Question: My mother is 82 years old. My father passed away this past January. They owned a 274-acre farm and a small house in town - all of which are paid for. They owned everything jointly, so all of it is hers now.
They had a will leaving everything to their two grown children upon their death. My brother is 57 years old and a bachelor; I'm the daughter, 51 years old, married with two grown sons. My brother farms all of the land on shares.
What is the best way for my mother to pass the farm on to her children without paying huge sums of money for probate and inheritance tax?
Answer: At age 82, it's time for your mother to be making decisions to conserve and pass on her estate. Since your mother now owns the entire estate, essentially your father's estate tax exemption was lost.
If the estate value is more than $625,000, which would require some estate tax due, you might ask your attorney about your mother disclaiming some of her husband's share of the estate. A disclaimer means that a potential beneficiary refuses to accept a bequest under the terms of a will or trust. For federal tax purposes, the disclaimant is regarded as never having received the property, so it would pass to the next legal recipient.
Disclaiming assets isn't as advantageous as having a decedent conserve their estate tax exemption, but it's better than nothing.
(Please note that if a beneficiary has received any benefit from property - like income from a crop grown on land they want to disclaim - they cannot later disclaim the property.)
Whether or not "huge sums of money" will have to be paid out in taxes depends on the value of the estate. An estate deemed to be over $625,000 (in 1998) can sometimes have the value reduced for the sake of federal estate taxation. In addition to tools like disclaimers, Special-Use Valuation (2032A of the Internal Revenue Code) can decrease the value of land.
The "2032A" Provision You mentioned that your brother farms all the land "on shares." I assume this indicates a crop-share situation between your mother and brother. If that is the case, then "2032A" may fit.
This provision can reduce the value of the land up to $750,000. The land must be currently in agricultural use, the taxpayer must be actively involved five out of eight years prior to death, and the qualifying heir agrees to keep the land in ag use for 10 more years. In addition, the value of the land itself must be at least 25% of the taxpayer's estate.
Gifting is an excellent way to reduce an estate; however, there are many rules that taxpayers should be aware of. Due to limited space, I'll just mention a couple.
Often, older taxpayers begin giving away large parts of their estate, thinking that they'll then qualify for Medicaid if they later need to be admitted to a nursing home.
Gifts are generally limited to $10,000/recipient/year. Excess gifts can trigger gift taxes, and it's important to keep a "three-year rule" in mind. Any asset transferred out of an estate within three years of applying for assistance is calculated back into the value of the estate when determining whether or not the individual needs help paying for care.
So, someone who gives away a couple sections of land can put themselves in a bind. They no longer have the land to sell to pay for expenses, but the government deems that they do.
I believe Kansas has a state "inheritance" tax. This is separate from (and in addition to) any federal estate tax that might be due. An estate tax is paid by the estate before any assets are distributed to heirs. An inheritance tax is paid by the person receiving the inheritance.
A "Buy-Sell" Agreement With your brother currently farming, perhaps it's appropriate that he ultimately end up with the land. A "Buy-Sell Agreement" between the two of you can avoid costly legal disputes later on. He could end up with the farm and you could receive some money by selling your share to him.
To answer your question, "What is the best way to pass the farm on ... ?" In my opinion, determine the value, plan for the use of legitimate estate-reduction techniques if necessary (gifting, disclaimers, Special-Use Valuation, Irrevocable Trusts); and devise an equitable disposition plan between heirs. If a tax is inevitable, planning a payment method is also imperative.