Farm Succession Planning:

Transcription

1 Farm Succession Planning: Where do I Start? Gary A. Hachfeld U of MN Extension Educator MnSCU Ag Symposium February 25, 2013 North Mankato, MN.

2 Why is this an Issue? Increased asset values! Lack of planning: Workshop data MN, ND, IA, WI ( ): 84.9% of farm families attending have no business transition plan. 69.3% of farm family members attending have no personal estate plan.

3 What happens if I do nothing? No business & personal estate plan: State Intestate law enforced: Assets may go to someone you don t want them going to. End up paying unnecessary taxes. Business dies with you. Family feud. All of the above.

4 Where do I start?

5 Begin by listing your goals: List what you want to have happen to your business & personal assets. List what you do not want to have happen to your business & personal assets. Write them down: Step #1 - do your personal list - alone! - individual, family, retirement & business goals. Step #2 - sit with your spouse (generations separately) & prioritize your lists. Step #3 - everyone (all farming generations) sit together & prioritize your business goals - final goals list.

6 Begin by listing your goals: Goals need to be in writing: 1,100% greater probability of achieving them if written down. Have specific terms for specific results. Goals must have a timeline. Must be attainable and realistic. Must be dynamic and flexible. You must be clear and firm about them. This is the list you take to your transition/estate team to begin the process!

7 Find a Competent Asset Transition & Estate Planning Team Attorney ( ( ( Accountant Financial Planner Insurance agent Banker Others - -

8 Tax Update

9 Tax Issues Federal estate tax: $5 million exclusion per person & full step-up in asset basis ($1,730,800 credit) $5,120,000 million exclusion per person & full step-up in asset basis ($1,772,800 credit) & 12 - unused exclusion amount portable to surviving spouse. - 35% tax rate maximum on amounts above the exclusions $5,250,000 exclusion, full step-up basis. - $2,080,000 (est.) credit, portability to spouse. - 40% maximum Federal estate tax rate.

10 Tax Issues Minnesota estate tax: $1 million exclusion per person & full step-up in asset basis & beyond: - $1 million exclusion per person & full step-up in asset basis PLUS - $4 million exclusion per person & full step-up in basis if qualified farm or small business property. - Estate tax rate of 41% down to 9.96% on amounts over exclusions.

11 Minnesota Small Business Property & Qualified Farm Property Exclusion MN law July $4 million exclusion. Limited to decedents dying after June 30, Applies to qualified farm and small businesses property ONLY! Property value must be included in decedent s federal adjusted taxable estate. Must meet MN definition of farm you must own it! No business entities or trusts with land qualify yet! Farm property must be homestead of decedent and/or decedent s spouse (no machinery, livestock, etc.).

12 Minnesota Small Business Property & Qualified Farm Property Exclusion Decedent continuously owned farm property 3 years prior to death. Heir receiving qualified property must be considered actively farming heir. Heir continuously uses the property in the operation of the trade or business for 3 years following decedent s death. Small Business additions: Decedent or decedent s spouse materially participated in business in taxable year ending before decedent s death. Trade or business had gross annual sales of $10 million or less in taxable year ending before decedent s death. Property does not consist of cash or cash equivalents.

13 Minnesota Small Business Property & Qualified Farm Property Exclusion Qualified heir must be a family member. Qualified family member: Decedent s ancestors: parent, grandparent, etc. or Decedent s spouse or A lineal descendant (child, grandchild, etc.) of the decedent, of the decedent s spouse or of the decedent s parents or Spouse of any lineal descendant described previously.

14 Minnesota Small Business Property & Qualified Farm Property Exclusion Recapture tax provision: If either of the following occur within 3 years of decedent s death and before the death of the qualified heir, a recapture tax of 16% is imposed on entire amount of exclusion: 1) qualified heir disposes of any interest in the qualified property (other than by disposition to a qualified family member), OR 2) a family member ceases to use the qualified property in the operation of the trade or business.

15 Tax Issues Federal Capital Gain Tax: Depreciation Recapture (ordinary income tax rate). Capital Gain Tax: : - 5% or 15% tax rate - If in 10% or 15% federal income tax bracket, capital gain tax is 0% for capital gain portion, when added to taxable income. 2013: - 5%, 15%, 25% & 28% unchanged from % rate if income plus capital gain is within top of 15% federal income tax bracket (2013 = $72,500). - If income in 39.6% federal income tax bracket, top capital gain tax rate is 20%

16 Depreciation Recapture $20,000 sale price $10,000 purchase Capital Gain - $10,000 Rate: applicable capital gain rate Depreciation Recapture - $5,000 Depreciation Rate: ordinary income $5,000 no SE tax $5,000 adjusted basis (not taxed)

17 Tax Issues Federal Capital Gain Tax: Depreciation Recapture (ordinary income tax rate). Capital Gain Tax: : - 5% or 15% tax rate - If in 10% or 15% federal income tax bracket, capital gain tax is 0% for capital gain portion, when added to taxable income. 2013: - 5%, 15%, 25% & 28% unchanged from % rate if income plus capital gain is within top of 15% federal income tax bracket (2013 = $72,500). - If income plus gain in 39.6% federal income tax bracket, top capital gain tax rate is 20%

18 Tax Issues Minnesota Capital Gain Tax: Capital gain taxed as ordinary income. Capital Gain/Ordinary Income Tax rates: Tax Rate (2012) 5.35% 7.05% 7.85% Single $0 - $23,670 $23,671 - $77,730 $77,731 + Head of Household $0 - $29,130 $29,131 - $117,060 $117,061 + Married Filing Jointly $0 - $34,590 $34,591 - $137,430 $137,431 + Married Filing Separate $0 - $17,300 $17,301 - $68,720 $68,721 +

19 Federal Gift Tax: Annual Gift Exclusion: Tax Issues $14,000 per person ($28,000 per couple) per recipient per year to as many people as you like. Lifetime Gift Exclusion: 2012: $5,120,000 per person 2013: $5,250,000 per person Gifts to spouse: US citizen: unlimited amount (marital deduction) Non - US citizen: limited to $142,000 (est.)

20 Federal Gift Tax: Tax Issues Gifts in excess of exclusion amounts requires filing an IRS 709 Gift Tax Form. No tax due while alive unless you exceed the lifetime exclusion amount. Federal gift tax maximum rate is 40%. 709 Gift Tax Forms are held by IRS until your death and amounts are added to your estate net worth. Depending upon the size of your estate, the gifts in excess of exclusions, could trigger estate tax. Minnesota Gift Tax: MN has no gift tax.

21 Transferring Assets

22 Methods for Transferring Assets Sell assets Gift assets Establish a business entity Pass through your estate All this within a business transition & personal estate plan

23 Parents: tax issues. Selling Assets Entering generation: capital issues. Consider piecemeal sales: Sell an item this year. Sell an item next year. Advantages: Spreads out tax obligation. Entering generation gains control of assets with minimum capital required.

24 Gifting Assets Parents: loss of control and income of asset. Entering generation: donors basis. Issues: Can parents afford it? Possible issues for Medical Assistance. Annual Gift Exclusion ($14,000 per person or $28,000 per couple) does not go far these days. Consider piecemeal gifting: Gift an item/% of item this year. Gift an item/% of item next year.

25 Sell & Gift Assets Can combine the sale and gifting of assets in a piecemeal fashion: Sell an item this year and gift an item this year. Sell and item next year and gift an item next year. Parents: spreads out tax obligation. Entering generation: garner control of assets with minimum capital required. Issues: Can parents afford it? Possible issues for Medical Assistance. Annual Gift Exclusion ($14,000 per person or $28,000 per couple) does not go far these days.

26 Minnesota: Business Entity General Partnership Limited Liability Partnership Limited Partnership Limited Liability Limited Partnership Limited Liability Company (LLC) Minnesota LLC Protected States LLC (South Dakota, Wyoming) Corporations: S & C Corporation

27 South Dakota LLC Protective Individual -Land -LLC shares LLC Operating Entity -Checkbook -Machinery -Livestock -Grain Veil To Protect Veil: -Do not use LLC checkbook for personal use -No personal assets in LLC (i.e. homestead) -File LLC with Secretary Of State -File tax return for LLC separately -Have organizational agreement -Minutes of 1 st and annual meeting -Statement of not publicly traded -Proper Resolutions for business purpose -Proper insurance -Proper leases up-to-date -Business purpose required

28 Business Entity Why consider an entity? Easier than trying to transfer specific assets. Have ownership shares: can sell, gift, transfer through estate or combination of all three. Transfer over time: Spreads out parent s tax obligations, generates retirement income Ownership by entering generation without huge capital requirement Except C corporation, taxed as pass- through entity. Discounting of assets. NOTE: entities limiting liability are subject to a single $40,000 FSA DCP payment.

29 Personal Estate Plan Will or Trust Power-of-Attorney Health Care Directive HIPAA authorized individuals

30 Personal Estate Plan Will: Lists how you want your assets distributed. Triggers probate process: $50,000 of assets or any real estate. Probate: Minnesota: Time: months. Cost: can cost 2-3% of estate value. Open to the public. Does not allow for disability planning. Does not protect assets from lawsuits.

31 Personal Estate Plan Revocable Living Trust: You still own & control all assets. Assets in trust bypass probate process. Administrative phase: Time can be much less than probate. Cost:.75-1% of estate value. Closed to the public. Allows for disability planning. Can protect assets from legal action.

32 Power-of-Attorney: Minnesota: Personal Estate Plan Statutory Short Form. Powers established by state legislature. Go into effect immediately upon signing document. Limits gifting to $10,000 per person per year. Common Law POA. You select powers granted & effect date, no gift restrictions. Select Durable form of POA - continues if you become disabled or incapacitated.

33 Personal Estate Plan Health Care Directive: List how you want to be cared for if disabled or death is eminent - physically & financially. List who you charge with the responsibility of carrying out your wishes. Can include organ donation, funeral details, etc. Place Health Care Directive into data base, receive card - paramount to caring your health care directive 24/7 (Legal Directives, Docubank, Legal Vault, US Living Will).

34 Personal Estate Plan HIPAA authorized individuals: Listing of folks you grant access to your medical information (applies to anyone age 18 or over). In addition to HIPAA authorized individuals, include HIPAA Personal Representative(s): HIPAA Personal Representative can sign new Health Care Directive & HIPAA document on your behalf if you are incapacitated or unconscious. Should be someone in addition to your spouse.

35 Disability Panel Included in your Revocable Living Trust. Lists those who will make a determination related to being placed into nursing home, etc. Includes: My current physician A specialist My spouse My children (name them) My grandchildren (name them) Nieces, nephews, etc.

36 Treatment of Heirs How do we compensate heir who has farmed with us for multiple years - helped us grow the business, stay on the farm, amass the size estate we have, etc.? See Publications then Farm Management - Transferring the Farm Series #11, Putting a Value on Sweat Equity. Fair May Not Mean Equal!!!

37 Personal Estate Plan Will or Trust Power-of-Attorney Health Care Directive HIPAA authorized individuals

38 Long-Term Health Care Issues

39 Long-Term Health Care Issues Deficit Reduction Act of 2005: Changed Medicaid disclosure period to 60 months. Changed eligibility rules for Medicaid. Minnesota: Life estate (after August 1, 2003), Wills, revocable living trusts, joint tenancy, irrevocable trusts (after July 1, 2005), No Longer Protects Assets from Long-Term Health Care Costs (nursing home).

40 Long-Term Health Care Issues Minnesota: A gift or sale of assets for less than fair market value, creates Medicaid penalty period unless 60 months passes before filing for Medicaid. Options: Gift all assets away, wait for 60 month period to expire, file for Medicaid: You end up in nursing before 60 months expire. Assume donee will pay for your care. Assume you, not donee will be first to enter nursing home. Self-insure. Self-pay. Long-term care insurance.

41 Long-Term Health Care Issues Is long-term health care an issue? 1 in 2 Americans, over age 65, will have an extended nursing home stay (does not include any type of home stay). 1 in 10 Americans, over age 65, will have a nursing home stay of more than 5 years. Of those needing long-term care, 40% are under age 65. Source: Genworth Financial 2012

42 Long-Term Care Costs Minnesota (2012) Region Home Health Aide (median/max/yr.) Assisted Living (median/max/yr.) Nursing Home (semi-private) (median/max/yr.) Nursing Home (private) (median/max/yr.) Duluth $52,258 $59,400 $46,200 $58,800 $86,020 $107,310 $93,163 $111,690 Mankato $48,048 $57,200 $37,200 $47,736 $77,500 $98,550 $85,782 $109,500 Minneapolis St. Paul $63,492 $73,216 $46,536 $62,820 $81,515 $111,690 $91,969 $118,990 Rochester $54,294 $59,488 $40,200 $73,200 $77,942 $110,230 $85,228 $120,085 St. Cloud $57,200 $64,064 $34,440 $54,180 $70,376 $74,460 $77,417 $85,410 Rest of State $48,048 $80,000 $32,400 $59,904 $75,555 $118,625 $81,724 $132,495 ** Data Source: Genworth Financial

43 Start with listing your goals. Summary Find a good transition & estate planning team. Familiarize yourself with the basics of the estate, capital gain and gift tax laws. Determine if a business entity would facilitate your business transition. Determine if a Will or trust fits your estate planning. Familiarize yourself with Power-of-Attorney, Health Care Directive, HIPAA, disability panel, etc. GET STARTED TODAY!!!!!!!!!

44 Website: business transfer & estate planning information sheets under Publications then Farm Management Contact Information: Gary A. Hachfeld

45 Thank you! Questions - Comments