surprises many people is they planned their estate eight to 10 years ago and they figure everything is set, said Bibler. Or they put their farmland in a revocable trust to avoid probate, but they forgot to include a large brokerage account. Suddenly they owe thousands of dollars in probate costs and attorney fees when they could have whittled that down to a minimal amount with prior planning.

1. Check how property is owned

The first thing to do is to examine the ownership title of all your property, including real estate, brokerage accounts and bank accounts, Bibler advised.

Most estate tax experts recommend revocable trusts as the most efficient and least costly way to pass on real estate and other key assets to the next generation. But if the older generation balks at the seemingly complicated process, there are other options.

"At the very least, you should move any tenancy-in-common property to joint tenancy with the right of survivorship," advised Bibler. It might seem like splitting hairs, but in the tax world, it makes a huge difference. "With the property titled correctly, you can avoid probate on the death of the first spouse to die and half of the property gets a 'step-up in basis,'" in effect forgiving a lifetime of capital gains, Bibler added.

Revocable trusts avoid the biggest problems in estates: Exit strategies. One of the most common problems with farmland ownership is that the second or third generation wants out of a family operation and wants to be fairly compensated on the spot, said Bibler.

It's much easier when a trust owns the assets, to have the trust buy out an owner and set up ground rules for sales ahead of time. Otherwise, each sibling will jointly own the land and one can demand a full-blown partition (which is his or her right). This often leads to a farm sale and hurt feelings among siblings, which is what the first generation wanted to avoid.

2. Check beneficiary forms

In recent years brokerage firms and large banks have insisted on probate for customers. One way to avoid probate with these accounts is to add a Transfer-on-Death secondary owner. (Caution: At firms such as Vanguard, beneficiary forms on tax-deferred retirement accounts do not apply to taxable investments held at the same institution, so you will need separate forms to designate your beneficiaries for IRAs.)

3. Watch ownership of insurance

Another title to check is your life insurance policy. If the older generation owns its life insurance policies, it could bump the estate into tax liability territory. To keep it out of the estate, the spouse or next generation beneficiaries should own the insurance policies. If the younger generation can't afford the premiums, there are ways to gift money to them to pay the premiums.

4. Clear your property's liens and easements

Verify your property titles are clear of liens and properly recorded in the county courthouse. You can have your attorney file a "probate without present administration," which currently costs $25 in Iowa. It becomes a permanent record of the property's value in case appraisals get lost through the years.

5. Have your attorney file an estate tax return on the first spouse's death, even if you owe no estate tax.

That will preserve "portability" when the surviving spouse dies. In effect, the $5.25 million (in 2013) exemption not used when the first spouse died can be added to the surviving spouse's exemption at the survivor's death.

6. Negotiate your fees upfront. Iowa has a statutory fee set at a maximum 2% of the value of the probated estate. "But many attorneys will now contract for a set fee rate or an hourly rate, whichever is less. Generally it comes in a lot less than the 2% of the estate size," said Bibler. In his area in rural northern Iowa, an hourly rate of approximately $200 is the usual charge for most estate tax attorneys.

EDITOR'S NOTE: DTN's tax columnist Andy Biebl recently wrote on how to manage tax-deferred accounts in his Sept. 13, 2013 column, "Get IRAs Ready for Hereafter." Subscribers can find that under the Farm Business page.

DTN's on-going Senior Partners series examines the financial, legal and emotional hurdles families face as they transition farm ownership from the senior to junior partners. To read other features in the package go to DTN/The Progressive Farmer In-Depth at…


Elizabeth Williams