Jul 24, 2014
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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.

“Don’t Worry. . .This Will All Be Yours Someday.” Are You Sure? Importance of Estate Planning

May 19, 2014

"Don’t Worry . . . This Will All Be Yours Someday." This statement is very common on family farms; spoken by a parent to their farming child, giving the child assurances that their hard work and effort on the farm will not be forgotten. Or, anytime the topic of farm estate planning comes up, it is immediately ended by the parents, saying "I got it when Grandpa left, and you’ll get it too." The conversation ends there. However, if the right documentation is not completed to ensure this is the case (ESTATE PLANNING), the farming child may be in trouble.

Picture this scenario: A mother and father have three children, and farm. When the kids are young, they do the "responsible thing" and have a will made primarily to determine who their children’s legal guardian would be, should they both have an untimely passing. Also, "general language" in the will states that all of the assets first go to the surviving spouse, and then equally to all children. The wills are signed, and put away.

Years pass. The family’s children all grow up and two of them go off to college, work hard and get good jobs. One child stays on the farm and works with mom and dad, helping them grow the farm and ensure its continued viability and profitability. The farming child works very hard and gets paid; although not any more than a general farm laborer. He is always told by his parents "Don’t worry – this will all be yours someday." "You are working hard, and we want the farm to be yours." Mom and dad say this, but the same wills that they drafted years ago remain put away. No changes are made reflecting their statements to the farming child.

Years later, dad passes away. His estate passes everything to mom, including the land, the machinery and the farm site. The farming child – who has been farming for decades now – talks to his mother about estate planning. He reminds her on what they’ve always said "Don’t worry . . . this will all be yours someday." Mom doesn’t change her will. She puts it off, as many do. Few want to think about their own mortality, especially after losing a loved one. Her will from years ago stays valid and put away. The farming child continues to work. He’s worried, but relying on what he was told.

More years pass, and during a family get together, one of the non-farming children talk about their mother’s estate planning. They wonder "what it is." The farming child speaks up and talks about what he has always been told: the farm will be his someday. The three non-farming children are shocked and arguments erupt. All sorts of statements are made regarding what their dad presumably "told them" and it was not at all consistent with what he told the farming child for years.

The arguments continue and all of the children – including the farming child look to their mother to make the decision. Mom knows what was said to the farming child. At the same time, she does not want to upset her other children. She is getting pressured and pulled in different directions. What will she decide? Will she do anything at all? The future of the farming child’s career and all of the work and effort they put in to making the farm what it is today is in jeopardy. The farming child’s worst fears have come true.

Do you see yourself in this story? Have you been told "Don’t worry . . . this will all be yours someday."? If so, it is absolutely crucial that you ensure the proper estate planning is completed so that those words are reality, when the time comes. It is crucial that your family – mom and dad – have made a plan that meets their needs, and distributes their assets in a fair and equitable manner, considering the contributions of the farming child.

Moreover, it is often good for parents to share this plan with all of their kids – farming and non-farming. Sharing is not required; however, often it assures that there is no question the plan is mom and dad’s plan, and not the farming child’s "doing" or "fault." On the other hand, sharing could lead to a slippery slope where arguments erupt. However, everyone "knows" the plan. Regardless of whether it’s shared or not: estate planning is a must.
 

Demystifying the Taxability of Life Insurance

Apr 15, 2014

There are a lot of questions and confusion with the taxability of life insurance.  Confusion generally centers on whether it is income taxable, estate taxable, or both?  Your life insurance is not subject to income tax at death, as long as you do not deduct the premium payments from your income taxes.  Although your life insurance policy may pass to your heirs’ income tax-free, it can affect your estate tax. If you are the owner of the insurance policy, it will become a part of your taxable estate when you die. You should make sure your life insurance policy won't have an impact on your estate's tax liability.

Spouses can transfer assets to each other tax-free. But if the beneficiary is anyone else (including your children), the policy will be a part of your estate for tax purposes. For example, suppose you buy a $1 million life insurance policy and name your son as the beneficiary. When you die, the life insurance policy will be included in your taxable estate. If the total amount of your taxable estate exceeds the then-current state or federal estate tax exemption, then your policy will be taxed.

In order to avoid having your life insurance policy taxed, you can either transfer the policy to someone else or put the policy into a trust. Once you transfer a policy to a trust or to someone else, you will no longer own the policy, which means you won't be able to change the beneficiary or exert control over it. In addition, the transfer may be subject to gift tax if the cash value of your policy, which is the amount you would get for your policy if you cashed it in, is more than $14,000 (in 2014, this figure rises every few years with inflation).  If you decide to transfer a life insurance policy, do it right away. If you die within three years of transferring the policy, the policy will still be included in your estate.

If you transfer a life insurance policy to a person, you need to make sure it is someone you trust not to cash in the policy.  For example, if your spouse owns the policy and you get divorced, there will be no way for you to get it back.  A better option may be to transfer the policy to a life insurance trust.  In that case, the trust owns the policy and is the beneficiary. You can then dictate who the beneficiary of the trust will be. For a life insurance trust to exclude your policy from estate taxes, it must be irrevocable and you cannot act as trustee.

If you want to transfer a current life insurance policy to someone else or set up a trust to purchase a policy, consult with your elder law attorney.

How Portability Affects Farm Estate Planning

Mar 13, 2014

Last time, the discussion was on the federal estate tax and how it was calculated. Recall that the 2014 estate tax exclusion amount is $5.34 million for individuals and $10.68 million for married couples. Married couples also have a tool – known as "portability", which was introduced last time, but not fully explained. As promised, this article will delve into the concept of portability, and how it works with federal estate tax.


"Portability" is the federal estate tax concept that provides that when a spouse dies, any unused estate tax exclusion amount transfers over to his surviving spouse. In most circumstances, the surviving spouse is able to add the deceased spouse’s unused exclusion amount to the survivor’s own estate tax exclusion. In other words, if a spouse dies and has not used all of his or her federal estate tax exclusion amount, the unused portion is available to the surviving spouse at her death.

A very important thing to remember includes the requirement that portability be preserved at the first spouse’s death. The surviving spouse must make an "affirmative election" within 9 months of the deceased spouse’s death to claim the use of portability. This affirmative election is accomplished by filing a federal estate tax return – IRS Form 706.

Portability is a great tool for married couples and their estate planning. However, I view it as a "safety net" in estate planning. I do not see it as a complete replacement for the need of credit shelter trusts. The following explains why:

1) Volatility in Estate Tax Legislation

a. The federal estate tax is "permanently" set for $5,000,000 and indexed for inflation. 2014 has an exemption of $5,340,000 per person. What "permanent" means is that the law will not automatically revert back – or "sunset" to earlier exemption amounts. Permanent does NOT mean our Government is precluded from changing the law in the future.

b. A credit shelter trust completely preserves the assets within it, based on the laws in place in the year of death.

2) Protect from Appreciation – "Freeze" the Value of Assets

a. With portability, when the first spouse passes, the values of the assets transferring to the survivor are not "frozen." In other words, the values of the assets are not locked in place at that time, because they transfer to the surviving spouse as an individual. As a result, the appreciation which occurs between the deceased spouse and the surviving spouse’s deaths will all be exposed for estate tax determination.

b. A credit shelter trust that is properly funded at the first spouse’s death will exclude all appreciation on the assets during the surviving spouse’s life from estate tax. This means that the assets within the credit shelter trust go to the heirs free of any estate tax, at the death of the surviving spouse.

3) Continued Protection in the Event of Remarriage

a. Portability ability is restricted in the event the surviving spouse remarries. If a surviving spouse remarries and then also survives their new spouse, the amount of unused exclusion available for use by the surviving spouse will be the unused exclusion of the last spouse to die. The first spouse’s exclusion is not protected with portability, in the event of a remarriage.

b. A credit shelter trust can serve as a protective vehicle in the event of a remarriage. It is also a good tool to help protect assets for the children, in the event of a remarriage – assuming it is drafted appropriately.

4) State Specific Estate Tax Planning?

a. Remember, portability deals with federal estate taxes. There are some states in the country which have their own state estate taxes. These states may not have portability available to preserve both exemption amounts. Minnesota, the state I live in, has its own state estate tax. Here, credit shelter trusts are commonly used to preserve both exemption amounts for married couples. Check with your attorney to see if your state has its own state estate taxes.

This article has touched on the basics of portability. It can be a good tool; but I caution sole reliance on it as an estate planning tool. Please consult your attorney to determine what works best for you.
 

Federal Estate Tax: What Is It? How Is It Calculated?

Feb 25, 2014

The federal estate tax is set "permanently" for $5,000,000 per person, indexed each year for inflation. "Permanently" means that it is not set to automatically expire, which earlier laws were. Recall December of 2012, when the estate tax was set to "sunset" from $5,000,000 to $1,000,000 per person. 
 
Although no sunset provision currently exists, the permanency of the law is such until the government decides to change it through legislature. There are no current proposals to do so; but it is something to keep in mind, as a part of your ongoing estate planning. 
 
The Federal estate tax rules require that a personal representative of an estate must ?le a federal estate tax return within nine months of a person’s death if that person’s gross estate exceeds the exemption amount for the year of death. Deaths occurring in 2014 have an exemption of $5,340,000. This will continue to increase each year, with the inflation provision. Note that this is for federal purposes. Check with your attorney on any state estate tax rules, specific to your local. 
 
Calculating the estate tax begins with a determination of the decedent’s gross estate. This generally includes all of the decedent’s assets: real estate, personal property, cash and cash equivalents (grain inventories, for example.), his or her share of jointly owned assets and life insurance proceeds from policies owned by the decedent.  Once the gross estate is valued, allowable deductions are subtracted. These generally include debts, funeral expenses, legal and administrative fees, and related expenses. 
 
Also, there are unlimited deductions for transfers made to surviving spouses and to charities. The deductions are totaled, and deducted from the gross estate valuation. Finally, once the deductions are accounted for, the net taxable estate is determined by adding in any taxable gifts (made after 1976), if not already included in the gross estate. Recall that taxable gifts are those which exceed the annual gifting allowance in any given year. These are tracked by a gift tax return, filed by the giver, at the time the gift is made. 
 
Once the calculations are made, as described, you arrive at the decedent’s "net taxable estate." If this is over the exemption for the year of death, then the decedent’s estate owes estate tax. The estate tax rate is 40%.
 
For married couples, the estate tax exemption is $10.68 million (2x $5,340,000.) Included in this is the concept and availability of "portability." Portability is the ability for a surviving spouse to carry over any unused exemption allowance when the first spouse passed away, so long as the surviving spouse filed a Form 706 to claim it within 9 months of the first spouse’s passing. 
 
There is more to detail with portability. . . . stay tuned!
 


 

Making Gifts to an Irrevocable Trust? Better Do Crummey Notices!

Oct 08, 2012

 

Importance of a Crummey Power in a Trust Document
A "Crummey Power" qualifies gifts made to certain trusts for the annual gift tax exclusion. Without it, such gifts to the trust would otherwise not qualify. If gifts made are deemed to not qualify, they remain in the giver’s estate for estate tax purposes. This unintended result can have negative implications on one’s estate plan.   
 
Crummey powers get their name from a 1968 tax court case (name of the taxpayer) in which the concept was first tested. Its applicability has subsequently been tested since then, and deemed appropriate by the tax courts. It can be a very useful tool for an estate plan. 
 
Understanding the importance of this power begins with a review of the annual gift tax exclusion. A taxpayer can give up to $13,000 (for 2012) per person to any number of recipients in a calendar year without affecting their federal estate and gift tax. Gifts that qualify for this annual exclusion are never taxed from a federal estate or gift tax standpoint. Meaning, no gift tax is owed when the gift is made, nor included in the taxable estate at death. Understand, however, that a gift of tax-deferred assets (harvested grain, for example) retains the income tax liability in the hands of the recipient.   The type of asset given is not restricted: personal property, cash or cash equivalents, real property, etc. are all available. Instead, the asset’s value is considered in the determination. 
 
The exclusion is available each year, and is not limited by the number of potential recipients.  One can give any number of other people up to $13,000 each. The exclusion is a "use it or lose it" device. If one does not completely use the allowed exemption in the given year, that unused amount is gone; unable to be "banked" for subsequent years’ gifts. 
 
The annual gift tax is an important estate planning tool to pass belongings to others during one’s life. Often estate plans will utilize this tool to aid in wealth transfers, business succession planning and potentially reducing one’s estate tax exposure. 
 
There are requirements to be met when utilizing the annual gift exclusion. Specifically, a gift must "qualify." One requirement to using the exclusion includes the qualification of a present interest gift. 
 
To qualify for the annual exclusion, a gift must be a present interest – the recipient must have all immediate rights to the use, possession, enjoyment and income of the property. By contrast, a future interest, which is a gift where the use rights, possession, enjoyment and income of the property are delayed until a future date. Crummey powers are important because they qualify gifts to certain trusts that would otherwise not qualify because they are future interests. 
 
The Crummey power gives the beneficiaries a time limited right to withdraw their share of the assets given to the trust. If the beneficiaries do not exercise their right to withdraw, it stays in the trust. Most importantly, it QUALIFIES for the annual gift tax exclusion. The tax court has heard many cases dealing with these allowances; and if done correctly, they remain an effective estate planning tool. 
 
To illustrate the importance of Crummey powers, imagine a scenario where a giver makes gifts to various family members, utilizing the annual allowance. He uses an irrevocable trust. There are Crummey powers available in the trust; however, no actual Crummey notices are given each year. The giver was seemingly able to reduce the value of his estate and also protect the assets, by giving them via a trust. However, the IRS could easily argue that since no Crummey notices were given, the gifts to the trust do NOT qualify for the annual exemption. Thus, they would be included in the giver’s estate for estate tax purposes. Clearly this is not what the giver intended. 
 
Crummey notices are a very important and necessary part when making gifts to trusts. Make sure to consult your professional and properly complete them when making gifts to trusts. Without them, unintended consequences may arise. 
 
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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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