1. WOMEN MANAGING THE FARM:
ESTATE PLANNING
AND ESTATE TAX ISSUES
Shon C. Robben
Arthur-Green, LLP
801 Poyntz Avenue
Manhattan, Kansas 66502
785-537-1345
785-537-7874 fax
robben@arthur-green.com
www.arthur-green.com
February 13, 2014
2. Estate Planning Objectives
1.
2.
3.
Ensure Assets Pass to Intended Parties
(Family, Charity, etc.)
Minimize Costs
•
Probate Expenses
•
Estate Taxes
•
Income Taxes- Stepped up basis
Pass Assets as Quickly as Possible to
Beneficiaries
•
Avoid delays with probate
3. Estate Planning Objectives
4. Care for Minors
•
•
Designate Guardians
Manage assets until minors reach desired age
5. Transfer Family Business to Maintain
Continuity
6. Plan for Long Term Care Expenses
4. What is Probate?
Court supervised procedure which oversees the
collection and distribution of all your property and the
payment of all your debts
Expensive:
•
Substantial court costs and attorneys fees to have a will and
testamentary trust probated
•
Attorneys fees can range from $2,000 up to 3% of your
estate
•
In almost every case the fees for probate exceed the costs for
using a nonprobate transfer
5. What is Probate?
Public Procedure:
•
All probate documents become part of public record
•
Records include an inventory of the estate assets and
persons to whom the assets are distributed
Lengthy Process:
•
6 months to several years before procedure is complete
•
Court supervised and numerous procedures have to be
followed
6. Forms of Ownership
1.
Sole Ownership
•
•
2.
This will cause assets to be distributed under intestate succession
or will of decedent
Probate needed
Tenants in Common
•
•
•
3.
Decedents’ share of asset will be distributed in the same manner
as sole ownership
Probate needed
Creditors of owner can only attach that owner’s interest
Joint Tenants With Right of Survivorship
•
•
•
This property will be distributed outside will or trust to surviving joint
tenant
No probate needed
Creditors of any owner can attach asset.
7. Forms of Ownership
4.
Ownership in Trust
•
•
•
5.
Property will be distributed as provided in Trust document
Avoids Probate
Can be protected from creditors of beneficiaries, except Grantor in
most cases.
Life Insurance, pensions and IRA’s
•
•
•
6.
have named beneficiaries
Creditors of beneficiaries cannot attach while owner is alive
Avoids Probate
Transfer on Death Asset
•
•
•
Creditors of beneficiaries cannot attach while owner is alive
Avoids Probate
Subject to Medicaid recovery
8. Options for Avoiding Probate
Joint Tenancy
Beneficiary Designations-life insurance,
retirement accounts
POD-TOD Assets
Distribution Options limited-may not reach desired
beneficiaries
No minor beneficiary options
Lifetime Gifts
May not be made in time
Gifts carry donor’s basis to donee
9. Options for Avoiding Probate
Revocable Living Trust
Definition: legal instrument created during your life
under which the trust owns your property and provides
for its management and disposition during your lifetime
and after your death
In the event you become disabled or incapacitated, the
trust allows your successor trustee to step in and use
trust assets to provide for your welfare and benefit
After death, the trust provides for the distribution of
your assets
10. Options for Avoiding Probate
Revocable Living Trust (cont.)
Living trust does not go through probate
Trust assets and beneficiaries are kept private
Less expensive to administer
Less time to administer and distribute assets
Can carry out complex distributions with a living trust
Provide for minor children
Provide for spouse and children in second marriage
Deal with distribution alternatives and contingencies
11. Advantages of Will & Trust
Avoid Distribution under Intestate Succession
– Kansas Intestacy Laws
Spouse Only-all to spouse
Spouse and Children-½ to spouse and ½ to
children
Children Only- all to children
Can designate recipient of assets
12. Advantages of Will & Trust
Minor Children
Can designate guardian for minor children
Defer distributions to minors until desired age
Hold in Trust
Discretionary Distribution
Choosing Personal Representative
Will – Executor
Trust – Successor Trustee
13. Advantages of Will & Trust
Authorize Sale of Assets and Payment of
Expenses
Authorize Continuation of Business
Tax Saving Opportunities
Use estate tax exemptions; generation skipping
Probate Avoidance – Trust Only
14. Types of Wills and Trusts
Wills
Basic Will – Spouse then Children (Adults)
Will with Trust for Minor Children or Special Needs
Pour-over Will
Tax-Saving Will – Creates Testamentary Credit
Shelter Trust or QTIP Trust
Trusts
Joint Living Trust
Main goal is to avoid probate
Surviving spouse has full control and access to assets
Include age restrictions for minors
Can use both estate tax exemptions with portability
Allows management of assets if disabled
15. Types of Wills and Trusts
Credit Shelter Trust
QTIP Trust
Benefits persons with disabilities
Trust only supplements public benefits
ILIT
Avoids Probate
Lets first spouse to die designate who receives assets after death of
surviving spouse
Popular with 2nd marriages
Special Needs/Supplemental Care Trusts
Avoids Probate
Uses decedent’s estate tax exemption
Owns life insurance policy
Keeps life insurance out of taxable estate
Medicaid Trusts
16. QTIP Trust- Second Marriage
Example:
Sue has $1,000,000 in her trust. She
has children from her first marriage, but
is now married to Ted. Ted only has
$250,000 in assets. Sue wants Ted to
have right to use her assets during his
lifetime, but wants to ensure unused
assets pass to her children.
17. QTIP Trust- Second Marriage
Sue’s Trust
$1,000,000
Ted’s Trust
$250,000
QTIP Trust
$1,000,000
-Ted-income for life
-Principal if needed for health,
maintenance or support (optional)
-At Ted’s death assets pass
to Sue’s children
Sue’s
Children
$1,000,000
Ted’s
Children
$250,000
18. Additional Estate Planning Tools
1. Financial Powers of Attorney
•
•
Durable Financial Power of Attorney
Homestead Power of Attorney
2. Health Care Directives
•
•
•
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Medical Power of Attorney
HIPAA Authorization (Health Insurance
Portability and Accountability Act of 1996)
Living Will
Do Not Resuscitate Order
19. Distribution Alternatives
Farming & Non-Farming Beneficiaries
Distribution of estate among farming and nonfarming children. (fair v. equal)
1. Distribute farming assets to child who is
farming. Start with livestock and equipment,
then home place or land most important to the
operation.
2. Distribute to non-farming children the nonfarming assets.
3. Are there enough other assets for “fair?”
20. Distribution Alternatives
Farming & Non-Farming Beneficiaries
1st Right. Allow farming children first right to buy
farm land, livestock, equipment or to lease land
after parents’ death for an extended period of time.
Children selling their share may be able to sell tax
free with step up in basis.
No Forced Partnership. Leave separate farms to
separate children instead of putting all children on
each deed.
21. Buy/Sell Agreements & Other
Provisions
1. Provisions can be placed in Will or Trust
documents providing the farming children the
option to purchase farm assets.
(a) Option to purchase land or livestock and
equipment at either of the following values:
(i)
Appraised value at death
(ii)
Value set in will or trust
(b) Payments can be made over a fixed period of time
(c) Farming child can purchase life insurance on
parents and use funds to purchase assets.
22. Buy/Sell Agreements & Other
Provisions
2. Require land to be leased to farming child for
fair market value
3. Hold farm assets in trust FBO all children, but
allow farming child to continue to farm
4. Transfer farm to family LLC
(c)
Allow farm child to manage/control entity
(b)
Restrict ownership to family members
23. Buy/Sell Agreements & Other
Provisions
5.
In corporations, partnerships or Limited Liability
Companies, the buy/sell provisions can be in
documents establishing the entity or by separate
agreement
(a)
Can require buy out if person leaves business or dies
(b)
Can fix price annually or do it by appraised value
(c)
Can use life insurance to provide funding
24. Planning with Life Insurance
Jim and Sue’s Assets
Farm Land
$1,000,000
J&S LLC
$1,372,000
Cash & Investments $ 200,000
$2,572,000
Two Children
Bob who is a farmer
Mary is not a farmer
Jim and Sue can purchase a second to die policy which pays on the death of
the survivor. Mary could be owner and beneficiary of the policy. The amount
would depend on cost of insurance and how much they want Mary to have.
One idea would be to purchase a $1,000,000 policy for Mary, and then leave
all land and LLC to Bob and life insurance, cash and investments to Mary.
Another idea would be for Bob to own the policy and be beneficiary, and then
have a buy-out provision in the trust for him to buy Mary’s share of the farm.
The parents can determine Mary’s share, and set a value if they wish to do so.
25. Federal Estate Tax
• The information provided hereafter represents
the Federal estate tax law based upon the
American Taxpayer Relief Act of 2012 (ATRA).
• ATRA contains no sunset provision, but is
always subject to change by an act of Congress.
26. Federal Estate Tax
Charitable and Marital Deductions
• Unlimited charitable deduction
• Unlimited marital deduction
• Decedent must be married
• Survived by spouse
• Spouse must be a U.S. citizen
•
Qualified Domestic Trust (QDOT)
28. Federal Estate & Gift Tax Exemptions
(2012 ATRA)
2013
Estate Tax
Exemption
$5,250,000
Gift Tax
Exemption
$5,250,000
2014
2015 and thereafter
$5,340,000
$5,000,000
$5,340,000
$5,000,000
Indexed for inflation
from 2011
Indexed for inflation
from 2011
The exemption is indexed for inflation increasing by $10,000 annual
increments and based on $5,000,000 exemption in 2011.
2014 Annual gift tax exclusion $14,000 per donee per year indexed for
inflation.
29. Maximum Estate & Gift Tax Rates
(2012 ATRA)
2011-2012
35%
2013 – and thereafter
40%
30. Generation Skipping Transfer
Tax Exemptions and Rates
(2012 ATRA)
Exemption
Maximum Rate
2013
$5,250,000
40%
2014
$5,340,000
40%
2015 and
thereafter
$5,000,000
40%
Indexed for inflation
from 2011
31. “Portability” Between Spouses
(2012 ATRA)
• Allows surviving spouse to take advantage of unused
portion of predeceased spouse’s estate tax exclusion
• If more than one predeceased spouse limited to lesser of
the current exemption ($5,340,000 in 2014) or unused
exclusion of last such deceased spouse
• Election made on timely filed estate tax return
32. “Portability” Between Spouses
(2012 ATRA)
Example #1
Husband dies in 2013 with $3,000,000 Estate
• Leaves entire $3,000,000 to children from prior marriage
• Estate Tax Return filed within 9 months of Husband’s death and
portability election made
• Wife’s exclusion amount becomes $7,500,000
•
Wife’s Original Exclusion
$5,250,000
Unused Exclusion of Husband
Total Exclusion
$2,250,000
$7,500,000
33. “Portability” Between Spouses
(2012 ATRA)
Wife’s Federal
Estate Tax
Exclusion
$5,250,000
Husband
$3,000,000
Estate Tax Return
filed for Husband
within 9 months
Children From
Prior Marriage
$3,000,000
$2,250,000 unused
by Husband
Available Gift/Estate
Tax Exclusion For
Wife $7,500,000
34. “Portability” Between Spouses
(2012 ATRA)
Example #2
•
•
•
•
•
Wife dies in January 2013 with $1,000,000 Estate
Leaves entire $1,000,000 to children from prior marriage
Taxpayer remarries March 2013
New wife dies in November 2013 with $2,000,000 Estate
Leaves entire $2,000,000 to children from prior marriage
35. “Portability” Between Spouses
(2012 ATRA)
• Estate Tax Returns were filed within 9 months of each
death and portability elections made
• Limited to lesser of $5,250,000 or unused exclusion of last
deceased spouse
• Husband’s exclusion amount is $8,500,000 rather than
$9,500,000 for 2013
Husband’s Original Exclusion
Unused Exclusion of Last Wife
$5,250,000
$3,250,000
$8,500,000
36. “Portability” Between Spouses
(2012 ATRA)
Husband’s Federal
Estate Tax
Exclusion
$5,250,000
Wife
$2,000,000
Estate Tax Return
filed within 9
months
Children From
Prior Marriage
$2,000,000
$3,250,000 unused
by last wife
Available Gift/Estate
Tax Exclusion For
Husband $8,500,000
37. Kansas Estate Tax
Kansas Estate Tax
•
•
No Kansas Estate or Inheritance Tax after
2009
Repealed effective January 1, 2010
38. Income Tax Basis Law
Decedent owns the following assets at death in 2012
Decedent’s Cost
Fair Market Value on
Date of Death and New
Income Tax Basis
Land
$200,000
$900,000
Stock
$100,000
$800,000
CD’s
$100,000
$100,000
No capital gains if sold by heirs following death for value used
in the estate.
39. Lifetime Gifting
Joe owns 500 acres of land he paid $100,000 for and is worth $1,500,000 and
wants to gift to his five children in 2013. He is married to Sue who consents to
the gift.
$1,500,000 gifted in 2013
Joe and Sue agree to split gifts.
($70,000) = (5 x $14,000 for Joe) use annual exclusion for each child
($70,000) = (5 x $14,000 for Sue) use annual exclusion for each child
$1,360,000 gift left
($680,000) $5,250,000 less $680,000=$4,570,000 lifetime gift exemption left for Joe
($680,000) $5,250,000 less $680,000=$4,570,000 lifetime gift exemption left for Sue
0 tax
Joe and Sue will each have $4,570,000 of estate tax exemption left
Basis to children in land is Joe’s basis $100,000
40. Planning Without
Estate Tax Concerns
(Federal Estate Tax 2014)
Planning for estates where assets are less than the
federal estate tax exemption of $5,340,000 in 2014
Example #1
John and Mary own:
House
Mutual Funds/Stocks
Savings
Farm
Total
$250,000
$200,000
$150,000
$1,300,000
$1,900,000
41. Planning Without
Estate Tax Concerns
(Federal Estate Tax 2014)
One Trust
• John and Mary execute one trust that will benefit the surviving
spouse
• On the death of the survivor of John and Mary, the trust will
distribute assets as directed by the trust
This planning allows for easy distribution of assets when no estate tax
planning is needed. Surviving spouse may change ultimate distribution of
assets, if they so desire, including distribution to a new spouse.
If one Trust is used, you must keep track of the Federal Estate Tax
exemption in the future to be sure it remains higher than assets in the one
trust. You also need to monitor the Kansas law in case Kansas enacts a new
estate tax law.
Any chance surviving spouse’s assets will exceed $5,340,000? File estate
tax return just in case.
42. Planning Without
Estate Tax Concerns
(Federal Estate Tax 2014)
John & Mary
$1,900,000
Surviving Spouse
$1,900,000
Children
$1,900,000
Federal Estate Tax
$0
43. Planning with Estate
Tax Concerns – 1 Trust
(Federal Estate Tax 2014)
John and Mary Own:
House & Land
Bank Accts
Mutual Funds/Stocks
Livestock Machinery & Equipment
$600,000
$450,000
$1,450,000
$1,100,000
Farm Ground
Total
$2,700,000
$6,300,000
44. Planning with Estate
Tax Concerns – 1 Trust
(Federal Estate Tax 2014)
John & Mary
$6,300,000
Surviving Spouse
$6,300,000
File Estate Tax
Return and make
portability election.
If not, face estate
tax of up to
$384,000
Federal Estate Tax
$0
Children
$6,300,000
45. Planning with Estate
Tax Concerns – 2 Trusts
(Federal Estate Tax 2014)
John’s Trust - $3,150,000
John Dies in Jan. 2014
•
•
•
•
Estate - $3,150,000
Federal Exemption - $5,340,000
Federal Estate Tax --$0
Principal stays in trust with
income to Mary for lifetime.
Mary can access principal for
health, education, maintenance
and support
Mary’s Trust - $3,150,000
Mary Dies in Nov. 2014
•
•
•
Estate - $3,150,000
Federal Exemption - $5,340,000
Federal Estate Tax --$0
* Both trusts are under $5,340,000 Federal Estate Tax Exemption
* Unused exemption of John can be used by Mary if federal estate tax
return is filed for John and election is made
46. Planning with Estate
Tax Concerns – 2 Trusts
(Federal Estate Tax 2014)
John’s Trust
$3,150,000
Mary’s Trust
$3,150,000
John Dies
John’s Trust
$3,150,000
Mary’s Trust
$3,150,000
• Income to Mary
• Principal for HEMS
• Mary as Trustee
Federal Estate Tax
$0
Mary Dies
Children
$6,300,000
47. Reasons To Use 2 Trust Plan
• Assets in credit shelter trust can be directed to children
of couple and not to a new spouse
• Appreciation of assets in credit shelter trust; avoid
estate taxation at death of surviving spouse
• Creditor protection from claims against surviving
spouse
48. Benefit of 2 Trusts
(Removing Growth from Estate)
John and Mary’s Total Assets
$10,240,000
• Set up one trust to use portability
• John Dies in 2012
All assets pass to Mary
• Assets increase in value 10% in 2013
• Mary dies at end of 2013 with $11,264,000 in her estate
• Combined exemption - $10,370,000
($5,120,000 + $5,250,000)
• Estate Tax is $357,600
49. Benefit of 2 Trusts
(Removing Growth from Estate)
One Trust Example
John & Mary
$10,240,000
John Dies 2012
Mary’s Trust @ Death
$11,264,000
$10,370,000
Exemption
Mary Dies 2013
Children
$10,906,400
50. Benefit of 2 Trusts
(Removing Growth from Estate)
John’s Trust $5,120,000
Mary’s Trust $5,120,000
John Dies 2012
Mary Dies end of 2013
•
•
•
•
•
•
Estate $5,120,000
•
Federal Exemption $5,120,000 •
Federal Estate Tax $0
•
Income to Mary for Life
Principal for HEMS
2013 – Assets grow to $5,632,000
Estate $5,632,000
Federal Exemption $5,250,000
Estate Tax $152,800
Kids Receive
John’s Trust $5,632,000
Mary’s Trust $5,479,200
Total
$11,111,200
* Avoided estate tax on growth in John’s Trust – saved $204,800
51. Benefit of 2 Trusts
(Removing Growth from Estate)
John’s Trust
$5,120,000
Mary’s Trust
$5,120,000
Mary Dies at end
of 2013
John Dies
John’s Trust at end
of 2013 - $5,632,000
Mary’s Trust
$5,632,000
• Income to Mary
• Principal for HEMS
•Mary as Trustee
Federal Estate Tax
$0
Children
$11,111,200
Federal Estate Tax
$152,800
52. Use Value Rules
Federal Estate Tax
1.
Allows use of alternate special valuation
instead of fair market value to determine
value of farm or real property used in
family business.
2.
Limited to reduction amount of $1,040,000
for 2012.
*2013 limitation - $1,070,000
*2014 limitation - $1,090,000
53. Use Value – Basic Requirements
U.S. Citizenship.
U.S. Real Property owned by decedent or a
closely held family business.
Real estate must pass to qualified heir
(ancestors, spouse, lineal descendants, lineal
descendants of spouse or parent, spouse of a
lineal descendant of descendant's parents or
lineal descendants).
54. Use Value – Basic Requirements
Decedent must have been using real
property for special use (farming, trade, or
business) at death.
Special use for 5 out of 8 previous years.
Value of special use real and personal
property must be 50% or more of gross
estate.
Special use real estate must be 25% or
more of gross estate.
55. Use Value Appraisal
(For Federal Estate Tax)
(2012 Land Value Calculation)
Average Pasture Rent
$22 per acre
Average Taxes
$2 per acre
Est. Average Federal Farm
Credit Interest Rate
5.15 percent (2012)
Land Value
($22-$2)/.0515 = $388 per
acre
56. Use Value Appraisal
(Jim’s Assets)
Jim’s Assets
Fair Market Value
Land Use Value for Federal Estate Tax
3000 Acres of
Pasture at $1,500
$4,500,000
3000 Acres of Pasture at
($1,164,000) but limited
reduction of $1,040,000
$ 3,460,000
400 Cows at $1000
$ 400,000
400 Cows at $1000
$ 400,000
Equipment
$ 800,000
Equipment
$ 800,000
Certificates of
Deposit
$ 300,000
Certificates of Deposit
$ 300,000
TOTAL
$6,000,000
ESTATE TOTAL
$4,960,000
57. Use Value Appraisal - 2012
Jim
Estate-with use value
Estate-without use value
$4,960,000
$6,000,0000
Federal Exclusion
$5,120,000
Federal Tax
$0
Estate Tax Without Using
Use Value
$308, 000
Note: Basis in land is $3,460,000 since use value appraisal
is used
58. Use Value – Recapture
1.
Property must be used in family business for
10 years.
2.
Qualified heir must materially participate in
business for 8 of 10 years.
3.
If fail continued use, tax savings is
recaptured.
59. Generation Skipping Transfer Tax
Reduce Estate Taxes by skipping a generation of
heirs
Prior to 1976, could make such transfers without
limits and completely skip a generation of estate
tax
60. Two Types of GST Transfers:
Direct Skip: Parent bypasses his/her children
and gives asset directly to grandchildren or a
trust for their benefit
GST Trust: Parent places assets in trust
which pays income to child for life, then
remainder passes to grandchildren after the
child is deceased
61. Generation Skipping Transfers
Direct Skip
Example No. 1:
Bob has assets worth $5,000,000. He has 1 son,
Bill, who is single. Bill’s net worth is
$7,000,000. Bob doesn’t want his assets subject
to estate tax in Bill’s estate. Bob’s trust leaves all
of his assets directly to Bill’s children at Bob’s
death.
62. Generation Skipping Transfers
GST Trust
Example No. 2:
Bob is 85 and has 1 child, Samantha. Bob’s
assets are worth $5,000,000. Samantha’s
husband is a spendthrift and Bob doesn’t want
Samantha’s husband wasting away Bob’s assets
after his death.
63. Generation Skipping Transfers
GST Trust
Solution:
Bob’s trust states at his death all of his assets are
to remain in trust for Samantha’s lifetime.
Samantha is entitled to income from the trust for
her lifetime and principal if needed for health,
maintenance and support. The trust has a
spendthrift provision protecting it from creditors.
At Samantha’s death the trust assets pass to her
children at age 30.
