Estate Planning for Farmers

Protecting the Familythe Farm,

and the Legacy

February 14, 2012Presenter: Miriam Robeson

Attorneywww.lawlatte.com

Why Plan? 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?

Family Farms Today

< 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

Family Farms Tomorrow < 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.

Age of Farmers

< 25

25-34

35-44

45-54

55-64

65-69

> 70

Source: USDA Economic Research Service

How Farms Grow

1900 1925 1950 1974 1997 2002 2007

0

500

1000

1500

2000

2500

3000

3500

4000

4500 number of farms

size of farms

value land/bldg

Source: USDA Economic Research Service

Multiple Operator Farms, 2003

Low S

ales

Med

ium

Sal

es

Larg

e

Very

Lar

ge

NonFa

mily

All F

arm

s05

101520253035404550

6.2

11.4 13.4

20.4

13.1

7.9

37.941.6 41.9

46.2 44.4

38.8

Multi-Operator and Multi-GenerationMulti-Operator, but not Multi-Generation

Source: USDA Economic Research Service

Estate Tax – 2012/2013 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%

Estate Tax Changes - $10M

2001

2002

2004

2006

2009

2010

2011

2013

0.00

2,000,000.00

4,000,000.00

6,000,000.00

8,000,000.00

10,000,000.00

12,000,000.00

ExemptionTax

Source: US IRS Code

How Big is Your Farm/Estate?

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 Equipment Grain/livestock

• Cash/Investments• Homestead

What Happens If You Don’t Plan?

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!

Indiana Inheritance 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

Goals of Estate Planning

1. Transfer to next generation

2. Minimize taxes

3. Preserve farm

4. Treat all children “fairly”

Estate Planning – Step 1 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

Two Paths – H&W

All to Spouse

Exemption amount in

Testamentary Trust

Remainder “outright”

Fed Exemption to Kids (Gen 2)

Exemption amount

“outright”

Remainder to Spouse

Farm (Holding) Corp

Pros

Discount Valuation

Ease of Gifting

ConsNo

Stepped Up Basis

Less Flexibility

What is Discount Valuation?

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!

Estate Planning – Step 2 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

Other Considerations – Step 3 FSA Program Planning – be sure your planning

allows for “active participation”

Power of Attorney – Allows Child to manage your affairs

Life Estate – An effective way to transfer/protect assets

Life Insurance – Can be used to help pay taxes or balance estate between farm/non-farm heirs

What if there is no successor?

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)

Tale of 5 Entities

1. Individual

2. General/Limited Partnership

3. C Corporation (Traditional)

4. S Corporation (Pass-Through)

5. Limited Liability Company (LLC)

Use of Entities in Estate Plan

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

Case Study – Basic Plan

Gen 1 (Mom & Dad)

Gen 2 On-Farm

Gen 3 On-farm

Gen 3 On-farm

Gen 2 Near-FarmGen 3

Off-farm

(minor)

Gen 2 Off-farm

Gen 3 Off-farm

(minor)

Gen 3 Off-Farm

Other Considerations 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)

What About (Living) Trusts?

Trusts are 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

How Do You Plan inAn Uncertain Tax Climate?

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

CAUTION! A Word to the Wise 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!

#1 Tool for Successful Planning

Communication

• Talk to your spouse

• Talk to your children

• Talk to your tax/legal professionals

Summary Three factors 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.

Thank You for your attention!

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, Attorneywww.lawlatte.com