What you think you know about succession planning, or heard at the coffee shop, might—or might not be—true.
Before moving down any one path, consult a team of knowledgeable, licensed experts, advises
David Repp, an attorney with Dickinson Mackaman Tyler & Hagen, P.C., Des Moines, Iowa, who specializes in taxation and succession planning.
Following are 11 common myths people often accept as truth.
1 I have to treat all my children equally. “There is no shame in admitting that the primary estate planning goal is to carry on the family farm,” Repp says. This may mean that the heir that stays home to farm may get additional farm assets so that the farming operation can be sustained.
The on-farm heir should always receive the farm operating assets. Non-farm assets can be distributed to off-farm heirs to equalize inheritance. However, the bulk of most balance sheets contain farmland.
If farm parents are uncomfortable giving all the farmland to the on-farm heir, they still have options to keep the farm intact but share its benefits for all their children. The first is to grant the on-farm heir an option to farm all the farmland in the estate. This allows the on-farm heir to cash rent the farmland.
The problem with this method is the laws of many states limit how long a “right to farm” can last. In Iowa, it is 20 years. In Minnesota, it is 21 years; Michigan, 12 years; Wisconsin, 15 years.
A better method is to put the farmland into a limited liability company and give shares of the LLC to all the children in the percentages desired. The on-farm heir can be entrenched with lifetime control of the LLC including the right to farm the land.
2 I want each of my children to receive a parcel of land. First, divisions of land can rarely, if ever, be equal, Repp says. Such divisions usually break up the farm rather than continue it.
Second, people forget to update their wills after subsequent sales, purchases and mortgages of farmland. “This may cause unintended consequences—one heir may inherit all the debt,” he says.
3 Life estates are simple and sensible. “Neither life tenant nor remainder holder can sell or mortgage the property without the consent of the other,” Repp says. So life estates can set up conflict. They can also create tax problems because there is no step up in basis when the life tenant dies.
4 Revocable trusts save taxes. “Revocable trusts offer no tax benefits, are costly to set up, need constant attention and are subject to post-death, probate-like administration,” Repp says. “Eighty percent fail to accomplish their stated objectives of avoiding probate.” Nevertheless, if a person’s life expectancy is short, he adds, a revocable trust may be a good tool to facilitate the transfer of assets to intended beneficiaries. They may also be useful for vacation homes in other states in order to avoid ancillary probate.
5 Beware of PODs, TODs and joint tenancy agreements. Payable on death (POD) and transfer on death (TOD) agreements can create inequities among heirs. Joint tenancy agreements can trigger gift taxes if they exceed limits.
6 Beware of Powers of Attorney. “Having power of attorney shifts the burden of proof in undue influence cases to the power holder,” Repp says. So power holders should be very careful when receiving gifts from mom and dad while acting as power holder for them. If there is any uncertainty about mom and dad’s mental capacity, a power holder should not accept any of their assets.
7 Avoid conspiracy theories. “Distant, off-farm heirs often assume undue influence when none may exist,” Repp says. “Parents should reach out to non-farm heirs regularly and share estate plans, even though it might be uncomfortable.”
8 Estate planning should be used as a Medicaid planning tool. “Medicaid is a safety net not to be abused,” says Repp, “and children do not have an inalienable right to inheritance.”
9 Sometimes Medicade planning is appropriate. Repp says when one spouse remains at home, when a disabled dependent exists or when a child is taking care of mom or dad are all cases when planning to set aside assets or dollars is warranted. In these cases, long-term care insurance should be considered so that assets do not have to be sold.
10 The farm will have to be sold for estate taxes. With today’s higher federal estate tax exemptions and built-in protections, no farm should ever have to be sold to pay taxes. In fact, Professor Neil Harl, Iowa State University estate tax expert, says he knows of no farm that has ever had to be sold to pay estate taxes.
11 Letting the tax dog wag the tail. Farmers will go to great lengths to avoid income taxes, which usually means buying expensive equipment just for the deduction. On the other hand, too little succession planning is done, Repp says.