Farm Credit Services Southwest

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1 Farm Credit Services Southwest Risk Management Webinar #4 Transition & Estate Planning, Life Insurance Ken Lassen, Senior Vice President Agri-Business Financial Services August 24, 2011

2 Agenda Estate Planning What is Estate Planning What is Estate Tax Case Study- Plan versus No Plan Life Insurance Common Uses for Ag Families Types of Policies Matching Uses and Types

3 Estate Planning

4 Why Estate Planning? To transfer the right assets to the right people within the family, farmers and nonfarmers. To avoid a lengthy and costly probate process. Manage estate taxation.

5 What is Estate Tax? When both spouses of a first generation family have died and assets are passed on to the next generation(s), those assets are subject to estate taxation if the estate value exceeds exemption amounts.

6 Current Tax Regulation Individual Exemption Estate Tax Ceiling 2002 $1 million 50% 2003 $1 million 49% 2004 $1.5 million 48% 2005 $1.5 million 47% 2006 $2 million 46% 2007 $2 million 45% 2008 $2 million 45% 2009 $3.5 million 45% 2010 Taxes repealed (revision approved Dec. 2010) 2011 and ??? $5 million 35%

7 Hypothetical Case Study Farming family with three adult children 2013 arrived with no permanent regulation passed by Congress Regs revert back to a $1 million personal exemption and a 50% highest marginal rate Estate valued at $4 million

8 The Family John Farmer Mary Farmer $4,000,000 Estate Billy Bob Betty

9 The Scenario Dad passes away in 2013 Mom passes away in 2014 Billy, Bob and Betty meet with family attorney and CPA to settle the estate.

10 Discussion Points at Meeting Probate fees and timeframe Reading of the Wills and discussion of disposition of assets. Estate tax return and estimate tax that will be due in 9 months. Options for liquidation of assets to pay taxes.

11 CPA s Estate Tax Computation Estate value at second death $ 4,000,000 Less Mom's individual exclusion (No Portability in new regs) $ 1,000,000 Taxable Estate $ 3,000,000 Estate Tax Due in 9 months (est.) $ 1,410,000 Legal and Accounting fees???

12 Where will we get the cash? Farm Land and Equipment $ 2,750,000 Personal Residence $ 400,000 Vacation Home $ 250,000 Cash and Investments $ 600,000 $ 4,000,000

13 Probable Result (after much argument and added legal and accounting fees) All assets are liquidated $1,410,000 is paid to IRS Each Heir receives around $835,000 Possible long term relationship damage within and among families.

14 Same Scenario but with better planning Mom and Dad set up an estate plan with a Revocable Living Trust and testamentary sub trust to preserve exclusions. They also construct the dispositive section of the trust to direct agricultural assets to their two sons and non-ag assets to their daughter, while still maintaining an equitable split. Parents create an Irrevocable Life Insurance Trust (ILIT) and fund it with a Survivors Life policy to create cash in the trust upon the second death (not included in the estate for taxation).

15 CPA s Estate Tax Computation (revised with planning) Estate value at second death $ 4,000,000 Less both parent's individual exclusions $ 2,000,000 Taxable Estate $ 2,000,000 Estate Tax Due in 9 months (est.) 940,000

16 Where will we get the cash? Farm Land and Equipment $ 2,750,000 Personal Residence $ 400,000 Vacation Home $ 250,000 Cash and Investments $ 600,000 $ 4,000,000 Life Insurance held in Trust (ILIT) $ 1,000,000

17 Probable Result after much less argument No Probate required for Trusts $1,000,000 is available outside the estate to pay a much reduced estate tax of $940,000. Billy and Bob get all the farmland and equipment. Betty get the homes, cash and investments. Each heir gets an inheritance over $1.3 million (about $500,000 more than scenario without planning) Each heir gets the type asset they wanted to have.

18 Is estate planning worth the time and expense to do it? YES!

19 Conclusion Remember: our case study was based on a default back to 2001 regs. That has not happened yet. You should be concerned about this issue, but not panic. Every family should have an estate plan regardless of estate size. Keep an eye on future estate tax regulatory changes between now and December 2012.

20 Life Insurance Common Uses for Ag Families Types of Policies Matching Uses and Types

21 Common Uses for Ag Families Payoff Business Debt Family Support Fund Buy-Sell Agreements (Joint Owners) Estate Planning-Tax Management

22 Types of Life Policies Term Life (temporary) Universal Life (permanent) Variable Universal Life (permanent)

23 Matching Uses and Types When your need will change in future years When your need will probably not change

24 The Process Preliminary quote versus post application offer Application process Insurer offer and first premium Life Insurance policy reviews (1035 xchg)

25 Questions? Next Webinar September 21, 2011 Crop Insurance Hedging Marketing Plans

Estate Planning. Farm Credit East, ACA Stephen Makarevich

Estate Planning. Farm Credit East, ACA Stephen Makarevich Estate Planning Farm Credit East, ACA Stephen Makarevich Farm Business Consultant 9 County Road 618 Lebanon, NJ 08833 1.800.787.3276 stephen.makarevich@farmcrediteast.com 1 What is Estate Planning? 2 Estate