AlB—Lancaster Farming, Saturday, February 6,1982
What do the new rules
WASHINGTON, D.C. The new
year ushered in something really
new: the rules on Federal estate
and gift taxes. The provisions,
which are part of the Economic
Recovery Tax Act of 1981, contain
many changes of interest to far
mers, according to USDA’s
Economic Research Service.
One sweeping change is in the
marital deduction. Before the new
law, there was a ceiling on gifts
and bequests you could make to
your spouse without incurring tax.
The marital deduction for
bequests was limited to 5250,000 or
half the adjusted gross estate,
whichever was greater. The
marital deduction for gifts was
limited to $lOO,OOO plus SO percent
of the value in excess of $200,000.
The new law allows unlimited
marital transfers without tax. That
is, you can give or will your spouse
any amount without paying gift or
estate taxes.
In addition, the rules on property
held jointly by a husband and wife
are now different. In the past, the
total value of such property was
included in the estate of the first
spouse to die, unless the surviving
spouse could prove that he or she
had paid for part of the property or
had materially participated in the
operation of the farm.
Now, however, half of jomt
property is assumed to belong to
the surviving spouse, regardless of
the amount each contributed to the
purchase of the property. So, when
one spouse dies, only half of the
property is included in that
spouse’s gross estate and is thus
potentially subject to estate tax.
Unified Credit Will
Allow $600,000 In
Tax-Free Gifts and Bequests
Besides allowing unlimited
property transfers to your spouse,
the new tax act substantially in
creases the “unified credit” (so
called because it can be applied
n
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against both the gift tax and the
estate tax). The unified credit
establishes the amount you can
will and/or give to recipients other
than your spouse, free of estate
and gift taxes.
Formerly, the unified credit was
$47,000. This meant that you could
give or will about $175,000 worth of
property tax-exempt, because the
credit canceled out the gift/estate
tax due on that amount. The new
law increases the unified credit
and so the tax-free amount each
year through 1987. For 1982, the
tax-free total is $223,000. By 1987, it
will be $600,000.
Annual (lift
Tax Exclusion Raised
Prior to 1982, you could give
away a maximum of $3,000 per
recipient per year without in
curring gift tax and without using
up any of your tax-free total under
the unified credit. Now, the
maximum has been raised to
$lO,OOO per recipient per year. (The
exclusion does not apply, though,
to gifts of future interests m
property.)
So, for example, you and your
spouse together could now give
each of your children $20,000 in
farm property annually, free of
gift taxes. And, as in the past,
these gifts do not count against the
amount that you can transfer tax
free because of the unified credit.
Installment Payment
Rules Liberalized
Past tax laws allowed estates
consisting mainly of farms or other
closely held businesses to pay
estate taxes m installments. The
new law broadens the conditions
for installment treatment and
extends the most favorable terms
to more farm heirs.
In the past, a farm might qualify
tor installment treatment of estate
taxes if it met either of two sets of
conditions, the first more
favorable than the second.
Remember, if you
don't see the
"STAR", It hasn't
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f' *
MCKEE
gt
The smooth unob
strucfed flow of a * aa **- . * he k , out
material continues to be Slde the bale is
fed and tumbled loosely P/ ess « d '" ward (oward ?
in the constant volume * he °° re ,orn ’ in B a high
chamber, gradually density outer layer This
compacting into a senes compaction from the
o) | a r, ers outside in produces the
soft "star" centre with a
tight ' weather-proof
shell lor maximum
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conditions
on estate taxes mean lor farmers?
(1) If the farm constituted more
than '65 percent of the decedent’s
adjusted gross estate (the gross
estate minus certain expenses,
debts, taxes, and losses), the
estate was allowed to pay only
interest for 5 years. Then, the tax
due could be paid in 10 equal an
nual installments thus
spreading payment over a total ot
IS years. Interest charged was 4
percent of taxes due on the first $1 *
million of the farm’s value and a!
higher rate (periodically set by the
Secretary of the Treasury) on the
rest. But if a third or more of the
farm was disposed of before the 15
years were up, all remaining taxes
and interest -came due im
mediately—even if the farm was
“disposed of” by the original heir’s
dying and passing it on to another
family member.
(2) If the farm constituted more
than 35 percent of the decedent’s
gross estate (or more than 50
percent of the decedent’s taxable
estate), the estate tax on it could
be paid in 2 to 10 equal yearly in
stallments. But there Was no 5-
year deferment period before
installments had to begin, and the
higher rate of interest was charged
on the entire amount of tax owed.
If halt or more ot the farm was
disposed ot, even because ot death
of an heir, all taxes and interest
came due immediately.
For the estate of a person dying
in 1902 or after, the new tax act
abolishes the second category, the
10-year treatment. Any farm that
constitutes more than 35 percent ot
an adjusted gross estate is now
eligible for the 15-year, two-level
interest treatment. To lose the
installment privilege, at least halt
(rather than a third) of the farm
must be disposed of during the
period. And, if an heir dies during
the 15-year period and the farm
passes to yet another family
member, the original decedent’s
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estate still keeps its installment- jg the average annual cash
payment right. rental per acre, or the average
Special Use " annual net share rental per acre
Valuation Rules Changed f or comparable farmland in the
In 1976, Congress enacted to a locality of the decedent’s farm;
low to value a farm, for estate tax "X” is the average annual state
purposes, according to its use and local real estate taxes, per
rather than its fair market value, acre, for comparable land; and
The change was made because >‘r” is the average annual ef
many farmers feared that their fective interest rate for new
land’s appreciation would result m Federal Land Bank loans in that
estate taxes out of line with the locality.
land’s income-producing potential. For all three variables, you take
The special use valuation law has the annual average of the 5 most
been refined further under the recent calendar years ended
Economic Recovery Tax Act. before the the date on which the
The changes are too numerous to decedent died,
cover entirely here, but here are Maximum Reduction from
details on three of the most im- Fair Market Value
portant... Is Now *790,000
Share Rente Now Qualify For From 1976 through 1980, *500,000
Use In The Cashßent Formula was the maximum amount by
The Internal Revenue Code which you could reduce a farm’s
specifies that one of two formulas f alr market value through special
has to be used to determine a valuation. The new tax act
farm’s special use value. The first raises that amount in yearly m
formula (given opposite) is more crements. For the estate "of a
favorable to the estate Ilian the person who died in 1981, the
second, which tends to produce a maximum is *600,000. For the
higher special use value and so a es tate of a person dying in 1982, the
higher tax. But in the past, to use imut will be *700,000; in 1983 and
the first formula, you had to Be after, *750,000.
able to factor m cash rentals for Recapture Period Shortened
comparable farmland in the For the estate of a person who
locality of the decedent’s farm, died before 1982, there was a 15-
Farms in areas where shate year recapture period for taxes
rentals were the rule had to be saved becasue of special use
valued according to the second, valuation. That is, during the 15
' less favorable formula. years after a decedent’s death, if
But the new law changes that an heir failed to meet the special
situation. For the estate ot a use requirements, the IRS could
person who dies after 1981, you can recapture some or all of the tax
now use “net share rental” to savings obtained through special
value the farm, if there is no use valuation. This rule still ap
comparable land trom which the . plies to estates of those who died in
gross cash rental can be deter- 1981 or before,
mined. The next share rental is the But, for estates of persons dying
value 'of the produce received a fter 1981, the Economic Recovery
by’the farm owner, minus the cash xax Act shortens the recapture
operating expenses incurred for period to 10 years. It also allows an
growing the 1 produce and paid by heir 2 years’grace, from the death
the owner - again, on comparable 0 f the decedent, to begin using the
farmland in your And, you farm tor farming. And it makes the
factor the figure into this formula. 2-year grace period retroactive to
Value of decedent’s farmland, per estates ol farm owners who died
acre =R - T/r. a f te r 1976.
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