Women Transitioning the Farm: Empowering Women to Achieve Financial, Family, and Personal Goals

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1 Women Transitioning the Farm: Empowering Women to Achieve Financial, Family, and Personal Goals Women, Ag and Food Network Annual Conference Nebraska City, Nebraska November 5, 2016 Presenters: Amy Swoboda, Legal Aid of Nebraska Susan E. Stokes, Hellmuth & Johnson Denise O Brien, Sustainable Iowa Land Trust, WFAN Founder

2 Need For Personal Legal Advice! The information in this presentation and accompanying material is provided for educational purposes only. It is not a substitute for individual legal consultation.

3 Why do farmers need transition planning?! Need to bring in the next generation of farmers and protect farmland Farmers are aging " Average age of farmer is 58 " 50% of farmers will be retiring in next decade " 91.5 million acres of farmland are slated for ownership transfer in the next 5 years " 21.5 million acres expected to be sold to a non-relative Beginning farmer numbers are falling " Decrease by 3% in SD and other states (Nebraska is an exception)

4 Why do farmers need transition planning?! Women are very important in transition planning Women own/control a lot of farmland 13% of farms are run solely by women 37% of landlords are women Largest group of farmland owners in Nebraska Women are conversation starters

5 Farm transition planning! Many farm families do not have a transition plan! There are tools to help you Preserve your farm Protect your assets Achieve your goals! Remember: this is not a legal question, it is a personal one

6 How to start transition planning! What are your goals? Personal goals for farm and next generation " Protect assets (financial problems, divorce, illness) " Preserve land for future generations " Maintain control over operation/property " Anticipate/minimize disputes " Engage next generation in management " Income for self, heirs! Vision for the future of your farm

7 How to start transition planning! Who are you trying to take care of? Family Land Yourself

8 Estate planning vs. farm transition planning! Difference between estate planning and farm transition planning Everyone should have an estate plan. Anticipates what happens upon death. It is one form of farm transition planning. Farm transition planning = figuring out when and how to transition your farm operation and farm land. Much of the planning can take place prior to death.! Estate plan components: Will or trust Titling Durable power of attorney Durable power of attorney for health care directive HIPAA

9 Getting started! Once you know your goals, you can answer these four questions: What is your estate? What is you farm business? How will you transfer it? When will you transfer it? To whom will you transfer it?! The answers to these questions will help you select transition tools that will help you meet your goals.

10 Transition Tools - Introduction! State laws govern! Need professional advice Lawyer Tax advisor Financial advisor Insurance agent

11 Topics this presentation does not cover but you should be aware of! Social Security issues! Disability issues! Long-term care planning Assessing risk Insurance Medicaid! Advance health care directives! Tax advice! Durable powers of attorney! HIPAA

12 Overview of Tools! Wills! Trusts! Titling! Gifts! Business Entity Formation/ Indirect Ownership

13 Federal Transfer Taxes! Estate tax occurs on time-of-death transfers! Gift tax on transfers made during life 40% tax! Unified Credit: Exemption amount is $5 million per person Indexed to inflation: $5.45 million in 2016 ($ )! Spouses can double the credit: $11.9 million! Tax planning zones: need for more tax planning Single Person: Estate $5.45 Million Married Couple: Estate $11.90 Million

14 Income Tax: Basis! Basis is a tax term for cost Tied to calculation of capital gain tax liability! Step up in basis only for time of death transfers In gifting, no step up in basis: donor s basis transfers to donee! Preserving step up in basis: important part of planning for most people

15 Wills! Definition: Document that transfers property at the time of death.! The Will identifies people This is me (testator), This my family (heirs), This is my personal representative (person who will be responsible)! Provides for guardianship of minor children payment of debts and taxes disposition of property tax planning testamentary trusts in terrorem clauses

16 Wills: Pros and Cons! Pros: Can be simply done Lawyers are familiar with them Revocable, can be changed Stepped up basis upon transfer! Cons: Estate has to go through probate

17 Trusts! Definition: Property held by one person (Trustee) for the benefit of another (Beneficiary). elements: Trustee. Holds legal title to trust property as fiduciary. Beneficiary (ies). Person legally entitled to the benefit of the trust property. Trust property. Must be identifiable and segregated and held by Trustee.! Person who creates the trust is the settlor/ grantor/trustor/donor.! Property transferred into the trust is owned by the trustee for the benefit of the beneficiaries.

18 Trusts! Two types: Revocable. Settlor retains the ability to revoke the trust during her life. " Can be funded all at once when created; or " Funded over time; or " Minimal funding during Settlor s life, mostly funded at time of death. Irrevocable. Just as name implies. Settlor cannot make changes.

19 Trusts: Pros and Cons! Pros: Avoid probate, remains private Flexible planning tool: as simple or complex as you want it to be. " Pour-over will Most estate planning lawyers are familiar with trusts. Trustee controls property and makes transfer Out-of-state property Business succession planning! Cons: Need a lawyer to set up Requires updating (e.g., laws change, family situations change, may want to transfer assets over time). Have to make sure assets are transferred into trust for trust to be effective. No court safeguards Separate Inheritance Tax may be required in your state

20 Titling! Definition. Basically, you put titled property in names of the person you want to have it after your death. Types: Joint Tenancy. Right of survivorship. The last of the joint owners to survive owns the entire property. E.g., spouses. Tenancy in Common. Each owner has an undivided share, which the owner can transfer at the time of her death, regardless of who dies first. Beneficiary Designation: Payment/transfer on death. E.g., life insurance.

21 Titling: Pros and Cons! Pros: Avoid probate Self-executing. Survivors can usually collect fairly quickly and easily.! Cons: Only for Assets Contingency planning- not effective Needs to be used with other tools just in case something is overlooked

22 Gifting! Can gift assets over time while alive.! Subject to federal and state taxation. State laws vary greatly. Some have specific agricultural property exclusions.! Annual gift tax exclusion of $14,000 per recipient.! Subject to cumulative lifetime exclusion cap of $5.45 million per donor.! Gift can be the assets themselves or stock (e.g., to farming heir).

23 Gifting: Pros and Cons! Pros Inter vivos transfer Start to gift away estate Create ownership for the successor! Cons Can be subject to transfer tax (40%) Must remember to fill out form 709

24 Business Entity Formation/ Indirect Ownership! What does it mean? Different entity owns asset rather the individual! Property is held in trust or owned by an entity, e.g. LLC Heirs own the entity Entity provides " structure for management " restrictions on ownership " asset protection! Be aware of anti-corporate farm laws

25 Types of Business Entities! Sole Proprietorship! Partnership! Limited Liability Partnership! Limited Liability Company! Corporation (C or S)

26 Sole Proprietorship! Most common! Simplest: Don t have to do anything! Individual taxation! No personal liability limitation! Sole proprietors can enter into joint ventures while retaining their sole proprietorship status

27 Partnership! Entity formed by two or more partners! Easy to form and maintain; should have a written partnership agreement! If you are working with someone to conduct business, you have an informal partnership! No personal liability limitations. All partners are jointly and severally liable.! Pass through taxation income/loss flow to individual partners

28 Limited Liability Partnership! Similar to regular partnership, but two classes of partners: limited partners and general partners! General partners have control and management authority! General partners have no personal liability limitations they are jointly and severally liable! Limited partners have no management authority and also no personal liability! Same taxation as regular partnership

29 Limited Liability Company! Flexible and popular! Create by filing certificate of registration with secretary of state! Owners = Members! Members own an ownership interest! Company can be managed by members or appointment a manager! Members have personal liability protection! Possible to have a one-person LLC! Default taxation is taxation as partnership but members can elect to be taxed as a corporation! LLC remains in existence until dissolved under state law

30 Benefits of using a Limited Liability Company for Transitioning Your Farm! Can do it over time, as next generation gets ready. E.g., transfer interests for the farming heir.! If assets are all held by the company, avoids probate. Only to assets not to company interest

31 Limited Liability Company as asset protection! The shareholders do not have personal liability, so long as the corporation maintains all formalities. Exception for acts of negligence

32 Limited Liability Company as a way to transition your farm: Pros and Cons! Pros Share assets among different owners " Make sure that farm or ranch successor has access to all assets necessary to continue operation Protect assets (creditors or divorce) Provide income to heirs Make gifts Limit liability of owners! Cons Complicated issues of Basis May have negative effect on loan eligibility

33 Limited Liability Company as a way to transition your farm! Part of your transition/estate plan for the farm or ranch! Operating agreement Free to assign his or her interest in the LLC as long as it is contained within OA! Systematically transfer assets to the next generation

34 Factors to consider before transferring farm business! Feasibility of transfer! Income needed for retirement! Financial position of incoming farmers! Readiness of the next generation/ incoming farmers! Willingness to let go: Are you ready?! Transfer all at once or over time?! Tax planning

35 What are others doing?! Of those who plan to dispose of their rented acres in the next five years, here is how they plan to do it: 1% Trust 14% 14% 23% 48% Sell to Non- Relative Sell to Relative Gift

36 Innovative transition tools! Can help keep your farm in farming! Can help a new farmer get started! Examples: Long-term leases trial period (Handout) Contract for Deed (Handout) Conservation Reserve Program Transition Incentive Program (CRP- TIP) (Handout) Land Trusts Denise

37 Getting Started! Gather information Questionnaire! Resources WFAN Nebraska Legal Aid " farmerandrancher.org Other Farmers

38 Contact Information! Susan E. Stokes Hellmuth & Johnson " Terrance Moore (952) " After November 15 " Amy Swoboda