PREPARING FOR THE TRANSITION: FARM TRANSITION AND ESTATE PLANNING

Transcription

1 PREPARING FOR THE TRANSITION: FARM TRANSITION AND ESTATE PLANNING Paul Goeringer, Extension Legal Specialist Mid-Atlantic Women in Ag Webinar April 26, 2017

2 Disclaimer This presentation is intended to provide general information over farm transition issues and should not be construed as providing legal advice. It should not be cited or relied upon as legal authority. State laws vary and no attempt is made to discuss laws of states other than Maryland. For advice about how these issues might apply to your individual situation, consult an attorney.

3 SO WHAT DO YOU NEED TO BE DOING?

4 Where are you?

5 Where are you? Today is about getting to where you want to go Communicate with your family and other heirs Develop the business plan and estate plans

6 WHAT ARE GOALS?

7 What are goals?

8 What are goals?

9 What Are Goals? Goals are statements of what you hope to achieve Goals will change based on circumstances and over time. Will have reevaluate and updated

10 What are Goals? Goals will be unique to you and your family Goals will reflect your values and beliefs Potentially mean compromise between you and your family

11 DEVELOP SMART GOALS

12 SMART Goals SMART Goals are: Specific Measurable Action-oriented Reasonable Timely

13 SMART Goal Example Diversify farm operation to include agritourism operation to increase farm income by $20,000/year by fall of 2016

14 Prioritize Goals What goals are important? Do short term goals help you achieve long term goals? Do they impede long-term goals? What goals are important?

15 Implement goals Set the roadmap for implementing Work with family and other stakeholders to achieve goals Look for potential problems in implementing

16 Reevaluate Recognize that life changes and goals may too Take time to see if goals are being met or need to reevaluate

17 DEVELOPING AN ESTATE PLAN

18 Developing the Estate Plan Majority of farms do not have an estate plan or transition plan Recent survey found 52% of Americans do not have an estate plan

19 Develop The Estate Plan Guardian nomination for minor children Advanced directive for health care Beneficiary designations Powers of attorney Business Healthcare Will Trust (?) Life insurance (?)

20 Dying Without An Estate Plan Without at least a valid will, you will be consider to have died intestate and state laws will govern how your property is distributed. Intestate is a person who dies without a valid will

21 Dying without an Estate Plan Interstate succession laws are designed to divide your property up among your family members, regardless of the relationship you had with that family members

22 Who Can Make a Will? As one state Supreme Court has pointed out Let it first be stated that one does not have to be a genius, a college graduate, a high school graduate, or even have attended grade school, to make a will. Harwell v. Garrett, 393 S.W.2d 256, 260 (Ark. 1965). Any person of sound mind over the age of 18 can make a will A will is one estate planning tool everyone should consider having.

23 Holographic Wills One exception to the properly witnessed requirement is a holographic will. A holographic will is a will written entirely in the testator s handwriting and signed at the end by testator Only valid in Maryland if made by a member of the armed services and signed by the testator outside the United States. Void one year after discharge

24 Changing the Will A will can be changed or amended by drafting a codicil that amends the earlier will or the person can draft a new will. The codicil, or document amending the prior will, will need to meet all the requirements of a valid will to be valid

25 Property Outside the Will Life insurance policies you have selected the beneficiary of the policy on your death Payable-on-death bank accounts you have selected

26 Property Outside the Will Joint bank accounts Real property held as joint tenants with rights of survivorship

27 Trusts Unlike wills, trusts as an estate planning tool are not for everyone People who should consider using a trust Those with estates approaching federal estate tax limits, for 2017 that is estates over $5.49 million Those with children or a disabled family member to provide for their care if the parents were to unexpectedly pass away Family members that can no longer manage their own affairs, such as an elderly parent

28 Trust terminology Grantor, Trustor, or Settlor various ways to describe the person who creates the trust Trustee is the person that manages the property in the trust Beneficiary is the person that the trust benefits

29 Testamentary Trust Trust created in a will upon the death of the grantor Typically used to provide for the benefit of minor children or disabled family members

30 Living Trust Is created during the trustor s life and continue after the trustor s death. Used by many people as a way to avoid the probate process upon their death. Revocable You retain control of the trust to change the beneficiaries, trustee, terms, and can even choose to dissolve the trust Irrevocable permanent and retain no power to change the trust

31 Living Trust Reasons to consider a living trust Avoid probate costs Allows for the transfer of property in different states Allows for managing of assets if you become incapacitated Distributes property to the beneficiaries faster than probate process Reasons to not consider a living trust Expensive to set up and update, requires a lawyer to draft trust documents and to administer Expenses can outweigh benefits

32 Develop the Estate Plan Pros of Wills Control property till death Can direct who gets property Select executor and guardians Once property distributed will no longer needed Cons of Wills Have to probate it Easily contested (even with no contest clause) Takes time and public process State specific

33 Develop Estate Plan Pros of Living Trusts Eliminates need for probate Not public info Difficult to contest Do not need guardian to hold assets for minors Cons of Living Trusts Potentially have trustee fees Adds complexity to asset management Need to coordinate with other estate tools Still need a will

34 Durable Power of Attorney Appoints an attorneyin-fact or agent to handle your business and financial issues that could arise if you become incapacitated and this power lasts until the authority is revoked or at your death

35 Health Care Proxy Similar to a durable power of attorney, but with a health care proxy you appoint an agent to make health care decisions for you if you become incapacitated Agent only receives decision making power when the primary doctor determines you are no longer able to make medical decisions If the health care proxy s authority is not limited, then the agent could be entitled to make decision involving whether or not to remove life sustaining methods

36 Living Will A living will, also known as an advance health care directive is a specific set of instructions given by a person in the event they are no longer able to make decisions about their health. Typically, this document specifies the type of medical treatment that you do not want to receive in certain situations.

37 Living Will Takes burden off family Specifies when you want medical treatment Decisions made when you can t make decisions

38 Issues to Consider Transferring farm data: Equipment on farms is producing more data. Important to plan for how that data will be shared Access to social media accounts (ie make sure they know the passwords).

39 TAX CONSIDERATIONS

40 Before We Go Further Disclaimer: I am not a tax expert and I do not pretend to be one. If you have detailed tax questions then will need to check with your accountant.

41 WE GOOD?

42 Federal Estate Taxes Federal estate tax exemption Pegged to inflation goes up each year 2017: $5.49 million For couple, double that amount

43 Federal Estate Taxes Portability: Allows surviving spouse to use unused federal estate tax exemption Has to file the appropriate tax forms and can not get remarried

44 Maryland Estate Taxes In 2014, Maryland recoupled the state s estate tax exemption to the federal rate. Starting in 2015, increases each year till fully recoupled in Dates Jan. 1, 2017 to Jan. 1, 2018 Jan. 1, 2018 to Jan. 1, 2019 Jan. 1, 2019 and onward Amount $3 million $4 million Check federal exemption in 2019

45 Maryland Estate Taxes Maryland, has special exemption for agricultural property. Exempts $5 million of ag property and have to agree to keep in agriculture for 10 years.

46 Other Tax Issues Gift tax 2016 & 17 is $14,000 to any individual Portion used for gifts counts against federal estate tax exemption ie it goes down Strategies involved in all of this

47 OTHER ISSUES

48 Other Issues How to handle farm kid v. city kid? Equal Equitable

49 Business Entities Ways to divide: Business entity Ownership of farm resides in entity owed by heirs Control given to on-farm successor Participation to off-farm heirs Use of business entities can facility estate plan

50 Conservation Easements Conservation easements: Potentially help equalize shares between farm and non-farm kids Can potentially utilize cash from sale of easement to equalize share

51 What About Sweat Equity? Not enforceable Creates ill will between family members Need to formalize relationship and create enforceable solutions

52 Thought on Marriage and Divorce If heir gets married during implementation of plan consider: Prenuptial Agreements Want to make clear that spouse will not have claim to farm/business in a divorce

53 Other reasons to consider prenup Complex families: Husband and wife both have children from previous marriage and no plan to have additional kids Want to insure each spouses assets go to their heirs.

54 WHAT ARE YOU TO DO?

55 Assemble a Team This is why you will work with a team of professionals Team will potentially include: Accountant/Tax professional Attorney Etc

56 IMPLEMENT, EVALUATE, AND REVISE

57 Reasons to Consider Revising? Birth Death Marriage Divorce Disability Major acquisition Major disposition Major legal change Regular basis

58 Reasons to Consider Revising Changes in estate taxes What Congress or the General Assembly giveth The same bodies can taketh away or increase.

59 Reasons to Consider Revising What if on-farm successor passes way? What if on-farm successor no longer wants to farm?

60 WRAP UP

61 Wrap Up Family Business Institute has found: 88% of current family business owners believe same family will be controlling business 5 years down the road. But what do the numbers tell us?

62 Wrap Up Family Business Institute has found: 30% survive to 2 nd generation

63 Wrap Up Family Business Institute has found: 30% survive to 2 nd generation 12% survive to 3 rd generation

64 Wrap Up Family Business Institute has found: 30% survive to 2 nd generation 12% survive to 3 rd generation 3% survive beyond the 4 th generation.

65 Wrap Up Why do businesses fail generation transitions: 1. Failure to prepare next generation or incompetent successors 2. Unclear succession plans 3. Family rivalries 4. Insufficient capitalization

66 Wrap up Have I frightened you? Point is not to be scared but prepared Talk to your stakeholders and work with qualified professionals

67 RESOURCES AVAILABLE

68 Resources Available Over summer launched: UME page Farm Transition and Estate Planning edu/agtransitions

69 Resources Available Through University of Minnesota s Center for Farm Financial Management: AgTransitions ns.umn.edu/

70 Resources Available Through Oklahoma State University Extension: Farm Transitions du/farmtransitions/

71 Resources Available This one is not free Book by Neil Harl at Iowa State Walks you through the process Book is $25 to $25 com/shop/farm-estateand-business-planning/

72 THANKS! ANY QUESTIONS? Phone: List of publications: