Estate planning

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Farm Estate Planning: 

Farm Estate Planning Dennis Kauppila UVM Extension, 4/01 Thanks to attorneys CKClarke, WDMiller

Why plan an estate?: 

Why plan an estate? To keep control of assets and decisions During your life- if you are incapacitated After your death

Estate Planning Objectives: 

Estate Planning Objectives Asset management who owns what, how do they own it? Tax savings-mainly Estate Tax Asset distribution-who gets what? WHO are we planning for? WHAT do we have to plan about? WHAT are our estate planning goals?

Who owns what?: 

Who owns what? The BIG QUESTION: Do we have a taxable estate? Answer governs tools you need to use. BALANCE SHEET tracks assets and liabilities

Balance Sheet- what you own and what you owe: 

Balance Sheet- what you own and what you owe Assets inventory list and value on 1/1 or 12/31 Liabilities, or debt Difference is net worth, or equity Shows solvency ability to pay off all debt if assets were sold Measures risk

Balance Sheet Layout: 

Balance Sheet Layout What you OWN Current gone in 12 mo time Intermediate here for 1- 10 yrs, cattle, equipment Long term real estate Non farm What you OWE Current open accounts Intermediate cattle and equipment on payment schedule Long term- real estate Non farm Own-owe= Net worth

TAXES- Unified Estate, Gift Tax: 

TAXES- Unified Estate, Gift Tax Unified Credit protects up to $675,000 from tax $1,000,000 on 1/1/2006 Gifts: $10,000 annual gift exclusion Tax rate begins at 37% State tax set ups varies Recent fine print for farms Current political football

Estate Taxes: 

Estate Taxes Payable by heirs Heirs get ‘step up in basis’ May avoid with planning Unified Credit of $211,300 shields an estate of $675,000 Gifts >$10,000 bring down Unified Credit annual gifts to as many as you wish give gift and your basis

Taxable Estate: 

Taxable Estate Probate Estate Real estate owned singly or Tenants in Common Personal property, savings, other inves-tements owned singly Business interests owned singly or their share of others Life insurance Non-probate Estate Joint Tenancy assets Real Estate Savings other investments Business interests Personal property Assets held in trust Accounts payable to named beneficiary Insurance Retirement plan

Planning about Estate Tax: 

Planning about Estate Tax How large is your estate today? How does it compare to amount covered by Unified Credit? If greater than, decrease your estate give it away sell it What is the value of your land?

Special rule 1- Estate Tax: 

Special rule 1- Estate Tax TRA 97- Qualified Family Owned Business Interest Deduction from Estate Taxes for certain family business interests that pass to certain qualified heirs. Value of the interest >50% adj gross estate. Active business for 5 of last 8 years Recapture % of benefit if family not involved in business up to 10 years later

Special rule 2- Estate Tax: 

Special rule 2- Estate Tax TRA 97- Land subject to ‘qualified conservation easement.’ Land owned by family for 3 yrs within 25 mile of metro area (OMB) within 25 miles of national park, or wilderness area within 10 miles of nat. urban forest Can exclude % of land value in the estate

Special rule 3- Estate Tax: 

Special rule 3- Estate Tax Section 2032A- ‘special use valuation’ Can reduce farm or business R.E up to $750,000 in the estate Pass to qualified heir Devoted to qualified use before, after death % make up of total estate Recapture of tax savings if use changes with 10 years of death, lien

Marital Deduction: 

Marital Deduction Unlimited gifting between spouses Can gift assets to ‘split’ the estate into 2 halves, so each spouse has an estate small enough so no Estate Tax due Marital deduction defers tax Unified Credit eliminates tax Estate planning while both spouses live

Co-ownership of assets: 

Co-ownership of assets Joint Tenancy One spouse dies, second gets it all Most common Half of value in the first estate All of value in second estate- this is the problem Wording of the deed Tenancy in Common One tenant dies, their share passes as per their will Second tenant does NOT get it Married couple can change deeds to this type of ownership, double Unified Credit

Estate plan components: 

Estate plan components Wills for each spouse Trusts (maybe) Beneficiary designations Living wills Durable Powers of Attorney both ‘health care’ and ‘property’ Marital property agreements

Reasons for a will: 

Reasons for a will You call the shots Avoid intestacy VT- 1/3 to spouse, 2/3 to kids NH- 1st $50K + 1/2 of remainder to spouse Designate executor, guardian Provide for asset management for minors Make specific gifts Charitable and non-charitable


Probate Process to distribute assets owned only the deceased person Executor (administrator) Inventories (and collects) probate assets Pays debts, expenses, taxes Distributes assets to beneficiaries Under supervision of Probate Court, usually a state court, state laws

Trusts- basics: 

Trusts- basics GRANTOR moves ownership to the trust TRUSTEE manages assets BENEFICIARY receives income Set up now vs. in your will Revocable vs. irrevocable Funded vs. unfunded

Why use a trust?: 

Why use a trust? Alternative to probate process Protect beneficiary professional management creditor protection, beneficiary w/fin probs Beneficiary is a minor Second marriage- income to spouse Income for second spouse, principal to children from first marriage Estate taxes- make sure they get paid

Uses of trusts: 

Uses of trusts Most are testamentary alternative to will direct management of assets after death Provide income for life Split trusts income for life, gifts, estate planning Grantor trusts, simplify probate fix value of asset, appreciation in the trust Alaska, off-shore trusts- risky shields

Trusts- good and bad: 

Trusts- good and bad Asset in a trust is shielded from Est. Tax is NOT shielded from Medicaid, since 1994 Surviving spouse can be both trustee and beneficiary Must be written up legally Terms of trust determine how and when beneficiary can pull out assets Laws and situations change over time

Other pieces of estate plan: 

Other pieces of estate plan Beneficiaries (they may pre-decease you) important for life insurance, IRA Living wills- varies with states ‘prolonging’ your life in hospital Durable Powers of Attorney Making decisions for and about you ‘Health care’- life and death ‘Property’- assets and income

Surviving Spouse: 

Surviving Spouse Income needs Security needs Unified Estate and Gift Tax- unlimited gifting between spouses can double the tax credit. Must plan. ‘Joint tenancy’ -heirs inherit asset ‘Tenants in common’- spouse gets it

Nursing Homes: 

Nursing Homes Fear of using the farm to take care of …. Federal Medicaid program run by states kicks in when assets very low State takes a lien on some property State Medicaid plays hand close to chest can ‘look back’ on gifts illegal to plan on avoidance Can buy insurance Assets in trust NOT protected

3 of 6 principles of estate-bus. planning Kelsey: 

3 of 6 principles of estate-bus. planning Kelsey Never give ownership interests away unless you are prepared to lose property via divorce, death or creditors. Estate planning and business planning should be developed at the same time to assure adequate integration of the two. Assure a perception of fairness among the children and other interested heirs.

Retirement Cash Flow Planning: 

Retirement Cash Flow Planning Expense side how much are you spending NOW? how much will you spend THEN? 2/3 to 3/4 of pre-retirement Income side Social Security off farm investments farm assets

Farm Retirement ‘3-legged stool’: 

Farm Retirement ‘3-legged stool’ Social Security IRA’s and other off-farm investments Farm assets

Farm Retirement ‘3-legged stool’: 

Farm Retirement ‘3-legged stool’ Social Security based on profit, SE tax during working life they have sent out info this year IRA’s and other off-farm investments are there any? Farm assets, back to Balance Sheet rent them sell them

Capital Gains Tax, 1: 

Capital Gains Tax, 1 Debt to be repaid does NOT enter the picture Taxed on your gain

Capital Gains Tax, 2: 

Capital Gains Tax, 2 Sales price --Basis equals GAIN (you are taxed on gain)

3 Ways to Transfer Assets: 

3 Ways to Transfer Assets Sell Gift Inherit First 2 while you are alive Different tax consequences for each Only 1 provides income

Basis- important in planning: 

Basis- important in planning BASIS ‘Adjusted tax basis’ ‘Book value’ Purchase price --Accum. depreciation + improvements equals BASIS Planning tool Basis w/asset transfer Sale: New basis = sales price Gift: New basis = giver’s basis Inherit: New basis = f.m.v. Basis of Raised cow= 0 Land= purchase price

Sale of a farm: 

Sale of a farm Sale of many assets each w/different basis calculate Cap Gain of each can buyer depreciate the asset? Personal residence exclude up to $250,000 of gain lots of fine points Outright or direct sale Sell bit by bit Installment sale Bargain sale Purchase agreement

Types of sales: 

Types of sales Outright sale sell for lump sum tease out value of each asset Cash to you now Pay taxes now most secure for seller Bit by bit, piecemeal sell in pieces as buyer can afford all purchase money is principal taxes spread over time land value may increase faster than ability to save for the purchase

Installment sale: 

Installment sale Seller is lender Spreads tax and income over several years Buyer may not be able to borrow elsewhere Seller has risk of default, repossession Buyer pays interest Seller has interest and capital gain Flexibility Can have balloon payment Not for equipment due to depreciation recapture

Selling- other possibilities: 

Selling- other possibilities Bargain Sale Sell at less than FMV IRS will declare some was a gift, can affect your Unified Credit Best not to try ‘sneaking it through Consult w/tax advisor Purchase agreement Provision included in will Buy farm at agreed price and terms at a future date Protects person from having to buy-out off-farm heirs right away Set up with tax person and lawyer

Notes of Caution, Parsons UVM: 

Notes of Caution, Parsons UVM No 1 best method, it depends... May use different methods for diff. assets Method may vary with stage of transfer Requires lots of thought Communication Spouse, heirs, on-farm individual Let them know your plans, wishes, reasons They don’t have to agree with you

Why is this important?: 

Why is this important? You probably have lots of assets, planning can get them to the right people support you and your spouse maybe get next generation started lower taxes for heirs Make it easier for your loved ones when you die

‘To Do’ List: 

‘To Do’ List Decide what you want Hire the people to set it up properly Include everything you can think of Sign the papers Check them after births, marriages, deaths Or check them every 10 years or so

$800,000 estate, married couple, year 2001: 

$800,000 estate, married couple, year 2001

$1,350,000 estate, married couple, year 2001: 

$1,350,000 estate, married couple, year 2001

The end: 

The end

Many things at once: 

Many things at once Farm Assets Management Retiring Personal Income Home Stop farming?

No ‘one stop shopping’: 

No ‘one stop shopping’ Tax person Value of assets, tax basis, planning, balance sheet Lawyer Wills, trusts?, current ownership of assets Banker Balance sheet, bank accounts, loans, IRA Insurance agent IRA, beneficiaries Spouse What do WE want, need, do? Offspring What do THEY want, need? Other business partners

Capital Gains Tax, 4: 

Capital Gains Tax, 4 Taxed on your gain Debt to be repaid does NOT enter the picture Sales price --Basis equals GAIN (you are taxed on gain) BASIS ‘Adjusted tax basis’ ‘Book value’ Purchase price --Accum. depreciation + improvements equals BASIS


DEATH Dead people cannot own assets Asset ownership changes upon death Assets owned Jointly/ Tenant in Common Probate Court (states’ laws vary) Executor inventories Probate assets Pays debts, expenses, taxes Distributes assets to beneficiaries Follows the Will Or Probate Court decides

Balance Sheet Valuations: 

Balance Sheet Valuations Current easiest to value, least expense to sell Intermediate, cattle and equipment conservative market value don’t make big yearly changes Long term town assessment or appraisal Try 2 B.Sheets, one high, one low FYI

Hurdles to starting: 

Hurdles to starting DEATH Acknowledge the fact Planning now can make it easier for survivors TAXES Estate taxes after death Do you have a ‘taxable estate?’ A number of tax planning tools exist

Other info from Balance Sheet: 

Other info from Balance Sheet Your ‘share’ of ownership % equity (equity/assets) Leverage debt/equity Risk % debt (debt/assets) Return on assets or equity profit/ assets, or profit/ equity

‘Deferred Liabilities’ Not always on Balance Sheet: 

‘Deferred Liabilities’ Not always on Balance Sheet Not owed unless assets are sold Costs involved in a sale Commission Advertising Trucking Vet bill for sale Capital Gains Tax

Bringing in younger generation -1, Kelsey MSU Ext: 

Bringing in younger generation -1, Kelsey MSU Ext Do you really want to farm? Together? Testing stage: employer/employee Wage agreement Wage incentive plans Wage and income sharing

Bringing in younger generation -2: 

Bringing in younger generation -2 Joint working agreements Enterprise-type Joint venture-type Is the business profitable enough? $40-70,000 profit per family, DKohl, VA.Tech Can workable transfer plan be developed?

Typical starting business organization: 

Typical starting business organization Ownership share =labor contribution. Real estate owned by individuals and leased to business. Machinery, livestock contributed or leased Feed, crops, and operating capital contributed. Use of gifts.

Can the Farm Continue?: 

Can the Farm Continue? Is the farm profitable now? Can it be made profitable? Is there enough profit to share with another family, maybe with higher income needs than your family? Have you been updating buildings and equipment on a regular basis? Who owns the farm assets?

Younger Generation: 

Younger Generation Who is interested in the farm? Do they have the ability? Do they own farm assets now? Off-farm children Think ‘equitable’ not ‘equal’ Has farm made contribution already? Divorce is a risk in America today

Life Estate: 

Life Estate

Generational Transfers on the Farm MPKelsey, MSU Extension: 

Generational Transfers on the Farm MPKelsey, MSU Extension Family business life cycle Biggest family business conflicts Bringing in younger generation 6 principles of estate/bus. planning Typical starting bus. organization

Family business life cycle: 

Family business life cycle Entry Growth Exit Look at merging of the generations

Biggest family business conflicts: 

Biggest family business conflicts Clash of expectations Fight for dominance Philosophical or spiritual view Afraid that partner will get more than I do Clash of spouses

Other points to consider: 

Other points to consider Can the farm continue Younger generation Planning retirement income Surviving spouse Nursing homes No one stop shopping Many things at once

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