Last week, I talked about the high land prices that we've been seeing. I want to explore a similar topic – one that is equally important – but may not be forefront for most farmers.
Sky-high land prices can affect your estate when it comes to planning the best way to pass the farm to the next generation. On your final tax return, the IRS will fully value your land based on the current prices in your area. This will happen regardless of what you anticipate land prices to be, and may be different than what you expect.
That could change how you create your legacy plan. Most farmers tend to do a good job of making sure their farm balance sheet is up to date. But your personal balance sheet and net worth figures may not be as clear.
Your personal balance sheet should account for current average farmland prices in your area when estimating your net worth. That will enable you to capture a more accurate idea of the current value of your estate.
You may find that you're in a higher estate tax bracket than you think as a result of high land prices in your area. Knowing the full value of your estate allows you to make proactive plans to protect what you've worked so hard for.
Now, you probably shouldn't change that estimate of the value of your estate whenever a piece of land in your area is sold. That could get confusing and isn't necessary. But you do need to have a general idea of the value that Uncle Sam would place on your estate now – so you can create the best plan based on that.
The estate tax law situation is unclear as we head into 2013, but uncertainty about estate taxes is not a valid reason to put off planning. It's best to lay a plan using what we know today – and then review that plan regularly. Think about legacy planning as a process, not a one-time event that you finish and then forget about.
As land values – and possibly estate taxes – continue to soar, a strong legacy plan becomes even more important to operations that want to keep the farm in the family. The stakes have never been higher – but you can give the next generation a solid start in farming.