Estate Planning for Forest Landowners: What Will Become of Your Timberland?

Transcription

1 United States Department of Agriculture Forest Service Estate Planning for Forest Landowners: What Will Become of Your Timberland? Southern Research Station William C. Siegel, Harry L. Haney, Jr., and John L. Greene General Technical Report SRS 112

2 The Authors: William C. Siegel is a member of the Louisiana Bar and U.S. Forest Service Volunteer, River Ridge, LA; Harry L. Haney, Jr., is a Professor Emeritus, Department of Forestry, Virginia Polytechnic Institute and State University, Blacksburg, VA; and John L. Greene is a Research Forester, U.S. Forest Service, Southern Research Station, New Orleans, LA. Acknowledgments Funding for this book was provided by the U.S. Forest Service s Cooperative Forestry Staff, State and Private Forestry, Washington, DC. William L. Hoover, Professor, Purdue University, Department of Forestry and Natural Resources, West Lafayette, IN, and Tamara Cushing, Assistant Professor, University of Kentucky, Department of Forestry, Lexington, KY, provided technical reviews. January 2009 Southern Research Station 200 W.T. Weaver Blvd. Asheville, NC 28804

3 Estate Planning for Forest Landowners: What Will Become of Your Timberland? William C. Siegel, Harry L. Haney, Jr., and John L. Greene

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5 Abstract The purpose of this book is to provide guidelines and assistance to nonindustrial private forest owners and the legal, tax, financial, insurance, and forestry professionals who serve them on the application of estate planning techniques to forest properties. The book presents a working knowledge of the Federal estate and gift tax law as of September 30, 2008, with particular focus on the unique characteristics of owning timber and forest land. It consists of four major parts, plus appendices. Part I develops the practical and legal foundation for estate planning. Part II explains and illustrates the use of general estate planning tools. Part III explains and illustrates the use of additional tools that are specific to forest ownership. Part IV describes the forms of forest land ownership, as well as the basic features of State transfer taxes and the benefits of forest estate planning. The appendices include a glossary and the Federal forms for filing estate and gift taxes. Keywords: Estate planning, estate tax, gift tax, insurance, special use valuation, transfer tax, trust. iii

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7 Contents Page Abstract... iii List of Tables... xiv List of Figures... xiv PART I. INTRODUCTION Chapter 1. The Importance of Forestry Estate Planning Forest Ownership... 3 A Diverse Group... 3 What Can Happen?... 3 The Purpose of This Book... 4 Structure... 4 Readiness Questionnaire... 4 Chapter 2. Estate Planning Objectives and Considerations The High Cost of Dying Unprepared... 7 Unexpected Heirs... 7 Unexpected Values... 7 Transfer Costs... 7 Estate Planning Considerations Particular to Forestry... 8 Illiquidity of Land and Timber Assets... 9 Low, Irregular Income... 9 Continuity of Management... 9 Unitary Nature of the Forest... 9 Difficulty in Obtaining Credit A Forest Management Plan as Part of the Estate Plan Specific Estate Planning Objectives Preretirement and Postretirement Security Security and Compassion for Family Members Equitable Treatment of Children Continuity of the Forest Enterprise Minimize Transfer Costs Provide Flexibility and Durability Estate Planning Team for Forest Landowners Forest Landowner Attorney Certified Public Accountant (CPA) Institutional Trust Officer Chartered Life Underwriter (CLU) Forester v

8 Chapter 3. The Federal Estate and Gift Tax Process Page Background Unified Rates and Credits Unified Rates Applicable Credit Amount Determination of Gross and Taxable Estate Gross Estate Valuation Taxable Estate Determination of Tax Due Credit Reductions Estate Tax Computation Chapter 4. Valuation of Assets for Estate and Gift Purposes General Considerations Undervaluation State Death Tax Considerations Special Considerations Discounting for Minority and Undivided Interests Life Insurance Future Interests Closely Held Corporate Stock Factors to Consider Degree of Control Valuation Discounts Partnership and Limited Liability Company Interests Valuation Discounts Deathbed FLP Agreements Limited Liability Company Interests Forest Land and Timber Methods of Valuation Valuation of Bare Land Valuation of Merchantable Timber Valuation of Premerchantable Timber: A Case Study Reported Timber Specific Court Decisions Corporate Stock Partnership Interests Fee Interests vi

9 Chapter 5. The Legal Process Page Basis of the Law Statutory Basis Administrative Basis Judicial Basis Wills Need for and Advantages of a Will Will Preparation and Execution Joint, Mutual and Reciprocal Wills Changing a Will Power of Attorney Durable Power of Attorney Springing Power of Attorney Probate Probate Administration and Costs PART II. APPLICATION OF GENERAL ESTATE PLANNING TOOLS TO FOREST LAND Chapter 6. Use of the Marital Deduction in Estate Planning Overview Qualifying for the Marital Deduction Status as Surviving Spouse Transfer of Property Interests Exceptions to the Terminal Interest Rule QTIP Election The General Power of Appointment Survivorship Condition Right to the Payment An Income Interest QTIP and the Marital Deduction Qualification for the QTIP Contingent Income Interests To What Extent Should the Marital Deduction Be Used? Legal Rights Nontax Factors Marital Deduction Deferral How to Make a Marital Deduction Bequest Basic Patterns Formula Marital Deduction Bequests The Choice of Marital Deduction Formula vii

10 Chapter 7. Disclaimers, Settlements, and Elections to Take Against the Will Page General Considerations Disclaimers Disclaimer Requirements Interaction of State and Federal Law Disclaimer Provisions in the Will Disclaimers by the Surviving Spouse Disclaimers in Favor of a Surviving Spouse Charitable Disclaimers Will Settlements Election Against the Will Chapter 8. Gifts of Forestry Assets Overview Some Reasons for Gifts Gifting Tax Considerations Incomplete Gifts Gift Tax Rates, Credits, and Exclusions Split Gifts Basic Gifting Strategies What Type of Property to Give Income Tax Basis Installment Sales and Gifting of Installment Notes Gifts to Minors Custodianship Guardianships Trusts for Minors Gifts within 3 Years of Death Charitable Gifts Overview Charitable Income Tax Deduction Charitable Estate Tax Deduction Gifts with Retained Interest Charitable Remainders Qualified Conservation Contribution Chapter 9. Role of Trusts Overview Basic Considerations Trust Provisions Nontax Benefits viii

11 Page Tax Treatment of Trusts Income Taxes Estate Taxes Gift Taxes Types of Trusts and Applications Living Trusts Testamentary Trusts The Importance of Flexibility Use of Trusts and Disclaimers in Marital Deduction Planning QTIP Trust Power of Appointment Trust Estate Trust Disclaimer Trustees Individual versus Institutional Trustee Family Co-Trustees Successor Trustees Trustee Powers Chapter 10. Life Insurance Role of Life Insurance Insurance Program Estate s Needs Uses Types of Insurance Term Insurance Whole Life Insurance Other Insurance Estate and Gift Tax Considerations Proceeds Transfer of Ownership Choice of Primary and Contingent Beneficiaries Tax Liability Beneficiary Designation Insurance Trusts Other Considerations Settlement Options Replacing Policies in Force ix

12 Page How Much Insurance is Enough? Income Producer Periodic Review Chapter 11. Installment Contracts General Provisions Basic Requirements Restrictions Mechanics of the Election The Interest Portion of Installment Income Computing the Gain Estate Planning Considerations Advantages Disadvantages Other Considerations Use of Installment Sales to Facilitate Gifts Installment Obligation Dispositions at Death Income Tax Basis Transfer to the Obligor Installment Sales by the Estate PART III. APPLICATION OF FORESTRY-SPECIFIC ESTATE PLANNING TOOLS Chapter 12. Special Use Valuation Reduction in Value Community Property Qualifying Conditions Qualified Heirs Qualified Use Material Participation The 50- and 25-Percent Tests Election and Agreement Election The Agreement Valuation Alternate Valuation Special Use Valuation of Forest Land Other Valuation Considerations Postdeath Requirements x

13 Page Continued Ownership Within the Period Material Participation Qualified Use Recapture Tax Special Considerations Amount Subject to Recapture Payment of the Recapture Tax Recapture Lien Release from Recapture Tax Liability Timber and the Recapture Tax The Election Decision Chapter 13. Deferral and Extension of Estate Tax Payments Overview of the Estate Tax Due Date Place of Payment Method of Payment Flower Bonds Estate Tax Option for Closely Held Business Interests Percentage Test Interest Payable on Deferred Tax Making the Election Acceleration of Unpaid Taxes Liability for Payment of the Tax What Constitutes a Closely Held Business Interest? What Constitutes Withdrawal or Disposition? Planning Opportunities PART IV. FORMS OF BUSINESS ORGANIZATION AND FOREST LAND OWNERSHIP Chapter 14. Sole and Joint Ownership Considerations Sole Ownership Nonspousal Co-Ownership Tenancy In Common Joint Tenancy Advantages of Nonspousal Co-Ownership Disadvantages of Nonspousal Co-Ownership Spousal Co-Ownership Legal Development xi

14 Page Federal Estate Tax Aspects Disadvantages of Spousal Co-Ownership Community Property Life Estates Chapter 15. Partnerships The General Partnership Partnership Mechanics Partnership Units General Partnership Attributes Flexibility Unlimited Liability Management Rights Partners as Agents Assignment of Partnership Interest Partnership Taxation Partnership Termination Estate Planning with Partnerships Minors as Partners Retained Control Spousal Partnerships Limited Partnerships Family Limited Partnerships IRS Attacks on Family Limited Partnerships Chapter 16. Corporations Corporate Formation and Management Qualifying as a Foreign Corporation Limited Liability Corporate Management Income Tax Implications of Incorporation Depreciation Taxation of Corporate Income C Corporation Subchapter S Corporations Requirements for Electing and Maintaining Subchapter S Status Estate Planning Considerations Lifetime Transfer of Stock Transfers to Minors Estate Settlement xii

15 Page Loss of Capital Corporate Disadvantages Revised Estate Plans Chapter 17. Limited Liability Companies Organization and Operation Articles of Organization Members Operation Management Tax Considerations Basis and Distribution of Property Implications for Timber Properties Estate Planning Chapter 18. State Transfer Taxes Types of State Transfer Taxes Effect of the Economic Growth and Tax Relief Reconciliation Act Current State Transfer Taxes State Transfer Taxes and Estate Planning Chapter 19. The Benefit of Planning a Forest Estate or the Cost of Not Planning Hypothetical Family Timberland Example 19.1 No Estate Plan Example 19.2 A Simple Plan Example 19.3 A Balanced Estate Plan APPENDICES Appendix I: Source by Order of Appearance: Laws and Regulations, Court Cases, Publications, IRS Forms and Publications, IRS Rulings and Positions Appendix II: Glossary Appendix III: IRS Form 706 United States Estate (and Generation-Skipping Transfer) Tax Return Appendix IV: IRS Form 709 United States Gift (and Generation-Skipping Transfer) Tax Return, xiii

16 List of Tables Table 2.1 The high cost of dying average settlement costs at death based on Federal estate tax in 2008, plus an average administration cost of 5 percent... 8 Table 3.1 Federal unified estate and gift tax rate schedule, through Table 3.2 Estate tax applicable credit and exclusion amounts Table 18.1 State transfer tax systems in the Northeast, Table 18.2 State transfer tax systems in the North Central region, Table 18.3 State transfer tax systems in the South, Table 18.4 State transfer tax systems in the West, Page List of Figures Figure 1.1 Estate planning readiness questionnaire... 5 Figure 9.1 Marital deduction and applicable credit planning for two estate transfers Figure 10.1 How much insurance is enough? xiv