3/13/2012 FARM & RANCH OWNERS ESTATE PLANNING WHAT IS ESTATE PLANNING? Estate Planning is a Lifetime Process whereby:

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1 FARM & RANCH OWNERS ESTATE PLANNING What to do with the family farm or ranch WHAT IS ESTATE PLANNING? Estate Planning is a Lifetime Process whereby: Presented by: James A Kalicki, Esq. I control my property while I am alive and well I take care of myself and my loved ones if I become disabled I give what I want to whom I want, when I want and the way I want I do so with the lowest possible amount of professional fees and court costs WHAT ARE YOUR HOPES, DREAMS, AND VALUES? WHAT ARE YOUR FEARS? Let s List Them Let s List These Also 1

2 LOSING THE FARM OR RANCH TO CREDITORS OR PREDATORS? LOSING THE FARM OR RANCH TO THE PRODIGAL SON? Your son in law, Fred Your son, Marvin Hasn t had a job since 2006 Belongs to a religion that you consider a cult Sells T shirts at concerts by a band called Phish You suspect he is fond of chemical substances Thinks it s great that he has rich in laws Has started three businesses and two real estate deals All have failed Has asked you to financially back each one Has asked you to bail him out of each one Recently filed bankruptcy Owes $12,000 in legal fees and back taxes Is he going to get half of what you leave to your daughter!? Are you sure you want to leave your life s work to him? No strings attached? LOSING THE FARM OR RANCH TO YOUR SPOUSE S NEXT SPOUSE? PLANNING Elaine, your husband s next wife In the month since your death, has brought home cooked meals to your husband six times Each time she visits, wears a skimpier outfit Can t wait to redecorate your home, especially that hideous wallpaper you chose Thinks there is no good reason that money earmarked for your children shouldn t be spent on more important things like jewelry, sports cars, and European spa vacations Do you want her to get your children s heritance? How can you avoid these catastrophes? YOU NEED TO PLAN! If you don't know where you're going, you'll probably end up somewhere else. Yogi Berra 2

3 WHAT ARE SOME OF THE MORE COMMON ESTATE PLANS? DOING NOTHING Doing nothing (80% of adult Americans) Joint ownership with spouse or kids Giving away assets during lifetime Beneficiary transfers Will Revocable Living Trust Limited liability company Means dying intestate (lawyerese for without a will ) The State has laws that dictate how an intestate person s property will be distributed You have absolutely no control Property may go to people you don t want and in ways that you don t want Dying intestate means no tax planning Dying intestate means: Let the chips fall where they may. OWN EVERYTHING JOINTLY WITH YOUR SPOUSE Planning may be necessary after first spouse s death when still in period of grieving Does not avoid probate on the second death No re marriage protection: Your assets may end up with people you never dreamed of. Piles up everything in second spouse s estate, which results in loss of the estate tax exemption No time for planning if both spouses die simultaneously Assets subject to predators and creditors of both spouses OWN JOINTLY WITH YOUR CHILDREN Parent loses control over property Property becomes subject to children s creditors Unbalanced estate plan what about other children Gift implications may cause huge Medicaid problems if medical assistance is needed 3

4 GIVING AWAY ASSETS BENEFICIARY DESIGNATIONS You lose control May cause huge Medicaid problems if medical assistance is needed within 5 years after the gift You may lose significant tax benefits (although, properly done, you may gain some also) They dictate who gets: Life Insurance IRAs, 401(k)s Pay on Death bank and brokerage accounts PROBLEMS WITH BENEFICIARY TRANSFERS WHAT IS A WILL? Trumps a will or a trust Transfers occur at death, but there could be court interference if beneficiary: Is incapacitated or a minor Dies first or at same time May result in Unbalanced Estate May leave no money for funeral, burial, and estate taxes No predator or creditor protection Reduced tax planning A formal document useless until death Only transfers property you own at death Does not affecti jointly owned property, beneficiary designations, life insurance, and pay on death accounts 4

5 A WILL PRACTICALLY GUARANTEES PROBATE A court proceeding Notice in the newspaper and to your creditors Everything is public information: your will and inventory of all you die owning Delay Invites fights by your heirs will contests Does not apply to a pourover (back up) will A WILL IS NOT A LIVING DOCUMENT A Will does nothing for you while you are alive Does not avoid Guardianship of your estate f you become incapacitated it s useless for incapacity planning WHAT IS GUARDIANSHIP OF THE ESTATE? Often called Living Probate Lawsuit against you to take away your right to be independent. Judge or jury decides if you are incapacitated Judge decides who will control your property Judge decides how your property will be handled while you are incapacitated WHAT IS A TRUST A Trust is a legal relationship a special kind of contract designed to control property management and distribution A Trust has three separate roles: The TRUSTMAKER (also referred to as the Grantor or Settlor) who creates and funds the Trust The TRUSTEE who holds the property and administers the Trust The BENEFICIARY who receives benefit from the Trust The same person can serve in all 3 roles 5

6 WHAT PROPERTY CAN BE HELD IN A TRUST Almost any property, including Homes Farms and Ranches Other income producing real estate Recreational Property Condominiums Personal property Cars, boats, and airplanes Bank accounts Stocks and bonds Business interests Oil and mineral and gas rights Leasehold interests and contract rights HOW IS A REVOCABLE LIVING TRUST DIFFERENT FROM A WILL? It s a private document, not a public record Assets of the Trust are distributed without notice being published in the newspaper or mailed to creditors Trust administration is much more efficient and has lower professional costs Contests are much less likely It is effective while you are alive It can be used to avoid Guardianship WILLS AND REVOCABLE LIVING TRUSTS ENABLE SOPHISTICATED PLANNING Revocable Living Trusts make it possible to control what happens to assets during the Trustmaker s life (useful for incapacity planning) Revocable Living Trusts and Trusts established under Wills can provide for: Creditor/predator protection Spendthrift protection Remarriage protection Estate tax minimization Additional care for children (or spouses) with special needs with government benefits disqualification LIMITED LIABILITY COMPANIES (LLCs) Limited Liability Companies are highly flexible and customizable tools that hold many benefits for small business owners (including farmers and ranchers) Limited Liability Companies can be thought of as a cross between a Partnership and a Corporation Organizing the family farm or ranch as a Limited Liability Company will: Provide present benefits Expand the possibilities to lower estate taxes Assist in equalizing gifts among heirs 6

7 PRESENT BENEFITS Allows control to be maintained by the Organizers As opposed to gifting of undivided interests, for example Limits personal liability Debts of the company and judgments against the company do not become the obligation of the Organizers or Members Owners creditors cannot force liquidation or get control or a say in management Installment sales can provide cash flow for retirement CAN LOWER ESTATE TAXES Minority/marketability adjustments reduce fair market value Gifting of ownership interests Use the annual gift tax exclusion (currently $12,000 [$24,000 for a married couple} per person, per year) to reduce the size of your estate Freeze current values up to $1,000,000 ($2,000,000 for a married couple) EQUALIZING GIFTS AMONG HEIRS One way to equalize the inheritance received by children who are active in the operations of the farm or ranch with those who are not is to create two classes of ownership The class received by the active children would have managerial duties and would receive both a salary and a distribution from profits The other class would not have managerial duties and would not receive a salary, but would still receive a distribution from profits Another way in which LLCs can be used to equalize inheritances is to prepare a Buy Sell Agreement requiring the active children to buy out the passive children or sell the property ADDITIONAL TECHNIQUES FOR MINIMIZING ESTATE TAXES Special Use Valuation IRC 2032A Allows agricultural land to be valued as such, as opposed to being valued at fair market value, for estate tax purposes Conservation Easements Allows land to be preserved, and provides an income tax deduction and estate tax reduction Estate Tax Installment Payments IRC 6166 Allows estate tax attributable to ownership interest in a small business to be paid over time Irrevocable Trust May buy second to die insurance to provide cash needed to pay estate taxes due 9 months after the second death (avoids fire sale of assets to raise cash) 7

8 THE NEVADA TRUST Self Settled Spendthrift Trust One of only a few jurisdictions to allow these types of trusts Grantor can be Administrative Trustee Must have independent Distribution Trustee Consider using a Trust Protector 2 Year Statute of Limitations Shortest in the Nation Irrevocable Trust Nuclear Bomb of Asset Protection ONE MORE FINAL THOUGHT We have met the enemy and he is us! Pogo Possum PROCRASTINATION (not the IRS) is THE MAJOR OBSTACLE to effective estate plans! You just need to get one of these THANK YOU FOR YOUR ATTENTION, ANY QUESTIONS? 401 Ryland Street Suite 200 Reno, NV T: F: