Thanks to Senate gridlock, taxpayers who are trying to do effective estate tax planning are in for a case of estate tax whiplash over the next few months.  The federal estate tax is due to disappear for one year starting in about two weeks, however, it may reappear unexpectedly and retroactively.

When the Senate refused to act this week, it opened the door for the estate tax to disappear in two weeks, although nobody knows for how long.  Under current law, the estate tax disappears on January 1, 2010 for the whole year and then reappears on January 1, 2011 at the old 2001 rates.  Also, the gift tax maximum rate will fall to 35% and for some assets inherited in 2010, the step up in basis will disappear (with the step up in basis, the capital gains tax is based upon the difference in value between what you sell it for and what it was worth at the time of death.  With the new law, you use “carry over basis” which means you need to go back and find out what the heir originally paid for it and use that basis.  This could end up being an accounting mess).  All this happens because the 2001 tax act phased out the estate tax over a 10 year period, repealing it entirely in 2010.  But the estate tax returns in 2011 under 2001 rules – a $ 1 million exemption and a 55-percent top rate.

The House had passed a law a couple of weeks ago making the current top rate of 45% and exemption amount of $3.5 million permanent.  Senate republicans wanted the rate lowered to 35% and the exemption at $5 million.  But lacking any unity in the Senate, Democrats failed to even get the Senate to vote on the issue.

The whiplash mess is that we are not sure if Congress will get their act together in early 2010 and pass a new estate tax law and whether it will be retroactive to January 1, 2010.  Senate Finance Committee Chair Max Baucus (D-Montana) has promised to revive the issue next month and make it retroactive to January 1, 2010, but that may not happen. 

In the meantime, I would not be making any large gifts assuming the new law will be in place.  You will want to watch and see what happens and when the dust settles, make your plans then.

An article in the Denver Post today and in other papers outlined a program in Iowa that is designed go help young non-farmers become farmers by hooking them up with farmers that are ready to retire.

This particular program is located in Iowa at Iowa State University and is headed up by Dave Baker.  The program is called the Beginning Farmer Center and it appears that they have helped up to 30 beginning farmers get partnered up with retiring farmers over the last three years. 

Although the program is designed to help younger people who want to get started in farming, but do not have the needed capital to do it on their own, it appears that there is no age limit on who can participate.

If you are nearing retirement and have no heirs who are interested in farming, this program or others like it in other states may help you partner up with somebody who wants to farm and would be willing and able to continue your farming legacy.  It is worth taking a look at it.

The people behind Successful Farming have developed a network for new farmers called Farmers for the Future.  They have had at least one conference and Loren Kruse, Editor-in-Chief of Successful Farming recapped the key ideas from the last conference.

This recap had many good ideas for new farmers, but I think almost all of the ten themes listed apply to all farmers.

The themes were as follows:

• Follow up your dreams with a written plan
• Look for other opportunities
• Build an attitude for success
• Hone your people skills
• Make your farm as special as a s business
• Know your strengths
• Build your reputation for things that matter
• Try new things
• Balance family and farming
• Help others grow

The three themes that really stood out to me were:

Follow up your dreams with a written plan- I am a firm believer in writing what you want to accomplish.  It does not need to be fancy, but write down on paper (or type it, etc.) what your goals are for the farm.  Make sure to list both business, i.e. how many acres I want to farm, what types of crops, etc. and personal, i.e. do you want your spouse and children involved, etc.  Although I have not seen a study, it is my firm opinion that a study would show that a written plan is achieved much more than a verbal plan.  If it is in writing, your spouse, banker, marketing advisor, attorneys, will all be happier.  WRITE IT DOWN.

Know your strengths- I think too many people spend too much timing on correctly their weaknesses and not enough time on expanding and promoting their strengths.  By the time you are out of high school (I would say kindergarten for most people), your traits are pretty well set for life.  Why get frustrated on trying to fix weaknesses that are very hard if not impossible to change, while you could be enjoying enhancing what you do well.  You can always find other people or advisors to do what you do not do well.  PROMOTE YOUR STRENGTHS.

Build an attitude for success – Attitude can be more important than perceived reality.  If you think you will be a success, it will be much easier than if you think you will be a failure.   Surround yourself with others that believe in you and your farm, continue to read and learn.  These steps will build a stable platform for farm success (and life success).  BUILD A SUCCESSFUL ATTITUDE.

I think over the next several months major changes will be made to the estate tax laws.  Right now, each individual can have a tax-free estate of $3.5 million.  Next year it is unlimited, however in 2011, it reverts back to $1.0 million. 

I think Congress will make changes this year to make the current $3.5 million estate permanent and indexed to inflation.  I also think they will allow married couples to combine the estates if it was not used up at the first death.  Farmers will most likely be allowed to reduce their farm valuations by a larger amount than is currently allowed.  All of these amounts may also be indexed with inflation.

This means that most farmers should be able to pass on their farms to heirs on a estate-tax free basis.  If the total value of the farm and other assets is less than $7.0 million, then it should be estate-tax free.  I know there are many farms with a value greater than $7.0 million, but compared to the old $2.0 million combined limit, these new amounts will make many more farms free from tax.

I was one of the last baby boomers (missed the 1950’s by 28 days) and all of my four boys will end up being known as the Millennial generation. Many of these will end up being your employees and the type of compensation and feedback that works for us does not work for them.

Chris Howard, Ph. D at the University of Oklahoma provides insight into how to interact with this generation. Some characteristics of this generation are:

• Taught to question authority at a young age.
• Saw lifelong employment end.
• Have no shared heroes–heroes are personal such as friends known to them.
• Question the sacrifices that Boomers have made to achieve their success.
• They are latch-key kids and raised as their parent’s “friends.”
• In thinking, they are independent, poor team players and great entrepreneurs.
• Have an attitude of prove it to me.

I can tell you all four of my boys have most if not all of these characteristics.

Dr. Howard also indicated that Millennials are:

• Generally optimistic.
• Hi-tech with electronically inclined communication and entertainment (my son’s cell phone at 2,600 text messages in one month).
• Individualistic, yet team oriented.
• Difficult for them to focus on “non-stimulating stuff” it’s DVD over books.
• New types of friendships with parents–parents catered to their wishes and did the most possible for their Millennial kids.
• Ambitious yet may appear clueless–once they accomplish a task they “expect gold medals for showing up,” but they are highly confident in their ability.
• They are “needy.”

We need to understand this generation to work effectively with them. We need to understand that they are not wrong, but simply different and the goals that worked for our generation do not apply to them.

The quicker that you grasp and promote this, the better your employer/employee relationship with Millennials will be.

The old saying in real estate is that the only three things that matter are location, location, and location. To me, the three things that matter most in succession planning is communicate, communicate, and communicate.

Verbal communication between each of the generations involved is the important first step. What does the generation passing on the farm want to accomplish with the transfer. The generation receiving the farm needs to communicate their desires, goals and wants.  During this back and forth verbal communication ………….

Non-verbal communication needs to be observed and dealt with. Many times, one generation will communicate to the other in words and not realize by the non-verbal communication (facial expressions, posture, etc.) received that what they are communicating is either not being received properly or is being ignored. After all parties have given and dealt with their verbal and non-verbal communication, then ……

Written communication puts it into writing. These documents are generally prepared with the help of appropriate counsel and/or consultants.  However, many times, this is where it ends. To be effective, this written communication needs to be given to each party verbally including the interpretation of non-verbal communication. If all goes well, the plan will be implemented correctly and a good base will be laid to continue the plan for all generations.