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  • 1. Protecting the Family the Farm, and the Legacy February 14, 2012Presenter: Miriam Robeson Attorney www.lawlatte.com
  • 2.  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?
  • 3. < 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
  • 4. < 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.
  • 5. Source: USDA Economic Research Service 1.6 14.4 8.5 < 25 8.3 25-34 21.3 35-44 45-5421.9 55-64 24 65-69 > 70
  • 6. Source: USDA Economic Research Service number of farms5000 size of farms4000 value land/bldg300020001000 0 1900 1925 1950 1974 1997 2002 2007
  • 7. Source: USDA Economic Research Service50 46.2 44.445 41.6 41.9 37.9 38.840353025 20.420 13.4 13.115 11.410 6.2 7.9 5 0 Multi-Operator and Multi-Generation Multi-Operator, but not Multi-Generation
  • 8.  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%
  • 9. Source: US IRS Code12,000,000.0010,000,000.00 8,000,000.00 6,000,000.00 Exemption Tax 4,000,000.00 2,000,000.00 0.00 2001 2002 2004 2006 2009 2010 2011 2013
  • 10.  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 • Cash/Investments  Equipment • Homestead  Grain/livestock
  • 11.  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!
  • 12.  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
  • 13. 1. Transfer to next generation2. Minimize taxes3. Preserve farm4. Treat all children “fairly”
  • 14.  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
  • 15. Fed ExemptionAll to Spouse to Kids (Gen 2) Exemption amount Exemption in Testamentary amount Trust “outright” Remainder Remainder “outright” to Spouse
  • 16. Pros ConsDiscount No SteppedValuation Up Basis Ease of Less Gifting Flexibility
  • 17. 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!
  • 18.  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
  • 19.  FSA Program Planning – be sure your planning allows for “active participation” Power of Attorney – Allows Child to manage your affairs Estate – An effective way to Life transfer/protect assets Insurance – Can be used to help pay Life taxes or balance estate between farm/non- farm heirs
  • 20.  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)
  • 21. 1. Individual2. General/Limited Partnership3. C Corporation (Traditional)4. S Corporation (Pass-Through)5. Limited Liability Company (LLC)
  • 22.  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
  • 23. Gen 1 (Mom & Dad) Gen 2 On- Gen 2 Gen 2 Off- Farm Near-Farm farm Gen 3 Gen 3 Gen 3 Gen 3 Gen 3 Off-farm Off-farm Off-On-farm On-farm (minor) (minor) Farm
  • 24.  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)
  • 25.  Trustsare 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
  • 26.  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
  • 27.  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!
  • 28. Communication • Talk to your spouse • Talk to your children • Talk to your tax/legal professionals
  • 29.  Threefactors 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.
  • 30.  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, Attorney www.lawlatte.com