Impending Fiscal Cliff Presents Challenges to Gifting Legacy Land

Posted by on Nov 27, 2012 in Blog, Estate Planning, Written by Thomas Hall | One Comment

By Thomas Hall, Estate Planning attorney and counselor at Braun & Gresham.

In the last quarter of 2012, more of our nation’s wealth is being transferred between generations than at any other time in our history.  This monumental transfer is caused by a confluence of factors, including the demographic reality of an aging population wave, and the changing federal gift tax law brought on by the impending “fiscal cliff.”

For the last two years the federal gift tax exemption amount – the amount you can pass to a non-spouse without paying gift tax – increased to $5 million dollars in 2011, and to $5.12 million dollars in 2012, the highest this exemption has ever been. But all that changes at the stroke of midnight on December 31st, 2012 if the nation plunges over the so called “fiscal cliff.”  The gift tax exemption then plummets to $1 million dollars and the tax rate rises sharply.  If President Obama’s budget is any guide to what Congress may enact, the lifetime gift exemption will be set at $1 million dollars.  While the federal gift tax exemption amount remains high and Congressional action remains uncertain, many families are rushing to complete lifetime or “inter vivos” gifts in this final month of 2012 in case the federal government fails to avert a fall over the fiscal cliff.

Gifting Legacy Land at the Edge of the Fiscal Cliff
Many families are transferring important family real estate, such as the family ranch, farm or vacation home, before a fall from the fiscal cliff reduces the gift tax exemption to $1 million dollars on Dec. 31st, 2012.

Professional advisors routinely counsel families to gift those assets during life which are expected to appreciate in value in the future.  By making such gifts during life all of the assets’ future appreciation is expected to escape estate tax at the donor’s death.  For this reason, many families are choosing to transfer important family real estate, such as the family ranch, farm or vacation home, to take advantage of the large gift tax exemption before a fall from the fiscal cliff reduces the exemption to $1 million dollars.

But these legacy lands are different than other, more fungible assets, especially considering their emotional significance to the family.  The family is not splitting up a pile of money.  The family ranch can only be divided between ever-increasing numbers of heirs before the ranch looses its integrity.  Without creative, thoughtful estate planning, families could be putting their land’s habitat, resources and family heritage at risk by attempting to subdivide and partition it like a more liquid family inheritance.

The Value of Gifting Legacy Land

By choosing to transfer family lands, the older generation is communicating a set of values to the next generation. Families express these values in a variety of ways.  In a traditional sense, a family’s wealth has historically been based in land ownership.  By transferring land, parents are passing security to their children. Some families desire that the legacy land will become the focus around which future generations may gather, thereby preserving family tradition and familial relationships, and providing future generations with a sense of identity tied to the land.

But gifting family lands to the next generation presents important challenges, both for the parents transferring the land and the children receiving it. Unlike cash or stocks, family land often is a highly illiquid asset. Parents sometime make this gift because legacy land is less likely to be sold or squandered.  By transferring wealth through land, the older generation is attempting to limit the next generation’s options, in order to protect the youngsters from themselves. And since maintaining the family farm or ranch can sometimes become a financial burden, it also allows the older generation, concerned with its own cash flow needs, to keep more liquid assets to maintain income.

Questions Arise When Gifting Legacy Land

Families must answer many questions and solve many problems in making gifts of legacy land between generations.  Does the next generation want the family ranch?  How does the older generation’s vision for the land fit with the younger generation’s vision? What is the best way to make such a transfer to accomplish the family’s goals, including family harmony and tax goals?  Should there be transfer restrictions that attempt to keep ownership within the family line? What is the exit strategy if someone wants out? How will the property be managed after the transfer?  What strategies can reduce the cost of land ownership, or conversely, generate new sources of income from the land to pay the  land’s carrying costs.

Subsequent blogs will examine a variety of answers to these questions, including specific strategies such as the use of business entities like limited partnerships, using irrevocable trusts to hold the land or endow operating expenses, strategies related to charitable giving, inter-generational gifts of land subject to conservation easements, strategies to generate cash flow by restoring worn out land, and risk and liability management strategies. We’ll also keep you up to date on the latest advancements in congress as they relate to the federal gift tax law as we move closer to December 31st.  Fasten your seat belts as we approach the fiscal cliff.

1 Comment

  1. Joyce Lucas
    November 27, 2012

    Thomas, I’m so grateful and blessed that I did what I did when I did! Again, I say thank you!

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