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.
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 generation2. Minimize taxes3. Preserve farm4. 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