Estate planning for farmers 02 14-12
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Estate Planning for Farmers
Protecting the Familythe Farm,
and the Legacy
February 14, 2012Presenter: Miriam Robeson
Attorneywww.lawlatte.com
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Why Plan? Old Model
• Farm until you die, then kids divide• Multi-generation farms
Today’s Model• Less than 10% of people raised on a farm return to the
farm• Older farmers are seeking slow-down or retirement, but
may still rely on farm income
What will happen to YOUR farm?
What legacy do you want to leave your children?
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Family Farms Today
< 2% of US Population claims farming as an occupation (960,000)
90% of farms are owned by individuals
3% of farms are owned by corporation• 90% of corporate farms are family-owned
1935 – 6.8 million farms 2002 – 2.1 million farms Average age of farmer = 57 years
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Family Farms Tomorrow < 1/3 of farms have a designated
successor More difficult for “Traditional Farm” to
support a family (or families) Increased regulation contributes to cost
and difficulty of maintaining a family farm
78% of farmers plan to transfer control to the next generation, but 40% of farmers have no formal succession plan.
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Age of Farmers
< 25
25-34
35-44
45-54
55-64
65-69
> 70
Source: USDA Economic Research Service
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How Farms Grow
1900 1925 1950 1974 1997 2002 2007
0
500
1000
1500
2000
2500
3000
3500
4000
4500 number of farms
size of farms
value land/bldg
Source: USDA Economic Research Service
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Multiple Operator Farms, 2003
Low S
ales
Med
ium
Sal
es
Larg
e
Very
Lar
ge
NonFa
mily
All F
arm
s05
101520253035404550
6.2
11.4 13.4
20.4
13.1
7.9
37.941.6 41.9
46.2 44.4
38.8
Multi-Operator and Multi-GenerationMulti-Operator, but not Multi-Generation
Source: USDA Economic Research Service
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Estate Tax – 2012/2013 When do you need to consider more
aggressive planning?
2012 -- $5M per person/$10M per married Estate Tax Exemption• Top Estate Tax Rate = 35%
2013 ???? -- $1M per person • Top Rate = 55%
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Estate Tax Changes - $10M
2001
2002
2004
2006
2009
2010
2011
2013
0.00
2,000,000.00
4,000,000.00
6,000,000.00
8,000,000.00
10,000,000.00
12,000,000.00
ExemptionTax
Source: US IRS Code
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How Big is Your Farm/Estate?
Valuation of Farm/Non-Farm Assets• How much is $10M?
1,600 acres @ $6,000/acre 1,500 acres @ $6,500/acre 1,400 acres @ $7,000/acre
• Assets to consider: Farm real estate Equipment Grain/livestock
• Cash/Investments• Homestead
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What Happens If You Don’t Plan?
Larger Estates – Estate Tax!• Payment of Estate Tax may require
liquidation of assets• Liquidation of assets may generate Capital
Gain Tax (for example, if in a corporation)• DOUBLE-TAX Effect – unnecessary estate tax
PLUS unnecessary liquidation/Capital Gain Tax!
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Indiana Inheritance Tax State Tax on transfers
• $100,000 exemption per child
• No tax on spouse transfers
• For farmers, there will be Inheritance tax
STAY TUNED – Indiana General Assembly is considering
phase-down or phase-out of Indiana Inheritance Tax
Current graduated level from 1% - 10% (> $1.5M per
heir)
• If you have (approx) $10M estate and 3 children, your
estate will pay approximately $1M in Indiana
Inheritance Tax
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Goals of Estate Planning
1. Transfer to next generation
2. Minimize taxes
3. Preserve farm
4. Treat all children “fairly”
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Estate Planning – Step 1 Husband & Wife Planning
• All Farm Real Estate “Tenants in Common”• Allows greatest flexibility for use of Estate
Tax Exemption Farm Holding Corporation
• H&W own their own shares• Can use Discount Valuation techniques
Testamentary Trust• Estate > Federal Exemption goes to Trust• Income to Surviving Spouse/Rest to Heirs
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Two Paths – H&W
All to Spouse
Exemption amount in
Testamentary Trust
Remainder “outright”
Fed Exemption to Kids (Gen 2)
Exemption amount
“outright”
Remainder to Spouse
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Farm (Holding) Corp
Pros
Discount Valuation
Ease of Gifting
ConsNo
Stepped Up Basis
Less Flexibility
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What is Discount Valuation?
A Smaller Piece of the Pie is worth less than the fractional value of the whole pie.
• Minority Interest – owning a non-controlling
share
• Lack of Marketability – Lack of ready market
for small closely-held and family corporations
• Common discount = 20-40%
• BIG tax savings!
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Estate Planning – Step 2 If Active Participation by Child(ren)
Use of Entity to mix transfer during life and transfer at (parents’) death
Plan for 3, 5, and 10 year goals
Involve next generation• “on farm” and “off farm” children
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Other Considerations – Step 3 FSA Program Planning – be sure your planning
allows for “active participation”
Power of Attorney – Allows Child to manage your affairs
Life Estate – An effective way to transfer/protect assets
Life Insurance – Can be used to help pay taxes or balance estate between farm/non-farm heirs
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What if there is no successor?
Planning considerations change if there are no heirs who are interested in maintaining the farm operation.
Factors:• Your needs/desires – retirement, continued
income, care in infirmity, tax planning
• Your children’s needs/desires – inability to understand/manage farm assets, desire for inheritance in more familiar form (cash)
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Tale of 5 Entities
1. Individual
2. General/Limited Partnership
3. C Corporation (Traditional)
4. S Corporation (Pass-Through)
5. Limited Liability Company (LLC)
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Use of Entities in Estate Plan
Reduces taxable estate through planned giving
Facilitates use of alternate valuation (Discount Valuation/Special Use Valuation)
Smoother transition to next-gen management
Downside – no stepped-up basis for real estate
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Case Study – Basic Plan
Gen 1 (Mom & Dad)
Gen 2 On-Farm
Gen 3 On-farm
Gen 3 On-farm
Gen 2 Near-FarmGen 3
Off-farm
(minor)
Gen 2 Off-farm
Gen 3 Off-farm
(minor)
Gen 3 Off-Farm
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Other Considerations 2nd Marriage (is there a pre-nup?)
• 1st Generation
• 2nd Generation issues with 2nd marriages
Divorce/Death
Special Needs spouse or child
Creditors/Financial troubles of heirs
Minors (children/grandchildren)
Incapacity (parent/spouse/child)
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What About (Living) Trusts?
Trusts are a popular estate planning tool
Farm planning should use trusts when – • Special Needs heir• Minor Children• Large Estate (> $10M in 2012)• Real Estate in more than one state
Trusts should be used with care Living Trusts versus Testamentary
Trusts
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How Do You Plan inAn Uncertain Tax Climate?
BE FLEXIBLE! Don’t put any techniques in place that cannot be “unwound” later if the tax climate changes
PLAN NOW! The longer you have to “work your plan,” the better you can accomplish your goals in spite of changes in the law.
INCLUDE THE NEXT GENERATION in your planning. “Family Goals” are more flexible than “Gen 1” Goals
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CAUTION! A Word to the Wise Information is based upon TODAY’S tax picture
– Note that the current Estate Tax law may change at the end of 2012
Many variables = many options – the examples presented are just to get you started
Talk to a professional! Tax and law experts
Be Flexible! You may need to change your plan as circumstances (and the law) changes!
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#1 Tool for Successful Planning
Communication
• Talk to your spouse
• Talk to your children
• Talk to your tax/legal professionals
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Summary Three factors for success in Farm Estate Tax
Planning
• Plan Early – it’s never too early to start planning for the future of the farm and the next generation
• Plan Often – reviewing your plan frequently allows for minor adjustments as the law or family changes and major adjustment more quickly
• Be Flexible – Understand that you may need to slightly or dramatically change your plans based upon the change in the law or family. Don’t do anything that cannot be un-done, later.
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Thank You for your attention!
Any Questions?
A copy of this presentation may be downloaded from the Presenter’s Website:
http://blog.lawlatte.com/index.php/2012-workshops/
Miriam Robeson, Attorneywww.lawlatte.com