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Succession Planning
Toolbox
Wills, LLCs, Trusts, and TOD Basics
Presented through Purdue University Extension
Why Use Multiple Tools in
Succession Planning
The right tool for the right job
When all you have is a
hammer, everything looks like
a nail
Setting Goals
The importance of orientation
Preserving for Generations: Who
are you doing this for?
Farm Management and Ease of
Operation
Transfer Farm to Next Generation
Liability Protection
Measure up to your Goals?
Howdoesyourplanning
Other Considerations
Stage of life or business
Sources of capital
Inter/Intra family issues
Risk management
Taxes
What Are Your Assets?
(Management Level: Easy -> Hard
• Cash or cash-like assets (grain)
• Retirement or other beneficiary accounts (IRAs, 401(k), Life
Insurance
• Equipment and other BIZ personal property
• Land
• Other Non-farm assets (vacation home)
A Word About
Federal Estate Taxes
$11.4M 2019
Exemption
per person
01
Portable
between
spouses
02
Unified Gift /
Estate /
Generation
Skipping
Rate
03
Capital
Gains
Taxes
04
A Word About
Federal Estate Taxes
Large estate owners should talk to a team of
professionals – accountants and lawyers. You
can afford it and you need it!
For everyone else, the goal is ease of transition,
not tax minimization
However, the Succession Plan should not
interfere with the farm operation
A Word About Timing
Different priorities for different
stages of life
Plan for multiple generations –
but not for all generations
Plan for flexibility
The 5D's of Farm Succession
Planning
Death
Divorce
Disability
Disaster
Disagreement
Farm Succession Risks
Risks from outside (the world)
Risks from inside (the family)
Challenges to MENTALLY pass the
farm to the next generation (are
they ready?)
Risks from operations (livestock,
tractors, farmland)
Risks from Government (FSA
limits, other gov’t restrictions
Succession Planning Tools
Remember, there is more than one tool
in a toolbox.
Entities as Farm and Succession
Devices
Business purpose
Liability protection
Organize operations
Greater flexibility
Better profitability
analysis
Estate planning
purpose
Protection from family
or creditors
Greater flexibility in
planning
Easier transfer of assets
Succession Planning Tools:
An Overview
Entity: Use of an entity for farm and estate planning.
(LLC // Corporation // S Corp // Partnership)
Wills: A traditional estate planning device that should
always be included.
Trusts: How to effectively use trusts in estate
planning.
TOD: Transfer/ Pay on Death designation
Limited Liability Corporation
Best suited for
Farmland: container
for succession.
Operational: container
for liability.
Succession Planning
benefits
Transfers ownership, not
dirt.
Preserves business model.
Preserves farm land
heritage.
Centralizes management.
Wills
Everyone needs a Will
Everyone understands the concept
A single document that will sweep
up any missed planning
Trusts
Use with LLC for best effectiveness
Minimize Trust presence "in the
world" for greater flexibility
Trust as ONE tool, not the only tool
 If managed correctly, can transfer
assets seamlessly to next generation
Can become overly complicated if
not used strategically
Transfer on Death/Pay on Death
Best Suited For:
Personal bank accounts
Investment account (watch broker
limitations!)
Non-farm assets (like vacation home)
Watch state-by-state application
Succession Planning benefits
Can be used for any property
Other Estate Planning Tools
Life Insurance
Lifetime Gifts
Planning for a Stepped Up Basis
Fair – vs – Equal
Planning should consider the needs of both
"On-farm" and "Off-farm" heirs
Whether Off-farm heirs can incorporate farm
income into their personal finance profile
Use of non-farm planning tools to equalize an
estate, leaving more farm assets to On-farm
heirs (like life insurance and cash investments)
Special Needs – Special Heirs
Physical / Mental infirmity can qualify for Gov't
entitlements
Legal issue
Residence issue
Succession Planning
Case Study
First Generation Plans for Transition
Succession Planning Case Study
First Generation Plan for Transition
Timing of Transition
During Life After Death of Spouse 1 After Death of Spouse 2
Options
Buy Out Rent Out Other Family Gift Bequest
Questions
What will be the most fair and effective way to
pass the farm business to the next generation?
When should the change take place?
Succession Planning Case Study
Family Members
Mom and Dad
GEN 1
Brother
(On-Farm)
Gen 2
Minor
Gen 3
Minor
Gen 3
Sister(Partially
On-Farm)
Gen 2
Adult
Gen 3
Adult
Gen 3
Sister(Off-Farm)
Gen 2
Mom and Dad – GEN 1
(Traditional Model)
Farm
Real
Estate
2,500
Acres
@7,500
Farm
Home
$150K
Farm
Equip-
ment
(Dad)
$1M
Grain
Inven-
tory
(Dad)
$1M
Retirement/
Investments
(Mom &
Dad joint
owners)
$500K
Florida
Home
(Mom &
Dad joint
owners)
$75K
Total Assets = $19,475,000
Farm Operation
2,500
Acres
Grain only
(no
livestock)
On-Farm
son is full-
time
employee
1 other
full-time
employees
+seasonal
Moderate
debt
On-Farm Brother
Home on
farm
Some
separate
farm real
estate
Some
separate
equipment
Farms with
Dad
Spouse and
children
Partially-on-Farm Sister
Home off farm
Helps with some
farming
(FSA paperwork,
bookkeeping)
Spouse with full
employement and
separate retirement
account
Off-Farm Sister
Home off Farm Fully Employed
No spouse or
children
GEN 2
GEN 2
GEN 2
Grandchildren (GEN 3)
Minor
Child
Minor
Child
Adult
Child
Adult
Child
Case Study – Pros and Cons
Planning OpportunitiesOptions: LAND Pros Cons
Land ownership in GEN 1
names, no entities.
Ease of transfer, stepped up
basis.
Subject to liability issues.
Multiple heirs = multiple names
on the deed, and possible
control issues in later
generations.
Land ownership in CORP Land stays protected from
human liability and human
creditors. Land stays intact
through generations.
No stepped-up basis. Possible
double-tax if sold. Difficult to
unwind corporations, and least
flexible model.
Land ownership in LLC Land protected from human
liability. Stepped up basis
available. Central control and
management. Can be adjusted at
any time.
All owners pay annual income
tax on their tax profile (can be
pro or con). Requires separate
tax return.
Land ownership in Trust Unfamiliar business model, which
can cause account complications
and tranfer issues. Not a business
model; it's an estate model.
Keeps ownership out of probate
if done correctly and
maintained. Ensures that land
will go as intended by Mom and
Dad.
Options: Business Model Pros Cons
Sole Proprietor (Dad) Easiest and most direct way of
doing business
Difficult to let control go,
difficult to parse ownership to
next generation, difficult to
transition, and greatest liability
risk.
LLC (Mom and Dad, to start) Easy to set up, operation is very
similar to Sole Proprietor model.
Easy to transition to next
generation and bring on new
owners.
LLC can be replicated as many
times as needed (One entity for
each "business" of the farm, like
livestock, grain, employees).
Not completely protected. Heirs
can demand to cash out and
might be able to take property.
Corporation Operation – S Corp Stable, easy to set up, high level
of protection for owners and
assets
“locks” land basis forever.
Taxable on termination to both
Entity and Owners
Case Study – Pros and Cons
REVIEW – What tools are in your
toolbox?
Entities
Last Will & Testament
Trusts
TOD/POD
Used in combination tailored to
the goals of your family and farm
REVIEW – What is the approach
to succession planning?
Identify goals
Identify family members who will
benefit from planning
Identify and mitigate risks
Use multiple tools to achieve
goals
TALK TO A PROFESSIONAL!
Any Questions?

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2019 farm succession planning presentation mer

  • 1. Succession Planning Toolbox Wills, LLCs, Trusts, and TOD Basics Presented through Purdue University Extension
  • 2. Why Use Multiple Tools in Succession Planning The right tool for the right job When all you have is a hammer, everything looks like a nail
  • 3. Setting Goals The importance of orientation Preserving for Generations: Who are you doing this for? Farm Management and Ease of Operation Transfer Farm to Next Generation Liability Protection Measure up to your Goals? Howdoesyourplanning
  • 4. Other Considerations Stage of life or business Sources of capital Inter/Intra family issues Risk management Taxes
  • 5. What Are Your Assets? (Management Level: Easy -> Hard • Cash or cash-like assets (grain) • Retirement or other beneficiary accounts (IRAs, 401(k), Life Insurance • Equipment and other BIZ personal property • Land • Other Non-farm assets (vacation home)
  • 6. A Word About Federal Estate Taxes $11.4M 2019 Exemption per person 01 Portable between spouses 02 Unified Gift / Estate / Generation Skipping Rate 03 Capital Gains Taxes 04
  • 7. A Word About Federal Estate Taxes Large estate owners should talk to a team of professionals – accountants and lawyers. You can afford it and you need it! For everyone else, the goal is ease of transition, not tax minimization However, the Succession Plan should not interfere with the farm operation
  • 8. A Word About Timing Different priorities for different stages of life Plan for multiple generations – but not for all generations Plan for flexibility
  • 9. The 5D's of Farm Succession Planning Death Divorce Disability Disaster Disagreement
  • 10. Farm Succession Risks Risks from outside (the world) Risks from inside (the family) Challenges to MENTALLY pass the farm to the next generation (are they ready?) Risks from operations (livestock, tractors, farmland) Risks from Government (FSA limits, other gov’t restrictions
  • 11. Succession Planning Tools Remember, there is more than one tool in a toolbox.
  • 12. Entities as Farm and Succession Devices Business purpose Liability protection Organize operations Greater flexibility Better profitability analysis Estate planning purpose Protection from family or creditors Greater flexibility in planning Easier transfer of assets
  • 13. Succession Planning Tools: An Overview Entity: Use of an entity for farm and estate planning. (LLC // Corporation // S Corp // Partnership) Wills: A traditional estate planning device that should always be included. Trusts: How to effectively use trusts in estate planning. TOD: Transfer/ Pay on Death designation
  • 14. Limited Liability Corporation Best suited for Farmland: container for succession. Operational: container for liability. Succession Planning benefits Transfers ownership, not dirt. Preserves business model. Preserves farm land heritage. Centralizes management.
  • 15. Wills Everyone needs a Will Everyone understands the concept A single document that will sweep up any missed planning
  • 16. Trusts Use with LLC for best effectiveness Minimize Trust presence "in the world" for greater flexibility Trust as ONE tool, not the only tool  If managed correctly, can transfer assets seamlessly to next generation Can become overly complicated if not used strategically
  • 17. Transfer on Death/Pay on Death Best Suited For: Personal bank accounts Investment account (watch broker limitations!) Non-farm assets (like vacation home) Watch state-by-state application Succession Planning benefits Can be used for any property
  • 18. Other Estate Planning Tools Life Insurance Lifetime Gifts Planning for a Stepped Up Basis
  • 19. Fair – vs – Equal Planning should consider the needs of both "On-farm" and "Off-farm" heirs Whether Off-farm heirs can incorporate farm income into their personal finance profile Use of non-farm planning tools to equalize an estate, leaving more farm assets to On-farm heirs (like life insurance and cash investments) Special Needs – Special Heirs Physical / Mental infirmity can qualify for Gov't entitlements Legal issue Residence issue
  • 20. Succession Planning Case Study First Generation Plans for Transition
  • 21. Succession Planning Case Study First Generation Plan for Transition Timing of Transition During Life After Death of Spouse 1 After Death of Spouse 2 Options Buy Out Rent Out Other Family Gift Bequest Questions What will be the most fair and effective way to pass the farm business to the next generation? When should the change take place?
  • 22. Succession Planning Case Study Family Members Mom and Dad GEN 1 Brother (On-Farm) Gen 2 Minor Gen 3 Minor Gen 3 Sister(Partially On-Farm) Gen 2 Adult Gen 3 Adult Gen 3 Sister(Off-Farm) Gen 2
  • 23. Mom and Dad – GEN 1 (Traditional Model) Farm Real Estate 2,500 Acres @7,500 Farm Home $150K Farm Equip- ment (Dad) $1M Grain Inven- tory (Dad) $1M Retirement/ Investments (Mom & Dad joint owners) $500K Florida Home (Mom & Dad joint owners) $75K Total Assets = $19,475,000
  • 24. Farm Operation 2,500 Acres Grain only (no livestock) On-Farm son is full- time employee 1 other full-time employees +seasonal Moderate debt
  • 25. On-Farm Brother Home on farm Some separate farm real estate Some separate equipment Farms with Dad Spouse and children Partially-on-Farm Sister Home off farm Helps with some farming (FSA paperwork, bookkeeping) Spouse with full employement and separate retirement account Off-Farm Sister Home off Farm Fully Employed No spouse or children GEN 2 GEN 2 GEN 2
  • 27. Case Study – Pros and Cons Planning OpportunitiesOptions: LAND Pros Cons Land ownership in GEN 1 names, no entities. Ease of transfer, stepped up basis. Subject to liability issues. Multiple heirs = multiple names on the deed, and possible control issues in later generations. Land ownership in CORP Land stays protected from human liability and human creditors. Land stays intact through generations. No stepped-up basis. Possible double-tax if sold. Difficult to unwind corporations, and least flexible model. Land ownership in LLC Land protected from human liability. Stepped up basis available. Central control and management. Can be adjusted at any time. All owners pay annual income tax on their tax profile (can be pro or con). Requires separate tax return. Land ownership in Trust Unfamiliar business model, which can cause account complications and tranfer issues. Not a business model; it's an estate model. Keeps ownership out of probate if done correctly and maintained. Ensures that land will go as intended by Mom and Dad.
  • 28. Options: Business Model Pros Cons Sole Proprietor (Dad) Easiest and most direct way of doing business Difficult to let control go, difficult to parse ownership to next generation, difficult to transition, and greatest liability risk. LLC (Mom and Dad, to start) Easy to set up, operation is very similar to Sole Proprietor model. Easy to transition to next generation and bring on new owners. LLC can be replicated as many times as needed (One entity for each "business" of the farm, like livestock, grain, employees). Not completely protected. Heirs can demand to cash out and might be able to take property. Corporation Operation – S Corp Stable, easy to set up, high level of protection for owners and assets “locks” land basis forever. Taxable on termination to both Entity and Owners Case Study – Pros and Cons
  • 29. REVIEW – What tools are in your toolbox? Entities Last Will & Testament Trusts TOD/POD Used in combination tailored to the goals of your family and farm
  • 30. REVIEW – What is the approach to succession planning? Identify goals Identify family members who will benefit from planning Identify and mitigate risks Use multiple tools to achieve goals TALK TO A PROFESSIONAL!

Editor's Notes

  1. Succession planning is an important part of strategic planning for any farming operation, but many farm families put of succession planning because it seems complicated and stressful to plan for a scenario for which you may not be ready.
  2. Just as in farming there are many tools, Succession Planning has many tools. Succession planning includes both “estate planning” tools and “business planning tools” There is no “one-size-fits-all” approach to estate planning, though many farm succession plans can have similar elements. It’s important to take into consideration (1) the people (2) the generations (timing) and (3) the assets when considering what tools will work best to suit your goals.
  3. The important first step is to determine your goals. Once you have established your goals, it is easier to choose the correct tools for the job (to accomplish the goals). There are a lot of estate planning tools, and different professionals (attorneys, accountant, or financial planners) prefer different tools. It is important to always measure whether a particular tool will accomplish a particular goal,. Alternatively, it is important to compare tools with goals to prevent the use of a tool that is awkward or not helpful to the overall plan. Don’t forget that your farm operation has to work within the tools you employ. Be sure that you measure your tool against the ease of incorporating that tool into the farm operation.
  4. Other considerations – what AFFECTS your farm operation? What needs to be addressed in your family that does not have anything to do with your farm? Special needs of a family member Family members who do (or do not) get a long Heavily leveraged versus “paid off” farm assets Outside ventures (work outside the farm, farm-related supplemental activities) Charitable concerns
  5. It is important to take a full inventory of the available assets. Different assets can be used in different ways for planning purposes. Off-farm children may prefer to inherit beneficiary accounts, while on-farm children want to be sure they don’t lose control of the land. Equipment is a major factor to any farm operation, but often treated casually (who owns it? How old is it? Where is it stored?) If the Gen 1 farmer wishes to retire, there may be serious tax consequences for selling all equipment at once. Non-farm assets, such as a vacation home or recreational vehicles (camper, boats) can affect the overall estate plan. Out of state assets should be included in the mix for purposes of properly titling them for ease of transfer to the next generation.
  6. As of January 1, 2018, the Federal Estate Exemption doubled. As of 2019, the exemption is $11.4M per person ($22.8 M per couple). Most family farms will fall comfortably below the Federal Estate Tax limit for a married couple, but there might be issues if one spouse “inherits the farm” and the exemption is lost for the first spouse (leaving only $11.4M to pass free of Federal Estate tax to the next generation). $11.4M is roughly equal to: 1,425 acres at $8,000 per acre. This does not include equipment, grain inventory, or buildings (including grain handling systems). Note that there may be an opportunity to push farm value to the grandchildren generation. As people live longer (into 90s), Gen 2 may be approaching their 70s, and might not need to “inherit (all) the farm” Each generation is assessed for Estate Tax at death – if you can “skip” a generation, it can save a lot of hassle and paperwork. -
  7. If your farm is not facing Federal Estate tax, don’t focus on devices intended to manage estate tax – instead, focus on devices and tools that make transfer to the next generation as easy as possible. ANY tool used for Succession Planning should not obstruct the normal farm operation – For example, putting all of the land in a “C Corporation” might prevent the next generation from cannibalizing the farm (if that is a concern), but C Corporations are notoriously inflexible business tools. On the other hand, with the new income tax environment for both Humans and Corporations, it is nearly a toss up of which is a better income tax management device.
  8. While it is nice to think about preserving the family farm “forever” for future generations, the reality is that the world changes, needs change, and farm operations change over time. We are not farming the same way today that farmers did three generations ago, and our priorities can be very different from that of our great-grandparents. Similarly, planning should focus on the people “NOW” – the ones who are alive today and will have a direct connection with the farm. By the same token, your best gift to future generations is implementing enough flexibility into your succession planning so that if their needs are vastly changed in 50 years, they will not be penalized (by tax or ease of change) for changing the character of the farm ownership (or liquidating entirely)
  9. No plan is perfect, and it is impossible to plan for every conceivable contingency. The planning discussion should touch on the worst disasters to any farm operation (see handout) These are challenges that might not be predictable or correctable, but provide the basis for contingency planning While it may be the “last answer,” “selling out” is an answer
  10. No matter which tools you use, there is risk. What are the reasonably expected risks, and can they be – Avoided Mitigated Endured
  11. There are two primary approaches – Tools that manage your estate and succession of assets to the next generation Tools that “stage” your farm operation to make it easier both to operate TODAY and to transition to TOMORROW.
  12. Good estate planning tools complement the business operation. Using one or more entities (Limited Liability Company or Corporation) can optimize the farm business while staging the farm operation for transition to the next generation gradually or at the death of Gen 1 owners Entity planning protects the farm (and the members of the next generations) from outside risks as well as inside conflict – the risks of which increase the more owners (children and grandchildren) are at the table. Entity planning allows much easier transfer of ownership to the next generation. It is a lot easier to sell, gift, or bequeath shares of stock as opposed to partial ownership of a field.
  13. The most effective Succession Plan will make use of more than one tools – but it is not required to make use of ALL the tools. Use what you need and the best tool for the job. Following are examples of how each tool might be incorporated into the overall Succession Plan
  14. When considering adding an Entity to your farm operation (especially if you have no previous experience with an entity) be sure to consult your legal and tax advisor to discuss how a Limited Liability Company (or any entity) will affect your farm operation. In many cases, adding an entity can help you manage cash flow better and potentially create tax savings.
  15. If you do nothing else, you should have a Will. Indiana law regarding Intestate Succession (who inherits if there is no will) can create unfortunate and unintended consequences – particularly in instances of a second marriage or step-children. The Will should be the LAST document you put into place for your Estate plan to “wrap up” all previous planning, but if you don’t have a Will, or are not ready for a comprehensive succession planning project, you should at least put a basic Will in place to avoid the unfortunate unintended consequences.
  16. Trusts are estate planning tools, not business planning tools. You should never consider a TRUST as part of your business plan, but a trust CAN be an effective ESTATE PLAN. It is important for you and your advisors to keep that in mind, and use trusts strategically and as a compliment to the rest of the business and succession plan
  17. This is a great way to “set it and forget it” for certain kinds of assets. It allows you to put your intentions into place exactly how you prefer. NOT the best tool for farm assets, but a terrific tool for “titled” assets, such as bank accounts, and non-farm real estate. Different from “Life Estate” – TOD asset is YOURS to use and sell as you see fit during your life. Can be applied to any asset (in the State of Indiana). A Life Estate is a partial-relinquishment of ownership and requires the consent of the remainder beneficiary if you want to sell the asset.
  18. Life insurance can be used to manage debt and to equalize bequests. For an on-farm heir who would benefit from majority ownership of the farm assets, life insurance can provide cash to off-set the farm inheritance. Life Insurance can be used to pay off farm debt and to buy-out off-farm heirs. This can be a very expensive tool, so evaluate careful and consider whether the cost of the life insurance over your expected lifetime might be better applied in another direction (either purchase of an investment asset or directing the other farm assets toward a different model to accomplish the same goal) Lifetime gifts are not as effective in an environment of very high Estate Tax Exemption. It used to be important to try to “gift-down” your estate by an annual gift (2019 Annual Exclusion Amount is $15,000). Rather than use the Annual Exclusion for transfer of low-basis farm assets, consider holding onto the assets until your death to make use of the Stepped Up Basis, and use other planning tools to accomplish the succession plan
  19. The use of tax pass-through entities (such as Limited Liability Companies) when non-farm heirs are owners can be problematic. LLCs can seem like a complication to individual tax returns when the owner is not familiar with the farm business. Be sure that your estate planning does not create hardship “TODAY” as you are trying to plan for the future. Note legal and tax limitations of family members who may have special needs in your estate planning. Seek advice from professionals who are experienced in special needs planning (which may not be the same as farm planning specialists)
  20. First Questions help to identify GOALS Questions should be evaluated in context of both FARM OPERATION and SUCCESSION PLANNING
  21. For purposes of this case study: Gen 1 - Mom and Dad Gen 2 - On Farm Brother // Partially on-farm Sister (helps out but has another job) // Off-Farm Sister (not involved in the farm operation, may live remote from the farm Gen 3 – Brother’s two minor children // Sister’s two adult children
  22. For “owned” farm assets (land, equipment, grain), value adds up quickly. Most farmers know the value of business assets (land, equipment, inventory) for bank loan purposes, but may not grasp the extent of asset to be managed in a Succession Planning context. How are assets titled? Mom & Dad may think that they farm “together” but the equipment might be in Dad’s name alone, and the grain might be stored in Dad’s name alone, or grain checks come only in one name. Loans may be joint, but equipment (tractors, combines, trucks) may be in Dad’s name.
  23. Livestock barns add an additional layer of complexity – Different entities own the barns, grower contracts control the operation, debt may be added to the livestock operation. Generally, the goal in Succession Planning with respect to livestock barns is to plan to preserve the livestock operations as a separate entity and confirm continencies in case the primary operator of the livestock barn is incapacitated or dies. In the case of substantial debt, planning goals should include managing the debt in the event of the death of a principal operator or owner of the farm. Is there someone to step in and operate the farm? If asset liquidation is necessary to pay off debt, have assets been identified that can be used for debt reduction without impairing the remainder of the farm?
  24. Now is the time for a frank discussion with the children about THEIR goals. While Gen 1 should plan as they see fit, including Gen 2 in the conversation at best may make planning easier or (at worst) will reveal the family pressure points. This example shows Gen 2 as stable, employed, and likely managing their own retirement investments. One goal may be to structure the farm so that Brother can continue farming, but provide a reasonable return (income) to the two sisters. What happens if one or more of the Gen 2 family members do not have stability? Unemployment, under-employment, disability, or debt? The goal may be to “fairly” provide for the at-risk family members without putting the farm assets at risk.
  25. Where do Gen 3 fit in the mix? Opportunities for adult Gen 3 members to inherit a “skip” share Opportunities to plan for a Trust to hold wealth for Gen 3 minor children until “of age” What if Gen 3 is not interested in the farm? – Planning for “cashing out” of the farm, if it comes