Estate Planning for Forest Landowners: What Will Become of Your Timberland?

Chapter 1. The Importance of Forestry Estate Planning
Forest Ownership	3
A Diverse Group	3
What Can Happen?	3
The Purpose of This Book	4
Structure	4
Readiness Questionnaire	4
Chapter 2. Estate Planning Objectives and Considerations
The High Cost of Dying Unprepared	7
Unexpected Heirs	7
Unexpected Values	7
Transfer Costs	7
Estate Planning Considerations Particular to Forestry	8
Illiquidity of Land and Timber Assets	9
Low, Irregular Income	9
Continuity of Management	9
Unitary Nature of the Forest	9
Difficulty in Obtaining Credit	10
A Forest Management Plan as Part of the Estate Plan	10
Specific Estate Planning Objectives	10
Preretirement and Postretirement Security	11
Security and Compassion for Family Member	11
Equitable Treatment of Children	11
Continuity of the Forest Enterprise	11
Minimize Transfer Costs	11
Provide Flexibility and Durability	12
Estate Planning Team for Forest Landowners	12
Forest Landowner	12
Attorney	12
Certified Public Accountant (CPA)	12
Institutional Trust Officer	12
Chartered Life Underwriter (CLU)	12
Forester	13
Chapter 3. The Federal Estate and Gift Tax Process
Background	15
Unified Rates and Credits	15
Unified Rates	15
Applicable Credit Amount	15
Determination of Gross and Taxable Estate	15
Gross Estate	15
Valuation	17
Taxable Estate	17
Determination of Tax Due	18
Credit Reductions	18
Estate Tax Computations	18
Chapter 4. Valuation of Assets for Estate and Gift Purposes
General Considerations	21
Undervaluation	21
State Death Tax Considerations	21
Special Considerations	21
Discounting for Minority and Undivided Interests	21
Life Insurance	22
Future Interests	22
Closely Held Corporate Stock	22
Factors to Consider	22
Degree of Control	23
Valuation Discounts	23
Partnership and Limited Liability Company Interests	24
Valuation Discounts	24
Deathbed FLP Agreements	24
Limited Liability Company Interests	25
Forest Land and Timber	25
Methods of Valuation	25
Valuation of Bare Land	26
Valuation of Merchantable Timber	27
Valuation of Premerchantable Timber: A Case Study	27
Reported Timber Specific Court Decisions	29
Corporate Stock	29
Partnership Interests	29
Fee Interests	29
Chapter 5. The Legal Process
Basis of the Law	31
Statutory Basis	31
Administrative Basis	31
Judicial Basis	31
Wills	31
Need for and Advantages of a Will	31
Will Preparation and Execution	32
Joint, Mutual and Reciprocal Wills	32
Changing a Will	32
Power of Attorney	32
Durable Power of Attorney	32
Springing Power of Attorney	32
Probate	32
Probate Administration and Costs	33
Chapter 6. Use of the Marital Deduction in Estate Planning
Overview	37
Qualifying for the Marital Deduction	37
Status as Surviving Spouse	37
Transfer of Property Interests	37
Exceptions to the Terminal Interest Rule	38
QTIP Election	38
The General Power of Appointment	38
Survivorship Condition	38
Right to the Payment	38
An Income Interest	38
QTIP and the Marital Deduction	38
Qualification for the QTIP	38
Contingent Income Interests	39
To What Extent Should the Marital Deduction Be Used?	39
Legal Rights	39
Nontax Factors	39
Marital Deduction Deferral	39
How to Make a Marital Deduction Bequest	40
Basic Patterns	40
Formula Marital Deduction Bequests	41
The Choice of Marital Deduction Formula	41
Chapter 7. Disclaimers, Settlements, and Elections to Take Against the Will
General Considerations	43
Disclaimers	43
Disclaimer Requirements	43
Interaction of State and Federal Law	43
Disclaimer Provisions in the Will	44
Disclaimers by the Surviving Spouse	44
Disclaimers in Favor of a Surviving Spouse	44
Charitable Disclaimers	44
Will Settlements	44
Election Against the Will	44
Chapter 8. Gifts of Forestry Assets
Overview	45
Some Reasons for Gifts	45
Gifting Tax Considerations	45
Incomplete Gifts	46
Gift Tax Rates, Credits, and Exclusions	46
Split Gifts	48
Basic Gifting Strategies	48
What Type of Property to Give	48
Income Tax Basis	49
Installment Sales and Gifting of Installment Notes	49
Gifts to Minors	49
Custodianship	50
Guardianships	50
Trusts for Minors	50
Gifts within 3 Years of Death	51
Charitable Gifts	51
Overview	51
Charitable Income Tax Deduction	51
Charitable Estate Tax Deduction	52
Gifts with Retained Interest - Charitable Remainders	52
Qualified Conservation Contribution	54
Chapter 9. Role of Trusts
Overview	57
Basic Considerations	57
Trust Provisions	57
Nontax Benefits	57
Tax Treatment of Trusts	58
Income Taxes	58
Estate Taxes	59
Gift Taxes	60
Types of Trusts and Applications	60
Living Trusts	60
Testamentary Trusts	62
The Importance of Flexibility	62
Use of Trusts and Disclaimers in Marital Deduction Planning	63
QTIP Trust	63
Power of Appointment Trust	64
Estate Trust	64
Disclaimer	65
Trustees	65
Individual versus Institutional Trustee	65
Family Co-Trustees	65
Successor Trustees	65
Trustee Powers	65
Chapter 10. Life Insurance
Role of Life Insurance	67
Insurance Program	67
Estate's Needs	68
Uses	68
Types of Insurance	68
Term Insurance	68
Whole Life Insurance	69
Other Insurance	69
Estate and Gift Tax Considerations	69
Proceeds	69
Transfer of Ownership	69
Choice of Primary and Contingent Beneficiaries	70
Tax Liability	70
Beneficiary Designation	70
Insurance Trusts	70
Other Considerations	70
Settlement Options	70
Replacing Policies in Force	71
How Much Insurance is Enough?	71
Income Producer	71
Periodic Review	71
Chapter 11. Installment Contracts
General Provisions	73
Basic Requirements	73
Restrictions	73
Mechanics of the Election	73
The Interest Portion of Installment Income	74
Computing the Gain	74
Estate Planning Considerations	74
Advantages	74
Disadvantages	75
Other Considerations	75
Use of Installment Sales to Facilitate Gifts	75
Installment Obligation Dispositions at Death	75
Income Tax Basis	75
Transfer to the Obligor	75
Installment Sales by the Estate	76
Chapter 12. Special Use Valuation
Reduction in Value	79
Community Property	79
Qualifying Conditions	79
Qualified Heirs	80
Qualified Use	80
Material Participation	81
The 50- and 25-Percent Tests	82
Election and Agreement	83
Election	83
The Agreement	84
Valuation	84
Alternate Valuation	84
Special Use Valuation of Forest Land	84
Other Valuation Considerations	86
Postdeath Requirements	86
Continued Ownership Within the Period	86
Material Participation	86
Quailified Use	86
Recapture Tax	86
Special Considerations	86
Amount Subject to Recapture	87
Payment of the Recapture Tax	87
Recapture Lien	87
Release from Recapture Tax Liability	87
Timber and the Recapture Tax	87
The Election Decision	88
Chapter 13. Deferral and Extension of Estate Tax Payments
Overview of the Estate Tax	89
Due Date	89
Place of Payment	89
Method of Payment	89
Flower Bonds	89
Estate Tax Option for Closely Held Business Interests	89
Percentage Test	89
Interest Payable on Deferred Tax	90
Making the Election	90
Acceleration of Unpaid Taxes	90
Liability for Payment of the Tax	91
What Constitutes a Closely Held Business Interest?	91
What Constitutes Withdrawal or Disposition	92
Planning Opportunities	92
Chapter 14. Sole and Joint Ownership Considerations
Sole Ownership	95
Nonspousal Co-Ownership	95
Tenancy In Common	95
Joint Tenancy	95
Advantages of Nonspousal Co-Ownership	95
Disadvantages of Nonspousal Co-Ownership	95
Spousal Co-Ownership	96
Legal Development	96
Federal Estate Tax Aspects	96
Disadvantages of Spousal Co-Ownership	97
Community Property	97
Life Estates	97
Chapter 15. Partnerships
The General Partnership	99
Partnership Mechanics	99
Partnership Units	99
General Partnership Attributes	99
Flexibility	99
Unlimited Liability	100
Management Rights	100
Partners as Agents	100
Assignment of Partnership Interest	100
Partnership Taxation	100
Partnership Termination	100
Estate Planning with Partnerships	100
Minors as Partners	100
Retained Control	101
Spousal Partnerships	101
Limited Partnerships	101
Family Limited Partnerships	101
IRS Attacks on Family Limited Partnerships	102
Chapter 16. Corporations
Corporate Formation and Management	103
Qualifying as a Foreign Corporation	103
Limited Liability	103
Corporate Management	103
Income Tax Implications of Incorporation	104
Depreciation	104
Taxation of Corporate Income	104
“C” Corporation	104
Subchapter S Corporations	105
Requirements for Electing and Maintaining Subchapter S Status	105
Estate Planning Considerations	106
Lifetime Transfer of Stock	106
Transfers to Minors	106
Estate Settlement	107
Loss of Capital	107
Corporate Disadvantages	107
Revised Estate Plans	108
Chapter 17. Limited Liability Companies
Organization and Operation	109
Articles of Organization.	109
Members	109
Operation	109
Management	109
Tax Considerations	110
Basis and Distribution of Property	110
Implications for Timber Properties	110
Estate Planning	110
Chapter 18. State Transfer Taxes
Types of State Transfer Taxes	111
Effect of the Economic Growth and Tax Relief Reconciliation Act	111
Current State Transfer Taxes	111
State Transfer Taxes and Estate Planning	116
Chapter 19. The Benefit of Planning a Forest - or the Cost of Not Planning
Hypothetical Family Timberland	117
Example 19.1—No Estate Plan	117
Example 19.2—A Simple Plan	118
Example 19.3—A Balanced Estate Plan	118
Appendix I. Source by Order of Appearance: Laws and Regulations, Court Cases, Publications, IRS Forms and Publications, IRS Rulings and Positions	121
Appendix II. Glossary	129
Appendix III. IRS Form 706—United States Estate (and Generation-Skipping Transfer) Tax Return	133
IRS Form 706—United States Estate (and Generation-Skipping Transfer) Tax Return	135
Schedule A-Real Estate	138
Instructions for Schedule A-Real Estate	139
Instructions for Schedule A-1-Section 2032A Valuation	140
Schedule A-1-Section 2032A Valuation	142
Schedule B-Stocks and Bonds	146
Schedule C-Mortgages, Notes and Cash	147
Instructions for Schedule C-Mortgages, Notes and Cash	148
Schedule D-Insurance on the Decedent's Life	149
Instructions for Schedule D-Insurance on the Decedent's Life	150
Schedule E-Jointly Owned Property	151
Instructions for Schedule E-Jointly Owned Property	152
Schedule F-Other Miscellaneous Property Not Reportable Under Any Other Schedule	153
Instructions for Schedule F-Other Miscellaneous Property	154
Schedule G-Transfers During Decedent's Life and Schedule H-Powers of Appointment	155
Schedule I-Annuities	156
Schedule J-Funeral Expenses and Expenses Incurred in Administering Property Subject to Claims	157
Instructions for Schedule J-Funeral Expenses and Expenses Incurred in Administering Property Subject to Claims	158
Schedule K-Debts of the Decedent, and Mortgages and Liens	159
Schedule L-Net Losses During Administration and Expenses Incurred in Administering Property Not Subject to Claims	160
Schedule M-Bequests, etc., to Surviving Spouse	161
Instructions for Schedule M-Bequests, etc., to Surviving Spouse	162
Schedule O-Charitable, Public, and Similar Gifts and Bequests	165
Schedule P-Credit for Foreign Death Taxes	166
Schedule R-Generation-Skipping Transfer Tax	167
Schedule R-1-Generation-Skipping Transfer Tax (Direct Skips From a Trust Payment Voucher)	170
Schedule R-1-Instructions for the Trustee	171
Schedule U-Qualified Conservation Easement Exclusion	172
Continuation Schedule	173
Instructions for Continuation Schedule	174
Appendix IV. IRS Form 709—United States Gift (and Generation- Skipping Transfer) Tax Return, 2008	175
IRS Form 709—United States Gift (and Generation- Skipping Transfer) Tax Return, 2008	177

Estate Planning for Forest Landowners: What Will Become of Your Timberland?

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