Wisconsin Corn/Soy Expo February 4, 2016 Wisconsin Dells

Transcription

1 Wisconsin Corn/Soy Expo February 4, 2016 Wisconsin Dells Presented by: George W. Twohig, J.D. Twohig Rietbrock Schneider & Halbach S.C. Chilton, WI

2 Twohig Rietbrock Schneider & Halbach Attorneys for Agriculture We are fortunate to serve as attorneys for many outstanding farm and agri-business clients throughout Wisconsin. By focusing our practice on agriculture, we have gained the experience and skills necessary to provide innovative and practical solutions to the unique planning and legal issues faced by today s farms and agri-businesses. Our group approach is the foundation of our firm s group practice and succession plan. We believe our agricultural law firm is a legacy worth continuing. Therefore, we are committed to developing our next generation of agricultural lawyers, so our clients can rely on our firm in the future. Our team approach also extends to working closely with the agricultural communities outstanding accountants, bankers, county and extension ag agents and other advisors. We are proud to be considered agricultural attorneys. George W. Twohig, J.D. Kim M. Rietbrock, J.D. Troy R. Schneider, J.D. Timothy R. Halbach, J.D. Jonathan A. Meulemans, J.D. Blake A. Knickelbein, J.D. Estate Admin. Assistant: Patricia A. Birschbach, CPA George W. Twohig, 2016: All materials provided with this seminar are proprietary and subject to copyright. 2

3 The Formula for Strong Partnership Relationships shared quality values + a common purpose and vision for the farm s future + explicit, compatible personal and business expectations + honest, respectful and proactive communications = effective partner relationships and superior results 3

4 Today s Transfers are Challenging: Different farm situations Farm transfers should focus on how the farm will be managed and owned by the next generation, rather than how the senior generation farmed. Who will be your successors? Career successors: Your farm is a sustainable business able to support families, and the children who stay will commit their fulltime careers to the farm. Sundown successors: The children want to farm on a part-time basis while pursuing full-time, off-farm careers. Successor owners of legacy farm real estate: The farm personal property will be sold in the future, but children want to own the farm real estate for emotional and/or investment reasons. 4

5 Today s Transfers are Challenging: More complex for each following generation Stage 1: Owner managed farm The farm is managed and owned by one family The parents are working to transfer management and ownership to an active child or multiple children Stage 2: Sibling or co-owner farm The farm is managed and owned by siblings or by partners Management and ownership will be transferred to active children from one or both of the siblings/partners Who transfers earned equity to the involved children? - the parent or the owners Should each family maintain its percentage of ownership or should the next generation be equal owners, even if more children from one family than the other? 5

6 Today s Transfers are Challenging: The cash flow problem Parents initial thoughts about the farm s transfer may be based on how they bought the farm years ago at lower farm values. But today, additional or alternate transfer methods must be considered: The farm has more cattle, equipment, facilities and land all at inflated values. More existing debt from improvements, expansion or the ups and downs of commodity prices. Greater gross income but smaller profit margins. Recurring years of low milk and commodity prices. Higher possible income tax in lifetime sales. More interest in equity by children who left. The farm must cash flow before, during and after the transfer 6

7 Assets Debt Net Cash = funds available for existing debt, expansion, improvements, family living and purchase of interests Max. Debt = Cash Flow Limitation Expand or Buy Expand or Buy Expand or Buy Expand or Buy Expand or Buy Operating Loans yr. 20 yr. 30 yr. Max. Debt = $? Benchmark? 10 yr. 20 yr. 30 yr. Son Parents 9

8 Most often, speakers stress the importance of production agriculture as it is the largest component of Wisconsin s economy. Its continuing financial success is critical to Wisconsin s economic future. But, economics doesn t adequately explain why so many of us who don t own a farm are committed to, and concerned about, the future of Wisconsin s family farms. Wisconsin has earned the reputation of a strong work ethic, great technical skills, strong families and conservative values. In large part, the collective character that makes Wisconsin special is founded on Wisconsin s agricultural roots-the family farm. To succeed, you must care for your family, your animals, the lands and waters and your community. 8

9 Successful Farm Business Families Recognize the family s real legacy is founded on passing quality values to the next generation. Quality of personal and business values count most, no matter the farm s size or equity or the family s wealth. Shared values set the standard for conduct, decisions and relationships. Important shared values may include: Core values: commitment to continuing the farm legacy, respect, honesty, trust, leadership, entrepreneurial spirit, practical realism, conservative risk taking, voluntary accountability, valuing others input and interaction and management and leadership development The value of a common mission (i.e. purpose) and common vision for the future of the farm The value of reinvesting income in the farm rather than excessively consuming it 9

10 The value of experiences: growth from challenges, networking and prior outside work experience The value of renewal: each generation must create, grow and have its own strategic success The value of viewing work as a service, rather than a job The value of expressing appreciation and recognition The value of forgiveness and the power of apologies The value of early and continuing education of the next generation The value of quality advisors, long-term relationships with them and pruning of advisors Recognize the need for profitability and strong cash flow so the farm is competitive, sustainable and able to support both generations. The business must be able to pay existing debt, replace depreciating assets, add improvements and new technology, while also providing for reasonable family living. A strong income statement and balance sheet supports the future of the farm and both generations. 10

11 Respect the challenge of combining family goals and farm business goals and commit time and resources Have read articles and attended seminars Important: Recognize the difference between an educational seminar and a sales seminar (where the presenter is selling planning services) Visited other family farms and tried to learn from them Work with quality advisors over a long term Recognize that planning is essential to continued success. Realize that transition planning is dynamic, not static. There will always be changes. Farm succession plans need to be flexible and will change over the course of the transfer. Starting early in delegating work and management responsibilities to the next generation. Early transfers of ownership interests motivates and demonstrates commitment. 11

12 Recognize that their family is unique but most farm families share the same problems and issues Financing farm growth and family liquidity The complications of working together and transferring management and ownership, communicating, and resolving conflict Understand that different people see the critical issues in different ways. They accept that it is natural and valid to disagree. This acceptance permits real communication. Recognize the need for leadership in planning, farm management and effective conflict resolution. Who will provide that leadership? Leaders lead by example. Setting goals, leading long-term changes, improving how individuals work together Inspiring individuals to reexamine their positions and consider other s perspectives so that the best decisions can be made. 12

13 Recognize and openly discuss the advantages of working together as partners Opportunity for the family to preserve its farm legacy and to pass quality values to the next generation and generations that follow Allows each person to focus on his or her individual strengths and assume individual responsibilities, while sharing decisionmaking on important matters Opportunity to build mutual trust and shared experiences that can strengthen the family and business relationships Opportunity to earn the respect of the other involved family members Opportunity for greater influence and career and financial success than might be achieved as individuals 13

14 Recognize, discuss and proactively deal with the disadvantages of the partnership The need to balance personal desire for independence, with the required interdependence of being a partner Potential for disappointment when personal goals or expectations are not fully realized (e.g. having one s ideas accepted, being assigned undesired work or duties) Being accountable and subject to criticism Each partner being financially dependent on the success or failure of the farm, rather than outside investments. Loss of privacy resulting from greater visibility in the community Recognize the value of conflicts and of proactively managing and resolving them Partners must accept constructive criticism and seek the best answer Resolved conflicts can lead to better understanding, better decisions and better relationships 14

15 Recognize the benefit of a culture of high level trust The concept of we -group benefit, achievement and recognition. Strong partnership relationships Openness to change and constructive criticism. Trust that the farm will transfer to the committed successors. Recognize the need for honest, proactive and respectful communication at all levels Communication: The exchange of information by any means: talk, signals, gestures, writing or behavior. Requires trust, vulnerability and willingness to raise issues that might lead to disagreement or conflict. Regular meetings, independent board/council. Crucial Conversations: Tools for talking when stakes are high, Kerry Patterson. 15

16 Recognize that involvement must be based on competence and earned privilege. Family members should be involved because they have something substantial to contribute to the operation. Compensation should be based on time, effort, responsibility and results, and should be reviewed. Successors want to earn the right to participate in the farm, rather than receive it because of their name. Recognize the need to educate in-laws about the family and farm to gain their support Understanding the family-its history, traditions and how the family thinks. The nature of the farm business: What makes the farm work, its finances, management and the role of the child spouse and how the farm will transfer. Understanding the in-law s role and scope of participation in the farm. 16

17 Sibling partnerships have unique challenges. Need greater business bias: employment and compensation policies, limits on transfers of interests Procedures to resolve deadlocks: outside directors, mediation, arbitration Successor to mom: keeping communications open, nurturing people, assuring fair treatment, maintaining family traditions and events. The leader needs the attitude I m here to make sure that the families are successful, rather than I m here to tell these people what to do or to favor my family. Need to establish a reasonable and fair way for family members to sell out their interests 17

18 Family values & vision Expectations re: Participation/inheritance Concern for the farm legacy Family Business vision & values Personal and business expectations Business planning Business structure Management structure Evolving roles and duties Lines of communication Conflict management Ownership Management Ownership transfers Planned transfer of equity during life Effective estate plans for transfers at death Culture of trust Effective partners Quality communication Shared decision-making Effective conflict resolution 18

19 The Challenge of Balancing Family and Farm Business Demands: Conflicts between Farm and Business Values Family System Values: Inherent inclusion Emotional needs Maintaining stability Over focus on business can erode: Family communications Family time Family loyalty Family relationships Business System Values: Earned inclusion Business performance Managing change Over focus on family can erode: Business communications Business time Decision-making Business relationships 19

20 What is fair to the children who left the farm? The cash flow problem: Your farm can only pay off-farm children what the farm can afford to pay. Your legacy: You have made your farm your life s work and judge your success by whether your farm is a better place than when you got it. You should transfer your farm to the next generation if they will make it their life s work, holding and improving the farm so it is sustainable for the generation that follows them. The intangible benefits: Your children who left received the invaluable opportunity of growing up on a farm. Farm life provided experiences that helped develop their strength, resiliency and independence. Those experiences are just not available to children who grow up in the city. The children who left are not dependent on your family farm, and they received significant intangible benefits that will serve them well through their lives. 20

21 My partners, Kim Rietbrock, Troy Schneider and Tim Halbach, and I often reflect on our choice to be agricultural attorneys. I sought them out because I knew and respected their families. They all grew up on successful local farms. They have confirmed my intuition that they would bring the farm values of honesty, hard work and team effort to our law practice. They share my goal of living and working as contributing members of the farm community, even though our jobs are different than yours. Most agricultural bankers, accountants and agents and other farm advisors are also sons or daughters of farmers. They too decided to leave the farm, but to stay part of the farm community. 21

22 Most farmers believe that their son or daughter will earn equity in the farm from their years of work, while the parents continue to draw income or receive sale proceeds for their financial security. Parents Test Period Period to earn farm equity Son/daughter 10 yrs. 20 yrs. 30 yrs. First, complete test period, Then partner with parents and earn equity in the LLC (personal property and possibly building site), Then acquire parents remaining interest in the LLC, Finally, acquire the remaining farm real estate. Contingency Plan = The Parents Estate Plan RIP

23 Transfer Planning Steps: Start the process Decide to invest the time and resources necessary to plan and complete your farm transfer Consider who should be involved in the planning process and future management and farm work and to what extent. Father, Mother, involved children, involved children s spouses, children who left, spouses of children who left. Generally discuss your intentions with your involved children, your key advisors, which may include an ag attorney, your accountant, banker and, in some instances, your farm business consultant, veterinarian, nutritionalist, etc. You may also want to get input from a farmer who is successfully transferring, or has transferred, that family farm. 23

24 Transfer Planning Steps: Start the process Selecting advisors to facilitate and guide the process. You may select an objective, third party advisor, who should be experienced in all aspects of farm transfers. Alternately, you may select several advisors to work as a team. As necessary, the advisor can help the group distill its thinking about key transfer issues and provide a better understanding of the upcoming challenges. During the process, you will work with an attorney, your accountant, county or extension ag agent, banker, and, in some cases, a farm business consultant. Do not try to figure it out without guidance. It has been successfully done before. 24

25 Transfer Planning: Farm Assessment Develop a written history of the farm. Written analysis of the farm s financial condition and ability to support multiple families, while investing in growth, expansion and new technologies. Personal balance sheets, including non-farm assets An analysis of the skills of involved family members and employees: Management ability, motivation and leadership An analysis of the status of interpersonal relationships and any existing problems: quality of communications, group cohesion, power issues and existing or potential areas of conflicts and the ability to resolve them. Current organization and duties, responsibilities and authorities of involved family members and employees 25

26 Transfer Planning: Farm Assessment Consider completing a SWOT analysis: Industry, economic and other external factors The best opportunities for our farm s business future are: The biggest risks and threats to our farm s business future are: Internal factors The most important strengths of our farm and management team are: The most important weaknesses of our farm and management team are: My biggest frustrations with our business are: Review the results of the farm assessment and share the assessment with the involved family members. Consider the assistance of the appropriate advisor. 26

27 Transfer Planning: First Group Meeting Inform the involved children of your commitment to the farm transfer and obtain their commitment to the planning process. Explain succession from your point of view Explain the importance and complexity of succession planning Discuss the transitional, rather than transactional nature of the transfer of management and ownership Generally discuss common objectives and any obstacles or existing disagreements or conflicts that must be resolved Obtain each person s commitment to listening, understanding, communicating, and accepting differences that do not adversely affect the farm business Obtain each person s commitment to the planning process 27

28 Transfer Planning: Regular Meetings Schedule regular meetings with the successors, have a written agenda and prioritize needed decisions and actions. Set Ground Rules for Meetings For example, we start on time and end on time, we will respect each other, we will be prepared, one person talks at a time, we will not interrupt, we will practice good listening, discussions will be solution driven, we will focus on the problem, not the person, if the situation gets too tense, I have a right to call a time out, we will be flexible and open, criticism must be constructive and intended to help the other person. Begin discussing and understanding each person s vision for the farm, perceived needs, wants, expectations, and concerns, and his or her desired role in the farm business. 28

29 Transfer Planning: Consider a Mission Statement A Mission Statement can provide a sense of purpose and direction, insure that involved family member s interests are not ignored and promote shared values and behavior standards. Our mission is to operate an efficient and profitable farm producing high quality agricultural commodities. We must strive to be leaders, to create a positive image for agriculture and to promote personal growth, respect, honest and proactive communications and financial stability among ourselves and our employees. We are committed to being good stewards of the livestock and lands placed in our care. Consider a Vision Statement It may be advisable to agree on a statement of the group s vision for the future of the farm. The vision statement should clearly describe what the farm business will be like in 5 to 10 years Success is more likely if everyone is moving toward the same goals as to the farm s future. 29

30 Transfer Planning: Statement of Values Consider a written statement of common values Quality and sustainable values are the greatest strength that a family can bring to business management and ownership. Values are the foundation for a culture of trust and synergy Motivate, give greater meaning and support a long-term view The group should discuss the values they hold most dear and that they believe are critical to the success of the farm and their relationship as partners A sampling of such values: Stewardship of the legacy, respect, honesty, trust, career commitment, group achievement and recognition, accountability, focus on reinvestment (not consumption), valuing input and interaction, merit, openness, practical realism, risk taking, leadership, entrepreneurial spirit, management and leadership development, focus on values and values education 30

31 Transfer Planning: Specific areas requiring discussion Each person s personal and business expectations as to the farm, management and ownership Make each person s expectations explicit and understood Identify issues in conflict or that may cause future conflict Work to develop and agree on compatible expectations Each person s management skills and styles must be considered. Openly discuss strengths and weaknesses Identify limitations that currently cause conflict or may cause problems in the future Discuss needed changes, training and education Develop the business organization Define current roles, duties and responsibilities Develop organization chart Discuss long-term roles, duties and responsibilities 31

32 Transfer Planning: Code of conduct Consider a code of conduct: rules of behavior that will guide decisions, procedures and how the owners will deal with each other and the farm s employees. Examples: Values: Maintain ethical conduct, treat each other with respect, treat others as you would expect to be treated, Management: Don t undermine each other, speak with a unified message to employees, respect other s opinions, needs and goals, Communications: Communicate honestly, proactively and respectfully, be responsible for what we say and how we say it, listen, seek to understand other s viewpoints, and to clarify miscommunications Family: Family discussions held in private, separate family issues from the business, limit business discussions during family events 32

33 Transfer Planning: Other policies that might be considered Communication policy: Lines of communication and standards for sharing information Decision-making process: How will important decisions be made, by the group or individually? Conflict resolution process: How will conflicts be managed, mediated and, if necessary, arbitrated? Performance standards and reviews: How will each person s efforts be evaluated and improvements made? Compensation policy: How will compensation be established and changed, from time to time? Plan for management and leadership development: How will members improve skills and abilities? Rules for admission of future descendants 33

34 Transfer Planning: Identify the Obstacles and Challenges Immediately discuss and begin resolving any existing management and relationship problem. Frustrations, rivalries and conflicts Communication problems Deficiencies in attitude, time commitment, performance and skills Problems in working together Planning for future challenges: What if: Death, disability, divorce, termination of employment Change in commitment or work time and effort Negative conduct or inadequate communication Any other conflict between members 34

35 Transfer Planning: Develop a strategic (short-term) plan Begin working to resolve any existing frustrations and conflicts, with the assistance of an outside advisor, if beneficial. Agree on immediate actions that will be taken to achieve each goal or existing management challenge. Define changes to be made in management. Clarify duties, responsibilities and authorities. Define immediate changes to move toward shared decision-making. Establish policies to improve communications. Establish how conflicts will be managed and resolved. Agree on short-term changes in operations and facilities. Agree on ways to improve management and leadership skills. Important: All based on budgets, projections and cash flow. 35

36 Transfer Planning: Transfer of management and ownership Develop a defined, but flexible, plan for transfer of management: Commitment to long-term business partnership. Transfer of management responsibilities, but sharing of control. Determine what are the essential farm assets and make certain the plan covers all of them. Transfer of equity (usually in lieu of sales): What equity have the on farm heirs earned and will earn in the future? How and when will equity be transferred during life? sales, gifts of earned equity, gifts to trusts (retained income), options to fix price, etc.? 36

37 Transfer Planning: Defined, but flexible, transfer of management and equity: Develop the best business structures for the farm business. Use of LLCs, partnerships vs. leases and options. Establish classes of ownership: voting, non-voting and/or incentive Rules for governing the company and making owner decisions Agree on how farm equity will transfer in the future Buy-Sell Agreement or other transfer restrictions Up-to-date, full asset coverage and price and terms that cash flow. Quality and up-to-date estate plans for each owner. Has the estate plan been coordinated with lifetime transfers? Do options under the estate plan cash flow? Living Trusts (probate avoidance), rather than Wills (probate). Marital property agreements: full step-up in basis upon a death. 37

38 Transfer Planning: Other planning issues Life insurance planning. Is life insurance necessary or adequate? Are the right people insured, with the right kind of insurance, in the right amount of death benefit? Is policy ownership and beneficiary designation correct? Retirement planning for senior members. How much income will the senior members need to maintain their lifestyle? What will be the sources of their retirement income? Compensation, rent, installment sales, investments, social security, etc. Where will the parents live? Home owned by the parents or home owned by the LLC? Right of occupancy agreement? 38

39 Transfer Planning: Other planning issues Dealing with risks of nursing home and long-term care. Senior farmers, who own real estate or LLC interests, want to protect those assets from the cost of nursing home or long-term care. Medical assistance has strict and very low asset and income limitations. The rules are complex and require careful planning to qualify for medical assistance. The alternatives include self-pay, long-term care insurance, asset divestments and irrevocable trusts (such as medicaid trusts). There is no single, magic solution, but with advanced planning assets can be protected and qualification for benefits can be achieved. 39

40 Stepped-up Basis: Marital Property vs. Common Law If the asset is held as marital property, then both decedent s half and the survivor s half receive a stepped-up basis to the value on date of death. Therefore, if the husband died: Lifetime Joint Tenancy Martial Property Tax 150,000 Sale Husband Wife Husband Wife FMV $900,000 $450,000 $450,000 $450,000 $450,000 Basis 100, ,000 50, , ,000 Gain 800, , ,000 The survivor could sell the asset for up to the fair market value as of the date of death without tax, or take depreciation on the full fair market value

41 Gift and Estate Tax Exemptions Year Estate Tax Exemption Top Estate & Gift Tax Rate Lifetime Gift Ex. Annual Gift Ex $675,000 55% $675,000 $10, $1 million 50%-49% $1 million $11, $1.5 million 48%-49% $1 million $11, $2 million 46%-45% $1 million $12, $3.5 million 45% $1 million $13, $5 million or no estate tax 35% No gift tax $13, $5 million 35% $5 million $13, $5.12 million 35% $5 million $13, $5.25 million 40% $5.25 million $14, $5.34 million 40% $5.34 million $14, $5.43 million 40% $5.43 million $14, $5.45 million 40% $5.45 million $14,000 41

42 Gift and Estate Tax Exemptions Portability. A surviving spouse may use the deceased spouse s unused estate tax exclusion upon her death (if not remarried). Lifetime gifts remove the gifted asset and its future appreciation from the donor s estate. Lifetime gifts (over the annual exclusion) reduce the estate tax exclusion. The donee carries over the donor s basis Generally, gifts are income tax free, but: Any assumed debt is income to the donor Gain is recognized to the extent that assumed debts exceed the donor s basis in the gifted assets. 42

43 Estate Tax Planning: For larger estates A 40% estate tax will be assessed on gifts or inheritances (other than to a spouse) in excess of $5.43 million for a single person and in excess of $10.86 million for a married couple (or the survivor). Planning for large estates is beyond the scope of this seminar. However, some of the available planning tools include: Installment sales Fixed options Valuation discounts LLC incentive interests Family limited partnerships Life insurance trusts Farm transfer trusts Intentionally defective grantor trusts Generation-skipping trusts Dynasty trusts Grantor retained annuity trusts Asset protection trusts Charitable trusts 43

44 Example 3: How Complex Can it Get Living Trust (parents) Rent income Shares Mgt., Inc. Shares Children LP interests as earned 2014 Irrevocable Trust (grantor trust) LP interest GP interest LP interest Property, LLC (land base) Crop land lease Cropping, LLC (machinery) Tax free sale to grantor trust Feed sales Dairy, LLC (DH & milk) Limited Partnership (Holds LLCs & life ins.) 100% 100% Bldg. Site, LLC (facilities) 44

45 Old Methods Sole Proprietorship or Partnership One on-farm heir Single Entity Corporations Sale of farm assets to the next generation 95% farm assets and 5% non-farm assets Current Methods Limited Liability Company (LLC) or Limited Liability Partnership (LLP) Multiple on-farm heirs Multiple Entities LLCs to shrink old Corps Non-sale transfers Gifts of earned equity Profit interests (equity for services) 95% farm assets and 5% non-farm assets 45

46 Example 1: Basic LLC Based Transfer Assets Bldg. Site? Farm Land Retained Debt Investments Life Insurance Debts Contribute Inventory Contribute/Sale Livestock Contribute/Lease Machinery Contribute/Lease Bldg. Site Contribute/Lease Land New LLC Inventory Livestock Machinery Bldg. Site? Debts Owned by Farmer Sale/Lifetime Gift Estate Plan Member Capital Growth Profits Owner 1 % % % Owner 2 % % % 46

47 Example 2: Working Around Old Corporations Old Corp Inventory Livestock Machinery Building Site Farm Land Debt Active business income Sub-Chapter S Election? Cropping Custom Work Dairy/Livestock Heifer Raising Facilities Lease Land Lease New LLC New Inventory Livestock Replacements New Machinery New Facilities New Land Debt New LLC-2? Further separation of assets, income or debts and liabilities 47

48 Old Methods Guardianship Medical Decisions? Married Couples Deeds: Individual Property Joint Tenants Tenants in Common Probate of Estates Wills Nursing Home Risk Self-pay for care Medicare (up to 100) Divestment of assets Life estates Current Methods Durable Power of Attorney Health Care Power of Attorney Married Couples: Marital Property Agreement Minimal Individual Property Survivorship Marital Property Marital Property Probate Avoidance POD/Beneficiary Designation Transfer on Death Deed Non-probate Transfer by MPA Living Trusts Nursing Home Risk Benefits of asset ownership Divestment of assets Long-term care insurance Medicaid trusts 48

49 Durable Powers of Attorney: Specific farm issues Consider having general agent(s) to manage personal financial matters and farm agent(s) with authority to manage and control farm business activities and to continue the planned transfer of farm assets. Special farm powers including the right to guarantee farm loans and to grant necessary mortgages and liens. Special provisions regarding long-term illness, qualification for benefits and asset protection. Direction as to payment of long-term care expenses from personal investments and income versus farm assets and farm income. 49

50 Powers of Attorney for Health Care If an incapacity prevents me from making health care decisions for myself, my acting Agent shall have the authority to make all of my health care decisions for me. The Agent can have the power to or for: Access and disclosure for medical information To make decisions about health care, pain treatment and nursing home To execute authorizations To make, modify or revoke organ and anatomical gifts To employ and terminate health care providers To take other appropriate actions Consider a HIPAA Authorization 50

51 Marital Property Agreements Wisconsin became a community property state on January 1, In a Marital Property Agreement, spouses can agree that upon the death of either spouse any of either or both spouse s property,, passes without probate to a designated person, trust or other entity, Wis. Statute Section (3)(f) Married couples can opt in or opt out of the Marital Property Act Classification as marital property is usually better because of the possible full step-up in basis at each spouse s death Limiting impact of divorces. Marital Property Agreements can classify gifted assets as donee s individual property. Key is a fair MPA balancing farm asset protection with reasonable financial security for donee s spouse and recognition of his or her efforts. 51

52 Revocable Living Trusts: Benefits of Living Trusts Not Wills Can avoid court probate, limit public disclosures and lower cost of estate administration New Wisconsin Trust Law (effective January 1, 2015) Trust Advisors Now, trust advisors may be appointed to direct the trustees regarding investments, distributions and other matters The Farm Trust Advisors shall have all powers permitted to a directing party under Chapters 701 and 881 of the Wis. Stats. in regard to any Farm Assets and the ongoing operation, growth and development of the Jones family farm. The Farm Trust Advisors powers shall include the authority to direct the Trustee to take any action with respect to the management and control of the Farm Assets and the Jones family farm. 52

53 Revocable Living Trusts: Trust Protectors Not Wills Now, Trust Protectors can be appointed with broad power to interpret, amend, modify and terminate any irrevocable trust established after the settlors deaths, to monitor investment actions and distributions and to take other permitted actions. Trust Protectors can give great flexibility when circumstances change. Trust Decanting Now, the Trust Protector or a Trust Advisor, as designated, may permit the termination of an irrevocable trust and the transfer of the trust assets to a new trust with different terms. 53

54 Beneficiary Designation Retirement Plans Life Insurance Bank S, B & MF Farm LLC Real Estate Personal Effects Rollover RLT as beneficiary Alt. 1: Title asset to the living trust during life Alt. 2: Transfer without probate by MPA Alt. 3: POD, TOD or TOD deed at 2 nd death Survivor Stretch Revocable Living Trust Beneficiaries: H & W Trustees H & W Children Surviving Spouse Surviving Spouse Distribute on Second Death Designated Trustees Trust Advisors Trust Protectors 54

55 Marital Deduction Revocable Living Trust Beneficiaries: H & W Trustees: H & W First Death Portable Exemption Revocable Survivor s Trust Beneficiary: Survivor Trustee: Survivor Second Death Exemption Irrevocable Family Trust Beneficiary: Survivor Trustee: Survivor Farm assets 90% - 95% Non farm assets 5% - 10% On farm children How much can the farm afford to pay? Children who left 55

56 Optional Use Of Deceased Spouse s Unified Credit Revocable Living Trust Beneficiaries: H & W Trustees: H & W First Death Marital Deduction IRA & Retirement Rollover Optional Disclaimer Trust Beneficiary: Survivor Trustee: Survivor Personal Effects Special Bequests Provisions for farm transfer Second Death Exemption Revocable Survivor s Trust Beneficiary: Survivor Trustee: Survivor Surviving Spouse Stretch Trusts for Young Heirs Trusts for Spendthrift Heirs Special Needs Trusts Outright Bequests 56

57 Estate Planning: Owner s balance sheet, with assets at FMV and listing related liabilities and basis Farm assets Operating assets Facilities Farm houses Agricultural land Farm or non-farm assets? Land with development value Hunting and recreational land Life insurance Non-farm assets Non-farm houses Outside investments Retirement plans 57

58 Farm Estate Planning: Evaluation Evaluate current situation Farm s financial condition, including cash flow for purchases by onfarm heirs The readiness of the on-farm heirs ability to assume management The ability to work together and resolve conflicts Do you want to retain the opportunity for a younger child to join the farm business? What assets are necessary for the farm to successfully continue? What should the non-farm heirs inherit? What non-farm assets are available? What can the on-farm heirs afford to pay from cash flow? Are the non-farm heirs committed to the farm transfer plan? What are the current risks of long-term care (i.e. nursing home)? Need to plan for senior owner s possible long-term care needs Alternatives: retaining assets (stepped-up basis) vs. divestment Long-term care insurance, medicaid trusts, and other alternatives 58

59 Common Farm Estate Planning Issues: Living Trusts Provisions: Fiduciaries Consider including a statement of your intentions Why you have included provisions for transfer of farm assets by gift or at less than fair market value. The intention to maintain inheritances as individual property Selection of fiduciaries Fully consider each fiduciary s values and abilities and commitment to the farm and family, willingness to effectuate the succession plan. General trustees Consider two or more check and balance Possibly, a farm child and a non-farm child Farm trust advisors Appoint the active children (if qualified) Maintains equal control Avoids non-farm trustees involvement in farm decisions Consider adding independent trustees or independent farm trust advisors To act as advisors and to resolve disputes Trust Protectors 59

60 Common Farm Estate Planning Issues: Living Trusts Provisions: Fiduciaries Coordinate trust provisions with transfer limitations in the operating agreement or buy-sell agreement Provisions may need to be better than in the buy-sell. Even in retirement, parents usually have to transfer at lower prices or by gift Early death can require acquisition of too many assets at one time Priority of transfers First focus on transfer of operating LLC (i.e. operating assets) Inventory, dairy herd, machinery and equipment, and probably, facilities and assumption of related debt Second focus on transfer of farm real estate Facilities and lands necessary for farm operations Sometimes, special provisions for land with high development value Third focus on other real estate Fourth focus on distribution of non-farm assets Fifth focus on the best use of any life insurance 60

61 Common Farm Estate Planning Issues: Living Trusts Transfer Provisions Transfer alternatives: Direct earned gift or bargain sale Delayed transfer with a farm trust Assets held in trust and distributed over years as earned Required number of years of farm service Transfer of operating LLC (i.e. operating assets) to the active descendants on an earned basis. Determine the value of membership interests Establish an effective appraisal process Have a reduced price that the farm can afford to pay Consider earned equity, assumed debt, cash flow Have practical terms for installment payment Not more than 10 years as real estate needs to be acquired Reasonable interest rate: if variable, maximum and minimum interest rate 61

62 Common Farm Estate Planning Issues: Farm real estate What real estate is essential (or should be kept) for the farm operation? What price and terms can the farm cash flow from operations? Must be a gift or sale at substantially below FMV Must consider any required purchase of operating assets. May need to defer real estate purchases. Some planning alternatives Direct transfer to on-farm heirs Real estate LLC or limited partnership Farm trusts with interests earned through farm services Opportunity for young child Different years of service and/or different percentages of ownership Options to purchase at reduced price and favorable payment terms Options to lease (for substantial term at favorable rent) Options to purchase during lease Rights of first refusal to lease or to purchase 62

63 Parents are often concerned that the heirs may sell gifted or discounted real estate or sell it for non-farm purposes. The trust may include a provision requiring a sharing of net proceeds with the other children in the event of an early sale. Shared by all children FMV $7,000 Bargain Price $4,000 Excess Proceeds $3,000 Earned equity Purchased equity

64 Special Situations Minor children and grandchildren: Distributions for education, down payment on a home, business or profession, taxes, etc. Duty of self-support as an adult Planning for financially incompetent heirs Total Return Trusts, delayed distribution Planning for second marriages and unmarried couples Pre-nuptial and co-habitation agreements and special Will provisions Life insurance to provide for spouse or children Planning for heirs with disabilities: Special Needs Trusts The purpose of SNT s are to give the beneficiary the opportunity to enjoy as pleasant and comfortable of life as possible, without supplanting available government aid and assistance. 64