The Federal Estate Tax was set to expire in 2010 meaning that no matter how much money you had when you left this world, there would be no federal estate tax on the money you would leave to your beneficiaries for that year.  Then it would start again in 2011 with a lower threshold.  However, President Obama’s budget will keep the estate tax at its current level of 45% for those estates valued at over $3.5M in 2010.

While most of us would probably be feeling pretty good if we had over $3.5M when we passed on, we would still like to protect as many assets as possible for our spouses, children, and other beneficiaries.  I, like Sen. Ensign, believe that this will have a dramatic and conceivably detrimental effect on small businesses and especially family farms.

Farmers are what I like to call “dirt rich.”  Meaning that most of their money (and there is a lot of it with the increasing land values) is tied up in their land.   Many larger family farms will exceed the $3.5M threshold, forcing the estate to pay the exorbitant 45% tax.  Because these “land assets” are not liquid, many family farms could be forced to sell much of their land just to pay the tax.  This would be a heartbreaking result.

This is definitely something that many small business owners and family farmers will want to pay attention to this year.

The company is Iowa Assessment Advisors and I wish them much success.

An interesting read for those interested in property tax related matters: County assessors get set for property tax protests.

The Court of Appeals, however, found more convincing the testimony of the property owners’ expert witnesses, and reduced the assessment to $230,000 for the assessed years.  (For specific reasons to protest the assessment please see our previous blog entry.)

This case amounts to what we refer to as a “battle of the experts” because both sides are forced to offer expert testimony as to what they believed to be the correct assessed, or true, value of the property.  If the property owners (taxpayers) are able to “’offer competent evidence by at least two disinterested witnesses that the market value of the property is less than the market value determined by the assessor,’ the burden shifts to the board of review to uphold the assessed value.”[1]  In this case the taxpayers were able to provide two disinterested expert witnesses who indicated that the assessed value was too high.  The primary evidence offered by the experts in this case revolved around the specific properties that the witnesses were referencing in their comparable sales formulas.

After review, the Supreme Court determined that even though the taxpayers were able to provide two disinterested expert witnesses, the District Court was correct in its initial ruling that the assessment was not excessive or inequitable due to the comparable sales evidence provided by the board of review’s witnesses.

An interesting note, the tax savings sought by the taxpayers amounted to a little more than a few thousand dollars…heaven knows how much they spent pursuing this matter all the way to the Iowa Supreme Court.  As I mentioned last time, the decision to pursue litigation in property tax assessment cases is almost entirely economical.

It’s 2009, so what does that mean to you as a property owner?  Reassessment time and possibly new property tax time!  I know…it’s definitely something to get excited about (tongue firmly in cheek).   Iowa state law requires that all real property be assessed every two years in odd-numbered years.

It will be very interesting to see what the numbers look like this year, in light of the declining real estate market and more recent financial downturn.

The process is fairly simple and understandable, the county assessor (or the Iowa Department of Revenue) will venture out and estimate the value of each property individually. The value the assessor establishes is called the “assessed value.”

Property owners who disagree with the assessor’s estimate of the market value of their property may protest or appeal their initial assessments to local boards of review by filing a written protest between April 16 and May 5 of each year. These boards meet annually in May to consider the protests.

A property owner may protest an assessment for one or more of the following reasons:

• The assessment is not comparable to others with similar properties.
• The property is assessed at more than its actual value.
• The property is exempt from taxation.
• There is an error in the assessment.
• The assessment is fraudulent.  (Iowa Code § 441.37).
• There has been a change of value in the parcel of real property since the last assessment. Note that this is the only ground upon which a protest concerning the valuation of a property can be filed in the year in which the assessor has not assessed or reassessed the property at issue. (Iowa Code § 441.35).

A property owner may appeal the protest to the property assessment appeal board, if the owner is dissatisfied with the boards’ decision. Either party dissatisfied with the actions of the Board of Review concerning the protest of the assessment at issue, may file an appeal from the Board of Review decision with the Iowa District Court within 20 days after a chairman of the Board of Review or May 31, whichever date is later.  Alternatively, property owners may still file appeals directly with the district court and bypass filing with the property assessment appeal board.  The filing fee for the appeal to the district court is $100, and the appeal cannot allege any new grounds other than those alleged in the initial protest, but may supply additional evidence.

A property owner should seriously consider the merits of their case and the overall value of the tax before pursuing the appeal in district court.  A property owner could end up spending much more in legal costs than the benefits of a lower assessment would warrant.  Therefore, the property owner must weigh the economic benefits of having the assessment lowered versus the economic costs of pursuing the appeal.

If you would like more information regarding Iowa Property Tax Protest and Iowa Property Tax Appeals please feel to contact us at the Kreamer Law Firm offices at 6600 Westown Parkway, Suite 190, West Des Moines, Iowa 50266. 

1.                  Buy-Sell Agreements. The Buy-Sell sets forth the terms under which owners will hold their interest while employed or associated with the farm, and also sets forth the terms and conditions under which an owner’s interest will be transferred upon the occurrence of certain triggering events such as death, disability, and/or termination of the owner’s relationship with the farm. 

2.                  Estate Planning Documents.  An owner’s will sets for the terms for which his estate will be distributed upon his death.  His estate includes all assets owned by the owner at the time of death. The estate plan (will) should specifically address how farm assets as well as non-farm assets are to be handled at the time of death.  In many farms, the active farm members do not want to have to involve their non-farm siblings in the day to day decisions that have to be made on the farm and what could be even worse is when the non-farm siblings have a financial stake in the operations.  Properly prepared estate planning documents together with business planning agreements avoid these problems. Trusts may also be used in connection with the farmer’s estate plan.  These trusts may be created during lifetime or at the time of the farmer’s death.  In both cases, the documents should be structured with the farm succession plan in mind. 

3.       Gifting Program.  With a properly structured gifting program in place, ownership of the farm may be transferred over a period of years from one generation to the next.  Such a plan may reduce income taxes as well as estate taxes.  A gifting plan also allows the new generation to have the ability to gain experience over time in operations, lender and vendor relationships, etc. while the senior generation is still available to help.         

 - The gifting program is usually used in conjunction with one of the previously discussed agreements.  

4.               Operating Agreements.  The operating agreement (or bylaws) are what we like to call the Constitution of your business (important if you are choosing an entity to run the farming operations).  This document sets out the rules that your entity must follow.  Typically these documents correspond with the state business code, but can be modified to meet the individual needs of your particular operation. 

5.               Others.  These are other documents that may be considered when putting your plan into action, but are not necessarily needed to implement your succession plan. 

a.      Employment Agreements.  

b.      Lease Agreements. 

1. Plan early.
2. Write a shared family vision, for example, “We want our family farming to be harmonious, consensual, enjoyable, and profitable.”
3. Write shared goals.
4. Seek the assistance of competent transition planners to make a “transfer team”–, attorneys, accountants, financial planners, insurance agents, Cooperative Extension state specialists, bankers, and other people-skill professionals.
5. Maintain open communication and effective problem solving, especially with issues of perceived inequity.
6. Make no assumptions about the feelings or plans of others who may be involved in the succession process (i.e. children, spouses, etc.).  Find out what those feelings are.
7. Allow and acknowledge feelings about the transfer process.  When people know what is planned, they are better able to cope, even though they may not like the plan.
8. Reduce the older generation’s involvement in heavy labor, management and land, while at the same time increase the younger generation’s involvement in all three.

The hardest part will be the initial meeting with the family, so as number 1 clearly states, get it done as soon as possible.

Senior Generation’s Objectives 

1.                  Retirement income and financial security

2.                  Farm continuation after retirement and death of parents

3.                  Equitable or non-equitable treatment of farm and non-farm heirs

4.                  Minimizing estate and income taxes for the parents and the next generation

5.                  Reduction or elimination of management responsibilities for the parents (or surviving spouse)

6.                  Protect assets for children and grandchildren with little if any exposure to creditors or spouses of children 

Younger Generation’s Objectives 

1.                  Assumption of management responsibilities

2.                  Attain or increase ownership

3.                  Assure income needs of parents in retirement does not impair children’s earning capacity on farm

4.                  Avoid involving non-farm heirs in management of farming entity, while still maintaining equity equality.

5.                  Avoid unnecessary imposition of estate taxes /plan for payment of estate taxes through insurance on parents 6.                  Deductibility of retirement income payments to parents 7.                  Establish/maintain credibility in community and with lenders/vendors/customers Sitting down with your family may be the most difficult part of this process, but is vital in determining the success and future of your family farm. 

Why is this an issue? Over 70% of the $40 trillion in wealth that may transition to a subsequent generation during the next decade is equity in

• planning for a gradual shift in management from one generation to the next;
• shifting ownership of the assets involved from generation to generation; and
• anticipating events that could disrupt management and ownership succession.

Therefore, it is critical that parents and children begin thinking about this transition as soon as possible, so as to avoid any possible problems when it comes time to transfer the farm. I will be following up on this issue next week…so stay tuned! 

• Did not properly execute the Will;

• Lacked the required “testamentary capacity” to execute a Will; or

• Was “unduly influenced” to execute the Will.

Although occasionally there are will challenges based on execution of the Will, will contests based on either, or both, lack of “testamentary capacity” and “undue influence” are far more common.What does it take to prove a lack of testamentary capacity?An individual lacks testamentary capacity, if, at the time of execution of their Will, they do NOT:

• Understand the nature of the instrument they are executing;

• Know and understand the nature and extent of his property;

• Remember the natural objects of his bounty (i.e. their direct family members); and

• Know the disposition they are intending to make.

What does it take to prove undue influence in drafting and/or executing of the Will?In order for a Will to be invalidated based on a theory of “undue influence” the heirs would have to show (again, by a preponderance of the evidence) that, at the time of execution of the purported Will:

• The Individual was susceptible to undue influence,

• The beneficiary had the opportunity to exercise such influence and effect the wrongful purpose,

• The beneficiary had a disposition to influence the individual unduly for the purpose of procuring an improper benefit,

• The Will must clearly appear to be the effect of undue influence,

• The beneficiary in fact had dominance over the individual,

• The individual’s mind at the time of execution of the Will was such that they were subject to the beneficiary’s dominance,

• The general character of the disposition of their property is such that it “looks” like there was undue influence, and

• The actions of the beneficiary in connection with making of the New Will appear to have been coercive.

A suspicion, but not a presumption, of undue influence arises where the dominant party participates in, in either the preparation or execution of the contested Will.The act of undue influence is rarely witnessed; therefore, the common situation is one where undue influence is proven by circumstantial evidence.What happens if the heir’s lawsuit is successful?

• “When two Wills exist and a contestant challenges only the later one, and does so successfully, the earlier Will stands as the testator’s Will. Hence, the old Will (if there is an original in existence) “stands”. The parties may also challenge the previous Will.

• “When there is no prior Will, the individual’s property passes pursuant to the intestacy statute.