managing for today and tomorrow

Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women

Estate Planning Part Three

Transferring Assets, Use of Trusts, DPA, Long Term Care Health Insurance

Managing for Today and Tomorrow


Homework Review

• Did you look at your net worth statement?• Did you look at the trend in net worth?• How are your assets balanced out between

farm and non-farm assets?• What are sources of retirement cash flow?


Methods to Transfer• Contract

– Life Insurance, Annuity• Transfer prior to death

– Complete severance– Retained rights

• Tenants in Common – goes to heirs• Joint Tenancy (rights of survivorship)

– Ownership vests to survivors• Probate

– Will– State law


Good Will ?

LandBuildings

Perennial Plants Fruit Trees Bushes

Machinery

BreedingLivestock

Inventory -Crops - Supplies- Market Livestock

Your FarmBusiness


Parent Business New Business

Cash RentCash Rent

“Rent to Own”

Installment Sale

Sell in parent business name? Gift?

Cash Rent $00.00Operating Business


BASIC ESTATE PLANNING FOR EVERYONE Reduce the number of times assets can be

taxed Income and estate taxes

Review how property is owned Check and update wills Durable Power of Attorney Durable Power of Attorney for Health Care

Patient Advocate Form


TAXABLE ESTATE LESS THAN $5 Million Sales and leases of business property Perhaps some bargain sales and gifts Insurance for risk Trust

Management needs Disability Elderly years Dependent Children


TAXABLE ESTATE $5 Million TO $10 Million All of the above Split estate to capture both $5 million

exemptions Separate Sole Proprietor ownership Tenancy in Common Trust for splitting the estate and

management. Bargain sales and gifts


TAXABLE ESTATE OVER $10,500,000 All of the above Gifts become more important tool Insurance to pay the tax Charitable contributions Get income producing assets to heirs

Bargain sales and gifts Use Special Use Valuation 2032A Don’t worry about it


Liquidity

• Cash• Life Insurance• 15 year installment payments if qualified• Borrowing


Terminology of Trusts• Property Corpus:

– The assets that are held in trust (also called trust res, trust assets, principal, or trust estate).

• Trustee: – Holds title to trust property; manages the trust property.

• Beneficiary: – Person or institution for whose benefit trustee owns

and manages the trust property.• Document (Trust instrument):

– Document that embodies the terms of the trust.• Donor (Settlor/Grantor):

– Person who funds the trust.


Advantages of Trusts• Can separate assets from beneficiaries; i.e.

separate management from benefits.• Utilize professional management of investments.• Avoid probate or minimize probate costs.• Provide for guardianship requirements of transfers

to minors or incapacitated persons.• Increase privacy in property transfers.• Guard against will contests.• Save estate tax, in certain cases.(split assets)


Types of Trusts• Intervivos (Living trust): established during life.

– Revocable - can be changed.– Irrevocable – cannot be changed.

• Testamentary: established at time of death.– Pour-over trusts are established by a will.– Charitable Remainder Trust– Life Insurance Trust

• Generation Skipping Trust• Remember:

– Trust may be joint (one trust for both spouses) or separate.– A joint trust may become two trust at the death of one.– All trusts become irrevocable upon the death of the settlor.


Intervivos Revocable Trust• Avoids probate of trust assets:

– Assets not required to go through probate process so transfer may be quicker after death.

– Generally costs more to create than a will, but avoids probate costs.

– Commonly used to avoid probate in another state where property is held.

• Property remains part of taxable estate for calculation federal estate tax:– Does not reduce the value of estate for estate tax planning.– Heirs do receive step-up in basis because of retained control.– Spouses can use their own individual unified credit.

• Can be fully funded at creation, at a set later date or subject to pour-over provisions of will.

• Can be used to transfer management of assets – can involve successor trustees to mange assets before death.


Intervivos Irrevocable Trust• Can reduce value of taxable estate:

– common tool for very high value estates.• If grantor/settlor does not retain interest in income or corpus

of trust:– Trust must benefit others– Ex. personal charitable foundation– No retention of life estate in income.– Enjoyment by beneficiaries cannot be contingent on death of

settlor – must be present interest (some room to plan for minors).

– Irrevocable transfer of property.• Transfers subject to Gift Tax:

– over $14,000 (2013) per person reduces unified credit (value of $5,250,000) but appreciation occurs outside of estate.


Charitable Remainder Uni-Trust (CRUT)

• Transfer property into trust irrevocably• Trust pays settlor income for life or term of years

– May provide for successor income beneficiaries • Remainder of trust goes to charities after death

of settlor/successor beneficiary or after term of years

• May transfer appreciated property into CRUT without capital gain recognition– CRUT may sell appreciated property without

recognizing capital gain• May receive charitable deduction • Payments may go to “Crummey Trust” to buy life

insurance


Charitable Remainder Annuity Trust (CRAT)

• Transfer property into trust irrevocably.• Trust pays settlor income for life or term of

years:– Relatively high rates of return on the full amount.– No recognition of capital gains.

• Remainder of trust goes to charities after death of settlor/successor beneficiary, or after term of years.

• May receive charitable deduction. • Payments may go to “Crummey Trust” to buy life

insurance


Interest Accumulation(Investments)

Premiums $$$$

Mortality Adm. Costs

Universal Life Insuranceor

Variable Life


Providing for Long-Term Care

• Adequate cash flow:– Significant earnings.– Sell assets.

• Long-Term Care Insurance.• Medicaid:

– Restrictions on resources.


Long Term Care Insurance• Your odds are 33% that you will spend more than 3

months in a nursing home (according to the insurance industry).

• The very wealthy and very poor probably don’t need LTC insurance.

• AARP suggests those with assets of more than $75,000 but less than $1 million may want to consider LTC in the Midwest.


Advance Directives• Durable power of attorney:

– A grant of authority to make financial decisions and conduct business on your behalf if you become incapacitated.

• Durable power of attorney for health care: – A grant of authority to make health care decisions

on your behalf if you are unable to make such decisions.


Durable Power of Attorney• Grant of power to another to look after assets and

manage affairs.• Anticipates possibility of incompetence; avoids need for

incompetency hearing or approval of guardian.• Statute defines powers (plenary – complete, unqualified):

– Should also include express powers for tax returns, life insurance matters, making gifts, transferring property into trust,

– Accessing safe deposit box, dealing with retirement plans and Social Security.

• May be contingent or present:– Contingent: effective only upon incompetence.– Present: effective when executed and continues in spite of

incompetence.


Durable Power of Attorney for Health Care

• Choose a person (agent) to make health care decisions for you if you cannot speak for yourself.

• Communicate instructions about your health care .

• Your responsibilities:• Think about your values and wishes.• Choose someone you trust.• Choose an alternate agent.• Talk to family members and the agent concerning your wishes.• Complete, sign and make copies for the agent and family members.

• Agent responsibilities:

• Allows you to:

• Understand your wishes.• Evaluate choices about your heath care.• Make decisions in accordance with your wishes.• Keep the original document.


• Doctor’s responsibility:

• Allows you to:

A Living WillBecomes effective when death is the alternative to

treatment and you are unable to make that decision.

• Direct physician to withhold or withdraw treatment that could prolong the dying process.

• Follow your wishes.

• Your responsibilities:• Clarify wishes with your family and with your physician.• Complete the proper forms.• Make copies for your family and physician.


Questions• Who do you want to get into your safety

deposit box? Is their name on the card?• Does your will/trust provide for designating

personal items? • Where is your most recent will located?• Who needs to know your plan? Why?• Have you compiled all critical information

in one place and who knows where?


Estate Planning Overview• Crucial estate planning steps:

– Examination of how property is owned or held– Review of family insurance program.– Advisability of lifetime gifting.– Alternatives for disposing during life or after death.– Transferring the family business.– Get started.– Get it written.


Your Up-To-Date Estate Plan• Documents

– Will– DPA

• Property titled correctly– TOD/POD

• Plans for non-titled property• Beneficiaries current – people tend to name

and forget

managing for today and tomorrow

Documents

owned business

business success

estate assets

retirement planning

nonfarm assets

new business fairy lean

control of real estate

younger generation