John J. Schwarz, II. Practice Areas Agricultural Law, Estate Planning, Real Estate Law, Municipal Law, Family Law, Contract Law, Employment Law

Transcription

1 Occupation Attorney, Simmons-Brown & Cress, PC. Angola, IN Farmer, Schwarz Family Farms, Stroh, IN John J. Schwarz, II Education Prairie Heights High School Tri-State University Indiana University School of Law B.S. Administrative/Mechanical Engineering Juris Doctorate Practice Areas Agricultural Law, Estate Planning, Real Estate Law, Municipal Law, Family Law, Contract Law, Employment Law Publications Columnist for Indiana Prairie Farmer. Columnist for Farm World.

2 Passing on the Family Farm By John J. Schwarz, II

3 Excuses for Not Having an Estate Plan I m going to live forever. I inherited my farm without my parents having a fancy estate plan. All estate planning does is put money in the lawyer s pockets I ll be dead and gone, so who cares.

4 What s Changed? Farm values have increased. Estate taxes have increased. Less children take ownership of farms. People live longer.

5 Basic Estate Planning Documents 1. Simple Will 2. Living Will 3. Durable Power of Attorney 4. Healthcare Representative

6 Simple Will -establishes who takes possession of your assets -ensures your funeral expenses and debts are paid -designates who will care for minor children -makes sure other wishes are granted EVERY PERSON SHOULD HAVE A WILL! 6

7 What happens if I don t have a will? If you don t write a Will, the State has written one for you 1. Generally one-third (1/3) of the net estate to the surviving spouse if he/she is survived by two or more children; or 2. Generally one-half (1/2) of the net estate to the surviving spouse if he/she is survived by one child or by the issue of one deceased child; or 3. Generally Three-fourths (3/4) of the net estate to the surviving spouse if he/she has no surviving issue, but he/she is survived by one or more parents; or 4. All of the net estate if there is no surviving issue or parent. **If no spouse, children, or other heirs, then to the State of Indiana. 7

8 The Iron Triangle Living Will Durable Power of Attorney Healthcare Representative 8

9 Living Will Designates what treatment you desire if you become incapacitated. 1. Yes to artificial support. 2. No to artificial support. 3. Neither- Let health care representative decide. 9

10 Durable Power of Attorney In Indiana, you can sign a durable power of attorney to appoint someone to handle your assets if you become incapacitated. At a minimum, a power of attorney should include the power to: -Manage and transfer all assets -Deal with the IRS -Make gifts on your behalf -Create and amend any trusts you set up 10

11 Healthcare Representative Authorizes another person to make health care decisions for you if you are unable to make informed health care decisions for yourself. Make arrangements with hospitals, health care facilities, nursing homes, etc.; Consent to or refuse health care in accordance with your Living Will; Admit or release you from a hospital, health care facility, nursing home, etc.; Have access to your medical and other records; Make anatomical gifts on your behalf; Request an autopsy; Make funeral plans; and Take any other action with respect to your health care that you could take if you were able to make such decisions for yourself. 11

12 Estate Planning for Farm Business Step 1: Identify your goal -each farming operation has its own unique set of goals. 12

13 Common Goals 1. Transfer farm operation to children. 2. Transfer farm to interested children, but compensate non-farming children. 3. Sell operation, retire to someplace warm. 4. Transfer farm to non-related individuals who want to start farming. 13

14 The Federal Estate Tax A tax on a person s estate after their death. Historically has been 40-50%

15 Current Credit (Shield) Amounts Year Max. Estate Tax Credit Max. Unified Rate 2009 $3.5 million 45% 2010 Tax Repealed 0% 2011 $1 million 50% 15

16 Example Smith farm located in Somewhere, Indiana. Dad = Jack Mom=Diane Children = Peter, Paul and Mary 1500 acre grain operation (1000 owned, 500 rented) 100 head of beef cattle 16

17 Goals for the Smith Family 1. Enable Paul to take over the farm. 2. Fairly compensate Peter and Mary. 3. See that Jack and Diane are taken care of in retirement years. 17

18 Total Value of Farm Land: 1000 acres at $4000/acre = $4,000,000 Home:=$175,000 Machinery= $250,000 Retirement Account = $125,000 Personal Assets = $100,000 Livestock and related items = $100,000 Total Assets= $4,750,000

19 Everyone in 2010 Gets a 3.5 Million Dollar Credit. Jack Diane 3.5 million 3.5 million Total 7 million dollars of credit

20 Current Estate Planning All American Estate Plan Jack Diane Peter, Paul, and Mary

21 Cost at the death of first spouse NOTHING! No tax is paid due to the marital deduction. All assets pass to the second spouse tax free. no tax on assets Jack Diane Peter, Paul, and Mary

22 Death of the Second Spouse Uncle Sam comes knocking with the estate tax

23 Loss of Exclusion Amount Because of the All-American estate plan, Jack s 3.5 million exemption was lost. Jack Diane $4,750,000 Peter, Paul, and Mary

24 Tax on Estate at Diane s Death Estate Value = 4,750,000 Exclusion Amount = -3,500,000 Total Taxable Estate= 1,250,000 Total Tax: 1.25 m x 45% = 562,500 24

25 But wait, there s more tax! Indiana Inheritance Tax Value of Inheritance after Exemptions Col. One Col. Two Tax on Col. One Rate on Excess over Col. One $0 $25, % 25,000 50, % 50, , % 200, ,000 5,250 4% 300, ,000 9,250 5% 500, ,000 19,250 6% 700,000 $1 mil 31,250 7% $1 mil $1.5 mil 52,250 8% Over 1.5 mill Over 1.5 mil 92,250 10% 25

26 Outcome of no estate planning Federal Estate Tax of 562,500. Peter, Paul, and Mary each pay approximately $100,000 in inheritance tax. Almost impossible for Paul to continue the farming operation. He will most likely have to sell assets to pay the taxes, AND still have to buy out his siblings. 26

27 Poor/No Estate Planning =NFL Not Farming Long 27

28 Proper Estate Planning Saves Money and Enables the Farming Operation to Continue. You have an estate planning tool box. But, will you use it?? 28

29 Division of Assets Jack Diane $2,000,000 $2,750,000 29

30 Protecting Jack s 2m Exclusion Jack (2 million) Income Diane (2.75 million) Trust Peter, Paul, and Mary 30

31 Using a Limited Liability Company (LLC) The IRS allows for the devaluation of a minority owned company of up to 30%. Jack = 48 shares Diane = 49 shares Peter, Paul, Mary = 1 share each Value of farm operation is then devalued 30%.

32 Shrinks value of estate in eyes of the IRS 4.75 million 3.2 million

33 The Importance of Life Insurance Live insurance enables parents to distribute funds to non-farming children and buy time for the farming children. Example: At Jack and Diane s death, life insurance policies pay out to the non-farming children (Peter and Mary) and provide them with inheritance, while buying time for Paul to obtain financing to purchase the farming operation.

34 Buy-Sell Agreements These allow the farming child or children to buy out the other siblings over a period of time. Remember: Fair does not mean equal.

35 Don t forget about gifting! Jack and Diane can each gift $13,000 per year to Peter, Paul and Mary tax free. Useful to reduce value of the estate.

36 Smith s new estate plan 1. Divide assets so to not lose Jack s exclusion. 2. Create LLC to obtain devaluation 3. Make lifetime gifts 4. Have life insurance polices. 5. Create buy-sell agreements for Paul. 6. Have basic estate documents in place.

37 Comparison No Estate Plan: -Paid over $500,000 in estate tax. -Each sibling paid around $100,000 inheritance tax. -Paul most likely unable to continue farming. With Estate Plan: -Zero dollars paid in estate tax. -Each siblings inheritance tax reduced. -Paul receives more of the farm (instead of the IRS) and is afforded time to buy out the remaining siblings.

38 The coming storm?

39 They times they are a-changin -Bob Dylan National economy is poor + farmers incomes put them in rich category = higher taxes. In 2011,estate tax exclusion reduced to 1 million unless congress acts. Capital gains could go from 15% to 25%. Farmers to shoulder more burden of real estate taxes.

40 Jack and Diane after 2010 Tax on Estate at Diane s Death Estate Value = $4,750,000 Exclusion Amount = $1,000,000 Total Taxable Estate=$3,750,000 Total Tax: 3.75 m x.50 = $1,875,500

41 Estate Planning is a Necessity for Farming Operations Return on investment: spend approximately $ , save over $1,000, ,000% return on investment! Keep the farming operation in the family and away from the IRS. Ensures harmony among heirs.

42 Final Thoughts Recognize your goals, evaluate your plans, and get the necessary help. Seek the correct help.