From inheritance taxes to probate to protecting your dairy’s assets, it’s important that you prepare – before the state does it for you.
By Matthew A. Tavrides, J.D.
Attorney & Counselor at Law
With the federal gift and estate tax exemption currently at $5.25 million per person ($10.5 million for married couples), some people wonder whether they need any estate planning. There are many reasons to do estate planning other than to avoid estate taxes. Proper estate planning is important for everyone, regardless of the size of your estate.
Everyone needs a plan. The real reason: If you don’t come home today, as the result of mental disability or death, are your family and loved ones going to be okay? Something will happen; the question is, will it be what you want?
1. Avoid State Inheritance/Death Taxes
It is true that, with the larger federal estate tax exemption in place, most families will not have to pay federal estate tax. But many states have their own inheritance/death tax. And while the states’ tax rates are generally lower than the federal tax rate of 40%, they typically apply at a much lower threshold. This means an estate could be exempt from federal tax but have to pay a state "death" tax. Proper estate planning can reduce or even eliminate state inheritance/death taxes.
2. Ensure Assets Are Distributed the Way You Want
Everyone has an estate plan. It is either the one we have created or the default plan of the state in which we live. In our experience, it is very unlikely that a state’s default plan is what you would want. State laws vary, but generally they direct that property pass outright to the closest family members. Who a state considers to be your "closest" family member is often complicated in non-nuclear families. Non-family members, like in the case of an unmarried couple, will not receive any of the assets.
3. Avoid Probate
For those who don’t have a plan, their assets will probably have to go through a court process called intestate ("no will") probate. For those who have a will, the assets it controls will also have to go through probate before they can be fully distributed to the heirs. Probate proceedings vary from state to state, but many view the time, cost, and loss of privacy and especially, loss of control that come with probate as unnecessary evils that should be avoided.
Even with a will, it is unlikely that all of the assets will go through probate. Assets with a valid beneficiary designation, such as life insurance and retirement plans, pass outside probate to whomever the decedent has named as beneficiary. Property owned jointly with the right of survivorship will automatically transfer to the surviving joint owner outside of the probate process.
However, minors and mentally incapacitated individuals may not own property. Therefore, if the beneficiary or joint owner is a minor or is mentally incapacitated, the court will have to get involved to protect their interests. If the beneficiary or joint owner has died before or simultaneously with the decedent, or the designation or title is otherwise invalid, those assets will also have to go through probate. That property will be distributed according to the will or, absent a will, the default state law.
Planning Tip: Probate can often be avoided by using joint ownership and beneficiary designations, but, in our experience, it most often leads to unintended consequences and has unintended risks. A better way to avoid probate is to establish and fully fund a revocable living trust. With a living trust, the trust maker keeps control over the assets, avoids uncertainty and unintended consequences, and avoids the risks associated with joint ownership. That’s why a living trust plan is often preferred by many families and professionals alike.
4. Protect Inheritances from Creditors and Predators
Gifted or inherited assets are protected from creditors and predators of the beneficiary, divorce, remarriage, law suits and irresponsible spending only if they are held in a properly drafted trust with safeguards built into it. In a trust, the trust maker can instruct the trustee to make distributions as needed to trust beneficiaries, which can include the surviving spouse, children and grandchildren.
5. Protect a Business and Other Assets
Those engaged in agricultural and related businesses must plan to protect their assets from the possibility of lawsuits. There are substantial risks and liability associated with livestock, machinery and equipment, employees and other guests (invited and uninvited), as well as hunting and recreational use of large tracts of land. Business owners also have to contemplate and plan for for what will happen to their business when they can no longer manage it due to incapacity, retirement or death.
Planning Tip: Asset protection planning can and should be included in the estate planning of farmers and ranchers. The time to plan for asset protection is before there is any potential threat. Once the threat of a claim arises, it is probably too late.
Planning Tip: Business succession planning should also be a part of estate planning farmers and ranchers. Someday the business will pass out of this owner’s control. Planning ahead can provide the time needed to grow and develop the business, groom a successor or look for a potential buyer. If an adult child will take over the business, proper planning can also help provide equitably for any children not involved in the agricultural business.
6. Pass Down Values to Future Generations
Unfortunately, more than 90% of family businesses fail to survive to the third generation. For many people in agriculture, preservation and protection of their family’s legacy, heritage and way of life is as important, and perhaps even more important, than any other form of planning. But it does require planning. Otherwise, in the event or your mental disability or death, something is going to happen; it just won’t be what you want.
Do something! Plan for the most important things in life -- our family and loved ones. Not having a plan is not a good option.
Matt Tavrides has practiced law in Central Florida for over 20 years, and concentrates in the areas of Estate Planning, Family Business Succession and Wealth Preservation Strategies for families in agriculture. A graduate of the U.S. Military Academy at West Point, he served as a Field Artillery Officer in the Army before attending law school at Mercer University in Macon, Georgia. He is a graduate of the NCBA Masters of Beef Advocacy program, serves on the Board of the Florida Cattlemen’s Foundation and is an active member and supporter of the Florida Cattlemen’s Association, the Florida CattleWomen, and the National Cattlemen’s Beef Association. Visit www.matpa.net. Contact Tavrides at email@example.com or (407) 843-8441
© 2013 Matthew A. Tavrides, MATpa Planning Solutions, WealthCounsel and The Advisors Forum. All rights reserved.