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May 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.

Potential Consequence with Life Estates

May 31, 2011

A "life estate" is an estate planning tool that involves a legal arrangement where a land owner gives the ultimate ownership ("future interest") of their land, retaining the right to use and income from the land for the remainder of their life. This is done through a deed, and once complete, the land owner is now the "life tenant", and when they pass away, the "future interest holder", receives full ownership, outright.

 
Often, people view these as something to do immediately, especially if they live in a state where a life estate would offer various asset protections (state specific). However, there are some potential consequences associated with life estate transactions that often go over-looked or unadvised.  
 
One major consequence of a life estate is the fact that it is a FINAL transaction. Once it’s given, it’s done. Options for changes based on future events become very difficult, if not impossible. For example, if the person you give the future interest to passes away, the deceased’s estate plan determines who the successor owner is, NOT the person who originally gave the life estate. This often leads to the ultimate ownership resting with someone whom the original owner did not intend. Unfortunately, many times these lead to negative consequences, such as the land "leaving the family."    
 
This is one of many potential unintended consequences associated with a life estate. The bottom line: life estates are good tools, but must be carefully analyzed from all angles, especially your comfort level with not being able to change them unilaterally once they’re given. 

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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.

Overcoming the Barriers in Completing an Estate Plan

May 26, 2011

Usually, when helping people with estate planning, the most glaring problem I see involves that which is not done. Most people realize the importance of estate planning, but yet, no plan is in place. Why? The fact is, there are many barriers in the way and people simply do not know how to overcome them. Common barriers include an unawareness of the options available with estate planning, and how to know what would work best. People often struggle to find someone to trust that will have their best interests in mind, not a product to sell. Another barrier involves the problem of simply not knowing where or how to start. Or, a barrier might involve a problem of how they want their assets distributed at death. For example, to ensure that a family farm can remain viable, there might be a need for a fair (and not necessarily equal) distribution of assets among farming children and non-farming children. When faced with this reality, people are often unsure and uneasy on how to do that. Finally, a common barrier involves the fact that no one wants to deal with the psychological difficulties in having to face their own mortality. While no one likes to think about this, it’s unavoidable.

 
Along with these barriers, many people display further feelings of hopelessness, thinking they are the only people in the world with these problems. At that point, I look them right in the eye and say "YOU ARE NOT ALONE!" In fact, most everyone faces one or more barriers in their estate planning. Accordingly, the starting point in completing an estate plan is realizing that these barriers exist and make the commitment to yourself and your family to get help and overcome them.
 
It is so important to knock down these barriers and complete your estate plans. Aside from how your assets are distributed upon your death, there are many reasons why it is crucial to complete an estate plan.
 
-         Prevent Against Paying Unnecessary Estate Taxes
 
o       In developing an estate plan, consideration must be given to the tax consequences of the plan. This is important so that the assets available to your family members can be maximized, and taxes minimized at death. This is especially important in farm families, as land values continue to rise substantially.
 
-         Farm / Business Transition
 
o       You may be passing on the farm to a farming child. You could have the best transition plan in place that is working exactly as it needs to. However, ignoring the estate planning component of this plan would likely bring your family into a situation that will lead to the failure of the farming operation that you and your loved ones have spent years building up. Accordingly, you must ensure your estate plan is compatible with your farm transition plan and must consider several factors to ensure the continued viability of your farm.
 
-         Appointing Guardians for Minor Children
 
o       A will allows for parents to appoint guardians to care for their minor children, should they both pass away. In the absence of a designated guardian under a will, the court must determine who will be guardian of the person and property of a minor child. The person chosen by the court may be the last person you would choose to raise your child. 
 
-         Your Opportunity to Make a Unique Estate Plan that Fits Your Goals
 
o       If you die without a will ("intestate"), your state's laws determine how your property is distributed.  The problem herein lies that what your legislators in congress determined as to who should get your property may be completely at odds with your current life situation. By planning your estate, you have the opportunity to make a plan that fits your goals. 
 
o       Additionally, you may have completed a will decades ago and it was exactly what you needed at that time. However, are you sure that it still meets your needs? Chances are that it does not. The reality is, family’s change, finances change, laws change, and personal goals change. Estate plans need to change accordingly.
 
OK, so where do you start? I suggest that you find a professional that you can trust has your best interests in mind. As an Agribusiness Consultant, my job is to help producers identify their estate planning needs and help them figure out the best way to achieve those goals. I have nothing to sell them or products to push. I simply help them figure out where to start, what their estate plan should look like, and what it takes to be completed. From there, I help them get the documents completed with their attorney and make sure that it fits with their overall farm transition/retirement plan. 
 
This service provides the peace of mind that the estate planning documents are completed and that they work best for the family. 
 
The best part about my position is seeing the faces of people turn from frustration, hopelessness and despair to that of happiness and peace of mind. I cannot get enough of that and hope you experience it for yourself. I encourage you to knock down those barriers and get that estate plan completed.

 

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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.

Farming With Family and Importance of Planning for the "What if’s" in Life

May 23, 2011
Many farmers I work with have an operation where they farm with a family member; either a sibling or relative. The most prevalent example of this involves a farming operation where two or more brothers are working together in "one" operation. This might be in the form of an entity (partnership, for example), or a situation where all involved are separate farmers (sole proprietors) but share expenses, machinery and equipment, land and profits. There are many positives to this type of operation: pooling resources and labor helps with farming efficiencies and profitability. Often times each person in the operation has found their "area of expertise", be it mechanics, marketing, farm management, agronomy or others. They all do their part, and the operation flows as smooth as possible. 
 
There are also potential negative implications to this type of operation. Working together through the years has likely proven efficient, but it has also likely led to a complicated ownership structure where everything is "tied" together. Likely, all of the machinery and equipment may be owned jointly. Neither owns a "whole piece" of the asset. Similarly, joint ownership of the land, farm building site and other farm assets is likely as well. If all is going well, this is not a big deal. But, what happens if there’s a change, or if something goes bad?
 
When you are "tied" together in a joint ownership structure, what happens if there’s a death? What happens if there’s a disability? What happens if there’s an argument and you can no longer work together? What happens if one brother has a child that wants to work into the operation, and the other doesn’t? What happens if one brother wants to retire, and the other doesn’t? What’s the plan? 
 
I imagine many responses to these questions to be: "We can work all of this out when and if that time comes. No use worrying about it now if it hasn’t happened." This response is a recipe for potential disaster. Don’t believe me? Let me paint a picture in your mind, as to what you would have to deal with to "work things out" if something bad happens. 
 
Imagine you are farming with your brother, and own almost everything together. You share machinery, equipment, and a farm / building site. You own most of your land together, as undivided equal owners. You share all expenses and profits, and work load. Things are going well. One day your brother has an untimely death. Reality has just changed from good to awful. The sadness and stress for your family and your operation is at an all time high. Not only have you lost a brother, you have lost your business partner and a crucial member to your operation.  You wonder how things will work now that he’s no longer there. What’s the plan? 
 
Now picture his wife. She has just lost her husband and is overwhelmed with grief and fear. Further imagine that this newly widowed woman has very little to do with the farming operation, being busy with her own work off the farm, her children and with all of life’s demands. These demands on her time have not provided her with the "day to day knowledge" of the farming operation. All she knows is that there are a lot of expensive assets and that there are liabilities against those assets. She knows because she signed the notes for them as your brother’s spouse. She wonders how she will pay for all of those liabilities, and support her family. 
 
Now picture the time when your brother’s estate is being administered. Imagine yourself sitting down with your brother’s widow, and her estate planning professionals and the discussion begins on what happens with the jointly owned farming assets: your machinery and equipment, your farm site and buildings, your land. You share assets, but you do not share goals for the future. Your goal is to continue farming. Her goal is to make sure she receives her assets and can pay off her debt and support her family. What’s the plan? 
 
With this picture in your mind, I’ll ask the question asked earlier again: "How will things work out?" If your answer remains "it will work itself out; no need to worry about it", frankly, that’s not realistic and that mindset can be disastrous for your business. There is no doubt it will "work itself out", but the frustration, anguish, expense and stress will likely be overwhelming both financially and emotionally. Moreover, your farming operation may be at a point where you as the surviving brother are no longer financially able to farm in a viable manner. No one wants this, but without planning, it can easily be reality.   
 
So, what can you do? The key to avoiding this and many other similar situations is to proactively plan for them using a method known as a "buy-sell agreement." A buy-sell agreement is a document where all owners of a business proactively plan and agree on a course of action in the event of death, disability or departure (break up of the business.)  Think of it as being proactive: having a clear, fair way to handle any of the above referenced situations. A buy-sell agreement is a "roadmap" that outlines how the farm would continue in the event of death, disability or departure. Additionally and equally as important, it outlines how the families would be taken care of as well, should something happen. It puts everyone "on the same page" with the operation, and know that a plan is in place, should something happen. 
 
Let’s Re-visit the above example with the brother’s untimely death. Assume everything is the same, except the families took the time prior to brother’s death to complete a buy-sell agreement. This agreement specifically outlined a plan of action in the event of a death so the farm could continue to operate, and the family of the deceased brother was taken care of as well. Imagine you as the brother, and the peace of mind you would feel, knowing everything is in place. Imagine you as the widow, and the peace of mind you would feel, knowing everything is in place. Everything was decided ahead of time, and everyone’s needs were met.    
 
Buy-sell agreements are very important in any business, but especially in farming. These documents are built specifically for each operation, finely tuned by your professionals to meet your goals. It is absolutely crucial from a business standpoint to work on this. If this is something you have not done, I strongly suggest you sit down with your professionals and build a plan specifically tailored to your unique situation. It will be well worth the time and effort. 
 
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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.

 

Basis Differences of Land Transfers to Heirs: Gifting vs. Transfer at Death

May 20, 2011

I am often presented with the question as to whether it is better to gift land (or other assets) during life, or transfer them at death, through their estate plan. The answer depends on the facts and circumstances of each individual situation. However, there are some distinct differences with each transfer that is the same for everyone. A major difference involves the basis of the land. 

 
An asset's "basis" is the original value of an asset for tax purposes. In land transactions, this is usually the purchase price, plus any improvements. When you gift an asset in life, you are transferring your basis in the asset. This is known as "carry-over basis." Accordingly, the recipient’s basis in the asset you gifted them will be the same as your original basis. It is different when you transfer an asset at death. At death, the asset recipient will receive a "step-up" in basis. The basis of the asset in this case is determined by the fair market value of the asset at the date of death. The original owner’s basis in the asset is inapplicable. There are exceptions to these rules, and you should make sure you understand how the rules relate to your specific circumstances. 

 

 

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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.

C-Corporations and Appreciating Assets

May 19, 2011
At times, people are advised to establish an entity and own their assets within them. The reason being is that certain entities can provide additional asset protection, compared to individual ownership. Asset protection is important; however, it is extremely important not to have “tunnel-vision.” There can be drastic tax consequences in later changes, depending on the type of entity.
 
The worst of these scenarios involves a C-corporation. I am leery about putting any appreciating asset into a C-corporation because of the negative tax effects should you ever want to take it out. For example, assume you set up a C-corporation and transfer your land into it. Assuming you receive shares in return for the transfer, and retain “control”, then this would generally be a tax free event. “Control” in this situation is generally defined as owning at least 80% of the voting stock and 80% of all other classes of stock. There are other potential pitfalls with this, so it is crucial that you consult your pertinent professionals when contemplating this type of transaction. 
 
Once the corporation is set up and you have your land in the corporation, if you later wanted to take the same land out of the C-corporation, it can be a nightmare. Understand that no money is exchanged; instead, it is simply coming back to you as the original owner. This transaction is treated as though the C-corporation “sold” the land to you for fair market value. Accordingly, when the C-corporation distributes the land back to you individually, there would be a consequence of double taxation (a C-corporation characteristic.) There would be a tax at the corporate level, and also at the individual level (capital gains.) Simply put, getting the same land back to you individually may lead to a major tax bill. This is an unintended consequence that must be analyzed when contemplating this type of planning.

 

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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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