Estate planning for farmers 02 14-12

Protecting the Family the Farm, and the Legacy February 14, 2012Presenter: Miriam Robeson Attorney www.lawlatte.com

 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?

< 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

< 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.

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

Source: USDA Economic Research Service number of farms5000 size of farms4000 value land/bldg300020001000 0 1900 1925 1950 1974 1997 2002 2007

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

 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%

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

 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

 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!

 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

1. Transfer to next generation2. Minimize taxes3. Preserve farm4. Treat all children “fairly”

 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

Fed ExemptionAll to Spouse to Kids (Gen 2) Exemption amount Exemption in Testamentary amount Trust “outright” Remainder Remainder “outright” to Spouse

Pros ConsDiscount No SteppedValuation Up Basis Ease of Less Gifting Flexibility

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!

 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

 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

 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)

1. Individual2. General/Limited Partnership3. C Corporation (Traditional)4. S Corporation (Pass-Through)5. Limited Liability Company (LLC)

 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

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

 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)

 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

 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

 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!

Communication • Talk to your spouse • Talk to your children • Talk to your tax/legal professionals

 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.

 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

Estate planning for farmers 02 14-12

by Miriam Robeson on Feb 13, 2012

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Estate planning for farmers 02 14-12 — Presentation Transcript