What to do with the family farm

Transcription

1 FARM ESTATE PLANNING What to do with the family farm Presented by: Ted Gudorf, J.D., LL.M North Main Street Suite C Dayton, OH Tel: Fax: Downtown: Kuhns Building 15 W. Fourth Street Dayton, OH 45402

2 WHAT IS ESTATE PLANNING? Estate Planning is a Lifetime Process whereby: I control my property while I am alive and well I take care of myself and my loved ones if I become disabled I give what I want, to whom I want, when I want and the way I want I do so with the lowest possible amount of p professional fees and court costs

3 WHAT ARE YOUR HOPES, DREAMS, AND VALUES? Let s List Them

4 WHAT ARE YOUR FEARS? Let s List These Also

5 LOSING THE FARM TO CREDITORS Your son-in-law, Fred OR PREDATORS? Hasn t had a job since 2006 Belongs to a religion that you consider a cult Sells T-shirts at concerts by a band called Phish You suspect he is fond of chemical substances Thinks it s great that he has rich in-laws I h i t t h lf f h t Is he going to get half of what you leave to your daughter!?

6 LOSING THE FARM TO THE Your son, Sean PRODIGAL SON? Has started three businesses and two real estate deals All have failed Has asked you to financially back each one Has asked you to bail him out of each one Recently filed bankruptcy Owes $12,000 in legal fees and back taxes Are you sure you want to leave your life s work to him? No strings attached?

7 LOSING THE FARM TO YOUR SPOUSE S NEXT SPOUSE? Elaine, your husband s s next wife In the month since your death, has brought home-cooked meals to your husband six times Each time she visits, wears a skimpier outfit Can t wait to redecorate your home, especially that hideous wallpaper you chose Thinks there is no good reason that money earmarked for your children shouldn t be spent on more important things like jewelry, sports cars, and European spa vacations Do you want her to get your children s heritance?

8 PLANNING How can you avoid these catastrophes? YOU NEED TO PLAN! If you don't know where you're going, you'll probably end up somewhere else. - Yogi Berra

9 WHAT ARE SOME OF THE MORE COMMON ESTATE PLANS? Do nothing: 80% of adult Americans Joint ownership with spouse or kids Giving away assets during lifetime Beneficiary transfers Will Revocable Living i Trust Irrevocable Trust Limited liability company

10 DOING NOTHING Means dying intestate The State will decide by a series of laws how your property will be distributed You have absolutely no control Property may go to persons you don t want and in a way that you do not want Dying intestate means no tax planning Dying intestate means: Let the chips fall where they may.

11 I OWN EVERYTHING JOINTLY WITH MY SPOUSE Planning may be necessary after first spouse s death when still in period of grieving Does not avoid probate on second death No re-marriage protection: Your assets may end up with people you never dreamed of Piles up everything in second spouse s estate, which results in loss of the estate tax exemption No time for planning if both spouses die simultaneously Assets subject to predators and creditors

12 I OWN JOINTLY WITH MY CHILD Parent loses control over property Property becomes subject to child s creditors Unbalanced estate plan what about my other children Gift implications for Medicaid

13 GIVING AWAY ASSETS You lose control May cause huge Medicaid problems if medical assistance is needed You may lose significant tax benefits (although, properly done, you may gain some)

14 BENEFICIARY DESIGNATIONS Life Insurance IRAs, 401(k)s Pay on death bank and Pay on death bank and brokerage accounts

15 PROBLEMS WITH BENEFICIARY TRANSFERS Trumps a will or a trust Transfers occur at death, but there could be court interference if beneficiary: Is incapacitated or a minor Dies first or at same time May result in Unbalanced Estate May leave no money for funeral, burial, and estate taxes No predator or creditor protection Reduced tax planning

16 WHAT IS A WILL? A formal document useless until death Only transfers property you own at death Ineffective for jointly owned property, beneficiary designations, life insurance, and pay on death accounts

17 A WILL GUARANTEES PROBATE A court proceeding Notice in the newspaper and to your creditors Everything is public information: your will and inventory of everything you owned Delay Invites fights by your heirs will contests

18 A WILL IS NOT A LIVING DOCUMENT A Will does nothing for you while you are alive Does not avoid Guardianship if you become incapacitated

19 A WILL IS USELESS FOR INCAPACITY PLANNING What is Guardianship? Often called Living Probate A court proceeding Someone else decides if you are incapacitated Someone else decides who will control your property Someone else decides how your property is handled

20 WHAT IS A TRUST A Trust is a legal entity apart from the person or persons who create it, which h is designed d to hold and control the distribution of property A Trust is composed three separate roles: The TRUSTMAKER (also referred to as the Grantor or Settlor) creates and funds the Trust The TRUSTEE holds the property and administers the Trust The BENEFICIARY receives benefit from the Trust Note that the same person can serve in each role

21 WHAT PROPERTY CAN BE HELD IN A TRUST A Trust can hold almost any property, including Homes Farms Cottages Condominiums Income producing real estate Personal property Cars, boats, and airplanes Bank accounts Stocks and bonds Business interests Oil, mineral and gas rights

22 HOW IS A REVOCABLE LIVING TRUST DIFFERENT FROM A WILL? A Revocable Living Trust is a private document, not subject to becoming public record Assets of the Trust are distributed without notice being published in the newspaper or mailed to creditors Trust administration is much more efficient, and has lower professional costs Contests are very unlikely Revocable Living Trusts can be useful for minimizing estate taxes

23 REVOCABLE LIVING TRUSTS ENABLE MORE SOPHISTICATED PLANNING Revocable Living Trusts make it possible to control what happens to the assets of the Trustmaker both during the Trustmaker s life and even years after death This, in turn, facilitates the provision of: Creditor/predator protection Spendthrift protection Remarriage protection Estate tax minimization Additional care for children (or spouses) with special needs Also, Revocable Living Trusts are useful for incapacity planning

24 HOW IS AN IRREVOCABLE TRUST DIFFERENT FROM A REVOCABLE TRUST Someone else should be Trustee Cannot make changes Access only to income but no principal Can make gifts

25 IRREVOCABLE LIVING TRUSTS ENABLE MEDICAID PLANNING Five year rule Fully protected Medicaid pays nursing home

26 LIMITED LIABILITY COMPANIES (LLCs) Limited Liability Companies are highly flexible and customizable tools that hold many benefits for small business owners (including farmers) Limited Liability Companies can be thought of as a cross between a Partnership and a Corporation Organizing the family farm as a Limited Liability Company will: Provide present benefits Expand the possibilities to lower estate taxes Assist in equalizing gifts among heirs

27 PRESENT BENEFITS Allows control to be maintained by the Organizers As opposed to gifting, for example Limits personal liability Debts of the company and judgments against the company do not become the obligation of the Organizers or Members

28 LOWER ESTATE TAXES Minority/marketability discounts This is an example of the whole being greater than the sum of its parts Gifting of ownership interests An opportunity to utilize the annual gift tax exclusion (currently $13,000 per year, per person) to reduce the size of what will become the decedent s estate

29 EQUALIZING GIFTS AMONG HEIRS One way to equalize the inheritance received by children who are active in the operations of the farm with those who are not is to create two classes of ownership The class received by the active children would have managerial duties and would receive both a salary and a distribution from profits The other class would not have managerial duties and would not receive a salary, but would still receive a distribution from profits Another way in which LLCs can be used to equalize inheritances it is to prepare a Buy-Sell Agreement requiring the active children to buy the farm from the estate, the proceeds of this sale would then benefit the passive children

30 ADDITIONAL TECHNIQUES FOR MINIMIZING ESTATE TAXES Special Use Valuation IRC 2032A Allows farmland to be valued as farmland, as opposed to being valued at fair market value, for estate tax purposes Conservation Easements Allows land to be preserved and provides an income tax deduction and estate tax reduction Estate Tax Installment Payments IRC 6166 Allows estate tax attributable to ownership interest in a small business to be paid over time Irrevocable Life Insurance Trust May be useful for meeting the estate tax burden of an estate composed of illiquid assets

31 ONE MORE FINAL THOUGHT We have met the enemy and he is us! Procrastination is the major obstacle to effective estate plans not the IRS

32 THANK YOU FOR YOUR ATTENTION, ANY QUESTIONS? 8141 North Main Street Suite C Dayton, OH Tel: Fax: Downtown: Kuhns Building 15 W. Fourth Street Dayton, OH