Some Estate Planning Considerations
 By Jim Burns

Poor Judd is dead! During his working life, he was able to purchase a number of timberland tracts, which now total 200-acres. He loved these lands and was proud of the good job of forest management he had done which had resulted in growing a large volume of high-quality sawtimber. The rest of his assets included life insurance, investments in stock, certificates of deposit and his house.

Since his wife passed away a few years ago, Judd Jr., his oldest son, had been working with him in the management of his timberlands. Judd always intended to leave the timberland to this son so the careful management of these assets would continue unchanged into the future. The remainder of Judd Sr.’s assets was to be split between his daughter, Sara and youngest son, Percy who had no interest in the timberlands.

Judd was always busy with work and never got around to having a will prepared by his attorney. He also envisioned “the kids will be reasonable and know what I want”. Unfortunately, without a will, the entire estate is now going to the children as 1/3 undivided interests each. Fathers’ intentions mean very little at this point. Are the children “reasonable”? Read on.

The quarrelling usually commences at the funeral or shortly thereafter. Judd Jr. and his son have been the only ones working with the timberlands and expected to inherit the timberlands. Percy, who lives in San Francisco, claims that Dad had given him (no deed) a favorite 40-acre tract and even called it “Percy’s 40". Other than that, he wants a 1/3 interest in all remaining assets.

The biggest surprise is Sara, who hasn’t seen her older brother or father in at least 25-years because she considered them “timber beasts” as they killed trees and called it management! Sara belongs to every loony “green” organization on the planet. She has completed her homework, however, and calculates that her 1/3 interest in the timber comes out to a cool $200,000.00 for the right to clear-cut the 200-acres. She has a contract from Quick Bucks Logging Company to prove it! The other part to her plan is to then sell the cut-over acreage and other assets. Poor Judd is really rolling in his grave!

Three heirs, three different viewpoints and excellent paying work for three lawyers. Is this an unusual scenario about a dysfunctional family? No! Based upon my years of experience as a forester and timber tax preparer, I would say this is the usual outcome. Even with the existence of a will there can be problems.

In this example, splitting-up the investments, insurance, CD’s and even equipment is not that big a problem, but real estate is. Anytime timberland is involved, all kinds of problems will transpire unless some legally binding direction has been pre-determined and codified.

There are numerous legal entities available which can be used to ensure that your future vision for the management and financial benefits of the timberland can be passed on to your heirs without causing an acrimonious end to the family. Trusts, LLC’s and partnerships would be a few examples. My objective in this article is not to advise which legal structure would be the best for you, but in realizing that one size does not fit all situations, I urge you to seek legal and accounting advice in this matter.

First of all, the advice I would like you to take to your attorney is the fact that timber is a capital asset and income from sales of timber should be reported as capital gain for federal and state income taxes. Reporting as such, you are entitled to take a Timber Depletion Deduction from the gross revenue to arrive at a net profit which is then taxed at the lower federal capital gain tax rates.

The depletion deduction is calculated from the cost basis of timberland, meaning; the higher the cost basis, the less income tax you will pay and, the lower the cost basis, the more income tax you pay. For example, if Judd’s father had purchased the timberland in 1945 for $100.00 – that would be his cost basis. Let’s say, in 1970 the father gives the land to Judd. The original cost basis goes with the gift, so Judd’s cost basis is only $100.00. Now, if Judd gifted the land to Judd Jr. before his death, Junior would only have a $100.00 cost basis in land that is worth a half million dollars today.

The better plan, tax-wise, would be to allow Judd Jr. to inherit the land which would give him a new cost basis of a half million dollars and little or no capital gain whenever he sold timber. Gifting timberland with a low cost basis is usually not a good idea.

The second tip you need to take to your lawyer concerns the actual future management of the timberland. Spell it out. If you have a written forest management plan, attach it as part of the legal document controlling the property. The other important part of this is to designate one person as the decision making authority. Timber sales are going to be made, contracts signed, property taxes incurred, easements, etc.

If two people are involved with decision making authority, the entire management process will go into slow-motion and perhaps cease. With three or more people involved, nothing will happen. Remember, when there are multiple heirs to timberland, the odds of having a ringer involved like “Sara” are high.

Jim Burns is a professional forester who owns and operates Burns Timber Tax Services and works in conjunction with Susan Metcalfe at Metcalfe Forestry LLC. For more information, call Susan at (989) 348-3596 with your questions.

TIMBER TAX TIP Myth or Fact: I don’t have to file a Form T if I have an occasional timber sale.

Fact: Actually, this is true. But you CANNOT show a depletion deduction (reduce your cost basis & reduce your tax liability on your timber sale revenue) with out filing a Form T. In other words, you must pay tax on the entire amount you earned from your timber sale if you choose not to file a Form T. Remember, as a landowner, you can amend your timber taxes up to three years prior.

TIMBER SALE INCOME TAXES
By Bill Cook MSU Extension Service Forester

If you received money in 2009 for the sale of timber, the government expects taxes to be paid on that income. The amount of tax you pay on that income will depend upon the nature of the timber sale and how well you follow the rules to minimize the tax liability.

Doing nothing will result in paying a higher tax (or perhaps penalties if you’re caught under-reporting!).

The first step might be to visit the National Timber Tax website at [ www.timbertax.org]. This resource is kept current with most recent changes in tax policy and provides access to forms and information.

You’ll want to download Form T, which is not a common form at the local library.

It may be worth your while to hire a professional tax preparer. Make certain the person knows about the timber sale income tax treatment. Some preparers do not. The IRS code is a bit obscure and there have been changes for the 2009 tax year.

The idea behind minimizing the tax bill is reducing the gross income to obtain a lower net income. There are three main ways to reduce the tax bill; 1) report income as capital gains, 2) calculate the timber basis and depletion, and 3) keep receipts for all out-of-pocket expenses related to the timber sale.

Check to learn if your timber sale income is eligible for capital gains tax rates, which are lower than ordinary income tax rates. Most timber sale income is eligible. You will need to have owned the timber for at least 12 months prior to sale. Also, capital gains income does not have to pay self-employment taxes, which is nearly 15 percent. You can save a lot with this tip.

Calculating basis and depletion values can be confusing. The basis is the monetary value of all your timber at the time it was purchased. Just the timber. Not the land. The depletion value is a portion of that basis and can be deducted from timber sale income based upon the percentage of total wood volume harvested. So, if you harvest half your wood volume; then half the basis value can be deducted from the timber sale income. If the entire forest was harvested, then the entire basis value can be deducted from the timber sale income. Working with a professional forester can help identify timber volumes and values. This calculation is especially helpful if you have owned your timber for less than 10 years or so.

Deductions are fairly easy to subtract from the gross timber sale income. You will need receipts. Some expenses can lie in a gray area of whether or not the expense was directly attributable to a timber sale. Expenses to hire a consulting forester, to set-up and administer the timber sale, is clearly a deduction. Building a graded road is debatable. Determinations might be best made with the help of a tax preparer that knows about timber sale taxation.

For many forest owners, a timber sale is a once or twice in a lifetime event. So, the same is true for the taxation part. If you’ve had a timber sale in 2009, then take advantage of the IRS rules that minimize the tax bill. If you’re contemplating a timber sale in the near future, you might want to take a look at these IRS rules before the sale. Planning ahead can sometimes save money

VULTURES ~ NATURE'S CLEAN-UP CREW
By Don Ingle

Not all birds returning to our northern forests in the springtime show up at your feeders. And while you might watch some birds there’s one bird that might be watching you from above.

It’s no time to play dead, either. Those avian eyes in the sky are owned by turkey vultures and as they soar high riding the thermals they are looking to do lunch on a rather gruesome menu by our standards.

But hey — these days a job’s a job.

Once turkey vultures have returned to their northern breeding grounds, they take up their task of being nature’s cleanup crew. Utilizing the carrion - road or winter kills -that are exposed once the snows have left, these big birds return to dine on the late and often rather ripe unfortunates of the wild.

Turkey vultures feed primarily on carrion - which they locate by smell or vision. As they soar they can see keenly for long distances and can smell odors from carrion from miles away.

They are often seen feeding in groups on large items like road killed deer, but will eat almost any kind or size of animal species — anything that won’t eat them first.

Though sometimes lumped in with raptors, they are not true raptors but certainly classed as birds of prey — dead prey.

To do their gruesome job, nature has equipped the vulture with certain protections from contact with carrion. The body of the vulture is protected from any bacterial disease it comes in contact with from spoiled remains of dead animals. To give the bird protection, the head is bare without feathered scalp so that the sunlight’s natural ultraviolet rays kill germs on the head area that might be fatal to other animals.

Likewise, the feet are also bare and featherless so that talons and legs that come in contract with the carrion also get their share of ultraviolet to kill germs.

The bird’s digestive track acids are so strong that no germs can live in it. And when the bird eliminates it does so on its legs and feet to further sanitize them.

Vultures breed in the northern parts of its range, Michigan included, and they are secretive in selecting nests sites. Often they lay eggs in old hollow snags, old fallen buildings, and most often on the ground in forested interiors away from most human disruption.

The female lays 2 eggs. When the chicks hatch out, they are truly something, by human standards, that only a mother could love. A ball of curly white down at first, they have a near charcoal gray featherless head and a sharp beak. That beak is made for tearing and ripping.

When approached a chick emits continuous hissing, displaying a willingness to put the beaky bite on you if you venture too close. A turkey vulture parent is fiercely protective of its young. If some intruder gets too close to the nest or young, the parent vulture will fly close in swooping moves and will regurgitate their last meal over the intruder as a defensive mechanism. Maybe offensive mechanism is more actuate; considering what a turkey vulture eats, it could be called a “weapon of mass disruption.” A young but full-grown vulture will not yet have the red head, yellowish bill, reddish legs of a mature, older vulture. But in size they remain the same. And they all exhibit a flight style that aids in identifying them. Their wings tend to form a “vee” in the center as they soar, while eagle wings tend to lie out straight without a dihedral shape in the center. From below they display a white band across both wings.

At this time, you do not need to drive very far to see high-soaring vultures circling over the landscape, honing in on their next meal, and doing the job nature has designed them to do.

For the turkey vulture, it’s just another day at work – with easy flying, nice aerial views, decent hours, and all the road kill they can eat!