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Do you have clients who own and operate a family farm? There is a lot of political rhetoric these days about
the estate tax laws and preserving family farms. All of this talk will probably not result in any action before the
election. Look for any changes in estate tax laws in 2001, at the earliest.
However, there is an important Michigan initiative which may be of interest to your clients. The Michigan
Department of Agriculture is accepting applications for the Purchase of Development Rights (PDR) program
through November 30, 2000. This might make a lot of sense to families who want to keep farming and pass
the farm through succeeding generations, but are either burdened with debt or merely want to free up cash
and liquify their estates.
There has been publicity in recent years about the development right purchases on Old Mission Peninsula.
Now, the Michigan Department of Agriculture has opened the program again. Cash payments for
development rights will be determined on the basis of independent appraisals and are capped at $5,000 per
acre.
MDA releases indicate that larger parcels will be favored and that at least 51% of the land submitted must be
devoted to agriculture use. Moreover, the local zoning authorities will be required to approve the application. In
most cases, this would probably mean the township board where there is township zoning in effect.
Tax Issues. The sale of development rights by active farmers offers interesting income and estate tax
planning opportunities. Cash payments would be subject to capital gain tax (maximum 20%). However, the
easements created by the sale of development rights would reduce the appraised value of the land
significantly which could result in estate tax savings of as much as 55%.
In the event that an appraisal determines that the development rights are worth more than $5,000 per acre,
the sale would be considered a bargain sale with an appropriate income tax deduction for the excess value.
In such case, interesting income tax calculations would arise involving complicated basis allocations.
The important point from the standpoint of your clients is that this may be an opportunity that fits their situation
and they should not wait until the last minute to secure the proper application forms from MDA’s Farmland
and Open Space Preservation office at (517)373-3328. As a professional advisor, you can inform your clients
of this opportunity and the deadline involved.
Conservation Easements. Donated conservation easements have been the subject of prior newsletters
because of the double or triple tax benefits available:
- Federal income tax deduction for the value of the easement
- Reduction in the taxable value of the land, because of the easement, for estate or gift tax purposes
- The right, in some cases, to an exclusion from federal estate tax of 40% the remaining value, under
Section 2031(c) of the Internal Revenue Code.
2031(c) exclusion can be icing on the cake providing a cash benefit, depending tax brackets, in excess of the
value of the conservation easement.
There are complicated formulas for determining the amount of the exclusion, the basis of the property in the
hands of the recipient and, of course, the impact of a bargain sale of development rights where the
transaction is part sale part contribution.
Conclusion. This is an example of special tax and legislative provisions that allow your clients to do well by
doing good. Many farmers say that they are not farming for the money, but because they like
the lifestyle. There are current Michigan property tax initiatives to help farmers stay on the farm and we have
outlined some of the opportunities that are available to those farmers and their families who want to keep the
farms in the family.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| Estate Planning Articles 2007 |
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| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| September 2000 PRESERVING THE FAMILY FARM by James R. Modrall III, J.D., C.P.A. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |