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September 2011 Archive for Farm Estate and Succession Planning

RSS By: Andrew Zenk

This blog focuses on making complex and difficult topics in estate and business planning understandable and applicable to the reader.

Andy is an Agribusiness Consultant for AgCountry Farm Credit Services, Fargo N.D., a farmer owned cooperative and part of the Farm Credit System serving eastern North Dakota and northwest and west central Minnesota.

Estate Tax Planning - Federal Estate Tax

Sep 27, 2011

 

 
Estate Tax Planning - Federal Estate Tax
 
The starting point here is to give you an understanding/overview of the federal estate tax issue. The federal estate tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death. The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them. The total of all of these items is your "gross estate." The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets.
 
Once you have accounted for the gross estate, certain deductions (and in special circumstances, reductions to value) are allowed in arriving at your "taxable estate."
 
These deductions may include mortgages and other debts, estate administration expenses, property that passes to surviving spouses and qualified charities. The value of some operating business interests or farms may be reduced for estates that qualify.
 
The amount of the exemption for federal estate taxes has changed over the years. As recently as 2008, the exemption was $2,000,000 per person. In 2009, the exemption was $3,500,000 per person. There was no estate tax in 2010. The law was scheduled to go back to $1,000,000 in 2011; however, Congress took action and changed that late last year. 
 
In December, Congress passed a bill that includes changes in the federal estate tax exemption amounts. For decedents dying in 2011 and 2012, the act greatly reduces the reach of the estate tax by granting estates a $5.0 million exemption for property subject to the tax. In 2009, the last year in which there was an estate tax, the exemption was $3.5 million, so this is a significant increase. In addition, the act introduces the concept of exemption "portability" between spouses.  
 
If one spouse does not use all of his or her $5 million exemption, it may be used by the estate for the surviving spouse, effectively creating a $10 million exemption for married couples. The few estates that exceed this $5 million/$10 million threshold will be subject to a new 35% tax rate, considerably lower than the 45% rate that prevailed before 2010.
 
Notice that the act applies to 2011 and 2012. What happens after that depends ultimately on what Congress decides. 
 
Because of this uncertainty, I recommend that you work with your attorney to incorporate estate tax planning protections in your planning. A very common tool is known as a "disclaimer trust." 
 
A disclaimer trust’s value is best explained by example. Assume a couple owns all of their assets jointly. When the first spouse dies, all of the assets pass to the surviving spouse. No estate tax is due at this time because of the unlimited marital deduction allowed. The survivor, however, now owns all of the couple’s assets as an individual. At the survivor’s death, all of the assets will be taxable in his or her estate, and the survivor will only be able to use his or her individual estate tax credit. 
 
In order to make use of the estate tax credit of the first spouse to die, some property (limited by the exemption amount) must pass to someone other than the surviving spouse. Usually, this is done using a disclaimer trust, as a part of the couple's wills.
 
A disclaimer trust is established at first death only when the surviving spouse elects to use it. If that person decides not to, it is inapplicable. This results in a very flexible tool for the survivor’s use and estate tax planning, which is very helpful, as none of us knows when we are going to die, or what estate tax problems we may have at that time.
 
The disclaimer trust allows for the assets to be available solely to the surviving spouse, but not have them included in the estate. The income generated by the assets placed into the disclaimer trust will go directly to the surviving spouse for the rest of his or her life. Moreover, the surviving spouse, along with a co-trustee of his or her choice, has control of the trust. At the passing of the surviving spouse, the disclaimer trust is terminated and the assets are passed to your heirs as you direct in the documents. 

 

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Disclaimer: The information contained in this publication provides a general overview of various topics and is strictly for informational purposes only. The reader should consult a qualified professional for advice based on his or her specific circumstances. AgCountry Farm Credit Services and the writer of this blog make no representations as to the accuracy or completeness of any information on this site or found by following any link on this site, and shall not be liable for any errors or omissions herein or for any losses or damages resulting from the display or use of this information. 
 
Required Disclosure Pursuant to IRS Circular 230: Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code; or (2) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.

Complete Estate Plan - Ancillary Documents

Sep 20, 2011

 

Continuing with the “estate planning overview” discussion, there are other documents that an estate plan should include: a durable financial power of attorney, a health care directive and a living will. A durable power of attorney allows you to appoint someone to take care of your financial affairs should you be unable to on your own. A health care directive allows you to appoint someone to make decisions regarding your health care should you be unable to on your own. A living will is your advanced directive on whether to continue or cease artificial life continuation procedures should you be near death. Each state has their own specific rules regarding these documents. Accordingly, it is important to talk specifically with your estate planning professional when handling these.
 
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Disclaimer: The information contained in this publication provides a general overview on various topics and is strictly for informational purposes only. The reader should consult a qualified professional for advice based on his/her specific circumstances. AgCountry Farm Credit Services and the writer of this blog make no representations as to the accuracy or completeness of any information on this site or found by following any link on this site, and shall not be liable for any errors or omissions herein or for any losses or damages resulting from the display or use of this information. 
 
Required Disclosure Pursuant to IRS Circular 230 : Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code; or (2) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.
 

Revocable Living Trust - General Overview

Sep 14, 2011

 

A revocable living trust is a legal document that holds title or ownership to your real property and assets. It is an estate planning "vehicle", in that it includes the details and instructions for how you want your estate to be handled at your disability and at your death. The first thing to understand with a living trust is the importance of "funding your trust." Funding is the process of transferring the name on accounts or property to the name of the trust. For a trust to be effective it has to own title to the property or asset. Funding can be a tedious and time consuming process, one that cannot be taken lightly, in order for the trust to work as you intended. All of your investments (not retirement accounts) need to be in the name of the trust.  All of your life insurance policies and bank accounts should be in the name of the trust as well. All of your real property, personal property and related assets (including farm machinery) should be in the name of the trust. Basically, everything you own should be owned by your trust. Many people find that this is a difficult process. This is something to discuss further with your attorney if this vehicle interests you.
 
One area that a trust works well in is if you own real property in multiple states. For example, if you find yourself owning your farmland here, and also a condo in Arizona, or Florida, etc., a trust is a good vehicle to avoid multiple probates. If you have real property in more than one state, you have to have probates in more than one state. 
 
It is necessary for you, as trust makers, to appoint trustees of your living trust. You both can be the primary trustees of your living trust, receiving full control to buy, sell, borrow or transfer in the case of a spouse's death. After both spouses pass, the living trust identifies the person or persons who will act as successor trustee. The living trust gives that person the right to manage all assets on behalf of your wishes made known in the trust document. 
 
Please understand that there are no tax or asset protection tools for you as trust makers when utilizing a living trust. This is a common misconception by many. If something happens where there is a bill, or a lawsuit, etc., the assets in the trust are at risk. Also, a living trust has no effect whatever on any tax savings, whether income tax, gift tax or like taxes. The very same tax planning can and usually does take place in a variety of estate planning tools.
 
It is also necessary to have a will, along with your living trust.  This will is known as a "pour over" will. It functions to put anything that you may not have funded into your living trust into it at your death. This is a good thing, as it ensures that your assets are distributed according to your living trust's instructions. However, if this method has to be used for your assets, you will not be able to avoid probate if the values transferred via the pour over will exceed those allowed under state law. Accordingly, the pour over will is a safety net, but it is crucial to properly fund a trust to ensure it works as you intended.

 

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Disclaimer: The information contained in this publication provides a general overview on various topics and is strictly for informational purposes only. The reader should consult a qualified professional for advice based on his/her specific circumstances. AgCountry Farm Credit Services and the writer of this blog make no representations as to the accuracy or completeness of any information on this site or found by following any link on this site, and shall not be liable for any errors or omissions herein or for any losses or damages resulting from the display or use of this information. 
 
Required Disclosure Pursuant to IRS Circular 230: Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code; or (2) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.
 

Last Will and Testament - General Overview

Sep 10, 2011

 

A last will and testament (“will”) is a legal declaration that a person creates in life to determine the transfer of his or her property at death. This document also names a personal representative responsible for making sure this transfer takes place. This “transfer” is accomplished through a public court proceeding known as probate. A will is amendable and/or revocable at any time the person making the will has the mental capacity to do so. It is often considered the most common way to accomplish estate planning goals and objectives. The benefits of a will are the fact that you can use a variety of tools to pass your assets to your heirs in a way you want. It is also a very efficient way for a person to plan, during your life. 
 
The arguable negative consequences of a will involve its requirement of probate at death. Probate is the process of by which the executor gathers all the property of someone who died, pays all just debts and taxes, and distributes the balance to the people designated in the will. Probate can be time consuming, especially if little planning is done prior to death. It is also a “public” proceeding, because it is a court proceeding.  
 
Some people think having a will avoids probate. This is not the case. A will is used in probate to determine who receives what property, who is appointed guardian to any minor children and who will be responsible for carrying out the wishes contained in the will.
 
Sometimes people want to avoid probate. In these instances, other estate-planning devices may be used.  Joint tenancies, pay-on-death accounts and transfer-on-death accounts are commonly used. Another commonly used method is known as a revocable living trust. My next post will discuss the revocable living trust as a tool.

 

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Disclaimer: The information contained in this publication provides a general overview on various topics and is strictly for informational purposes only. The reader should consult a qualified professional for advice based on his/her specific circumstances. AgCountry Farm Credit Services and the writer of this blog make no representations as to the accuracy or completeness of any information on this site or found by following any link on this site, and shall not be liable for any errors or omissions herein or for any losses or damages resulting from the display or use of this information. 
 
Required Disclosure Pursuant to IRS Circular 230: Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code; or (2) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.

Estate Planning - General Explanation and Overview

Sep 07, 2011

 

Estate planning is the process of anticipating and arranging for a person's death. This is a very "flexible" area of planning, as none of us know when we are going to pass away, what our assets will consist of, or what our government will impose on us for taxes at that time. Estate plans are often changed as the years go by to ensure that they accurately depict our goals and circumstances and changes in the law. Accordingly, my work with people focuses on building a plan that meets their current goals and issues but that is also flexible and can change with the coming years and the changes that occur in your family and in the tax law. 
 
Estate planning typically involves attempts to eliminate uncertainties over the administration of an estate at death and maximize the value of the estate by reducing taxes and other expenses. This can take many forms. In the next posts, I will examine a "last will and testament" and a "revocable living trust."

 

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Disclaimer: The information contained in this publication provides a general overview on various topics and is strictly for informational purposes only. The reader should consult a qualified professional for advice based on his/her specific circumstances. AgCountry Farm Credit Services and the writer of this blog make no representations as to the accuracy or completeness of any information on this site or found by following any link on this site, and shall not be liable for any errors or omissions herein or for any losses or damages resulting from the display or use of this information. 
 
Required Disclosure Pursuant to IRS Circular 230: Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code; or (2) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.

"Per Stirpes" Distribution in Estate Planning

Sep 02, 2011

 

Many of you may have heard the term “per stirpes” stated, either reading it in your estate planning documents, or hearing it at a law office, etc. This is a legal “term of art” (usual language) that deals with how your assets would be distributed, should one of your children pre-decease you. Per stirpes distribution means this instance would be handled by a provision in your estate planning documents that says if a child pre-deceases you, his or her share would be split equally among his or her kids. If he or she has no surviving children, then that share could be distributed to your other surviving children, or another option that you choose. 
 
Aside from who inherits your assets should one or more of your children pre-decease you, we discussed how this person(s) would inherit the assets. If a beneficiary is a minor, he or she would not be able to inherit individually outright. However, if they are the age of majority (18), they legally could individually inherit and own the property outright. However, if you gave an 18 year old a great sum of assets / dollars outright, this could be dangerous. Many times 18 year olds do not have the maturity to handle a sum of that size. Accordingly, many estate plans include a trust to protect the inheritance and have it available to the beneficiary, but only for certain things (health, education, maintenance and support). Then, at an age where you believe they are mature enough to handle it (25-30, usually), you can direct that the trust be cancelled and the beneficiary receives it outright.
 
This is something to discuss with your attorney, and come to your own conclusions on what works best for you. 

 

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Disclaimer: The information contained in this publication provides a general overview on various topics and is strictly for informational purposes only. The reader should consult a qualified professional for advice based on his/her specific circumstances. AgCountry Farm Credit Services and the writer of this blog make no representations as to the accuracy or completeness of any information on this site or found by following any link on this site, and shall not be liable for any errors or omissions herein or for any losses or damages resulting from the display or use of this information. 
 
Required Disclosure Pursuant to IRS Circular 230: Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code; or (2) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.
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