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Estate Planning for Farm Families Katie E. Watson, J.D., LL.M.
Friday, Eldredge & Clark, LLP
Topics
Incapacity
Terminally Ill
Asset Disposition
Advanced Planning Techniques
Farm Specific Planning Techniques
Incapacity
Overview - Incapacity
Durable General Power of Attorney
Durable Power of Attorney for Health Care
Durable General
Power of Attorney
Incapacity - DGPOA
Durable
Power of Attorney (“POA”) is not affected by
subsequent disability or incapacity.
Current POA or Springing POA
Should be acknowledged.
Incapacity - DGPOA
Specific Powers
Safe deposit box
Create, revoke and/or amend revocable trust.
Alter beneficiary designations.
Make gifts to family or charity.
Must specifically reference these powers in the
instrument.
Incapacity - DGPOA
Conservator or Guardian
POA may nominate conservator or guardian.
Attorney-in-fact is held accountable to
conservator or guardian.
Conservator or guardian can revoke or amend
POA.
In sum, conservator or guardian trumps POA.
Incapacity - DGPOA
Multiple Attorneys-in-Fact
Default rule: majority vote
Instrument can provide otherwise.
Unanimously, majority or individually?
Incapacity - DGPOA
Revocation
By agent, principal or death
Newer POA does not revoke prior POA unless
specifically stated.
Notify anyone holding prior POA that you have
revoked such POA.
Incapacity - DGPOA
Substitutes
Trust
Joint ownership
Business agreements
Some retirement plans
Durable Power of
Attorney for
Health Care
Incapacity – Health Care
“Health Care”
All care, treatment and procedures
Does not include decisions regarding life-
sustaining treatment, but it may contain a
declaration as to such treatment.
Incapacity – Health Care
Formalities
Written
Signed
2 witnesses
Should be acknowledged.
Incapacity – Health Care
Appointed agent takes precedent over others.
HIPAA authorization (federal)
Unanimously, majority or individually?
Incapacity – Health Care
Revocation
By agent or principal
Newer HCPOA does not revoke prior HCPOA
unless so stated.
Notify anyone holding prior HCPOA that such
HCPOA has been revoked.
Terminally Ill
Overview – Terminally Ill
Declaration to Physicians (“Living Will”)
Proxy
Do Not Resuscitate
Declaration to
Physicians
“Living Will”
Terminally Ill - Declaration
Declaration to Withhold or Withdraw Life-
Sustaining Treatment
Written, signed and 2 witnesses (should be
acknowledged)
Effective when in a terminal condition or
permanently unconscious as determined by
attending physician and another physician.
Terminally Ill - Declaration
Declaration to Withhold or Withdraw Life-
Sustaining Treatment (continued)
If given to care provider, part of medical record
and care provider must promptly notify if
unwilling to comply and patient must be
promptly transferred.
Other clear and convincing evidence of wishes
allowed in addition to written declaration.
Terminally Ill - Declaration
Revocation of Declaration
At any time and in any manner, without regard
to physical or mental condition
Notify anyone holding prior declaration.
Terminally Ill - Declaration
Comfort and Care
Always provide treatment for nutrition and
hydration (can be waived or is waived if
insertion of apparatus is required unless use of
artificial means is specified) and the comfort,
care or alleviation of pain.
Proxy
Terminally Ill - Proxy
Proxy
Gives authority to another to make decisions.
Unanimously, majority or individually?
Surrogate can be appointed by health care
provider.
Terminally Ill - Proxy
No Proxy
Legal guardian
If unmarried minor – parents
Spouse
Majority of adult children participating
If adult – parents
Majority of adult siblings participating
Loco parentis
Majority of adult heirs participating
Do Not
Resuscitate
Terminally Ill - DNR
Approved Identification
Standardized card, form, necklace or bracelet
Identifies existing declaration addressing CPR; or
Issued by attending physician.
Questions?
Asset Disposition
Overview - Disposition
Title
Designation
Trust
Will
Default
Title
Asset Disposition - Title
Title (not subject to will or probate)
Joint property with survivorship passes to
survivor, regardless of what your estate
planning documents say.
Name on account, then can withdraw
everything (best not to add names to accounts
as this can defeat your testamentary plan)
Designation
Asset Disposition - Designation
Designation (not subject to will or probate)
Life insurance
Retirement account
Payable on death or transfer on death
accounts
Beneficiary deed for real estate
Trust
Asset Disposition - Trust
Trust (not subject to will, probate, POA or
guardian)
Must transfer assets to the trust.
Name trust as designated beneficiary of life
insurance, retirement accounts, other accounts
and real estate.
Asset Disposition - Trust
Revocable trust benefits
Avoid probate (to the extent assets are
transferred to the trust)
Privacy (does not have to be filed with the
court)
Avoid guardianship
Tax savings (basis and estate)
Joint planning (“freeze” the overall plan)
Asset Disposition - Trust
Irrevocable Trust Benefits
Asset protection
Removes assets and future appreciation from
estate and possibly future estates.
Your terms (control)
Spendthrift trust (creditors and in-laws)
Charitable trusts
Will
Asset Disposition - Will
Will (subject to probate)
Does not apply to joint property, property with
beneficiary designation or property held by
trust.
Add a memorandum with regard to tangible
personal property.
Default
Asset Disposition - Default
No will, trust, joint ownership or designation
Home and 1/3 of all other property to spouse
(real property for life only)
Remainder (or if no spouse) to:
Descendants, or, if none,
All to spouse, or, if none,
All to parents, or, if none,
All to descendants of parents.
Asset Disposition - Default
Reasons to have a Will or Trust
Name your executor, trustee and guardian.
Alter the disposition on previous slide.
Provide for trusts instead of outright
inheritance.
Questions?
Advanced
Planning
Techniques
Overview
Current Tax Exemptions
Discounts and Freezes
Maximizing Tax Basis
Life Insurance Trust
Asset Protection Trust
Current Tax
Exemptions
Current Tax Exemptions
Estate Tax, Gift Tax and GST Tax Exemption
2015: $5.43 million
2016: $5.45 million
Exemptions are unified and are adjusted for
inflation each year.
Annual Exclusion Amount
2015 and 2016: $14,000 per donee
Discounts and
Freezes
Discounts and Freezes
Discount Valuation on Transfer
Separate control from value transferred (i.e., limited
partnership, voting/non-voting stock)
Transfer non-controlling interest
Transfer non-marketable interest
Retaining control, if desired (can create problems if not
done correctly)
Avoid discounts if no estate tax (higher basis)
Congress could limit
Discounts and Freezes
Freeze Estate Value
If no gift tax exemption or desire future cash
flow, then transfer by sale (outright or to trust).
Gifts avoid all future appreciation.
Sales avoid future appreciation that is greater
than the imputed interest on promissory note
(currently the AFR is very low).
Can gift note as exemption increases.
Maximizing
Income Tax Basis
Income Tax Basis
Include Maximum Amount in Estate of First
Spouse to Die
Joint revocable trust for married persons to
include all assets in estate of first-to-die.
General power of appointment held by first-to-
die over other spouse’s revocable trust.
Transfers to dying spouse
Income Tax Basis
Assets held in irrevocable trust may not qualify
for FMV basis on death of beneficiary.
Make distributions of appreciated assets
outright to beneficiary prior to death.
Include contingent general power of
appointment to cause inclusion in beneficiary’s
estate.
Life Insurance
Trust
Life Insurance Trust
Death Benefit Included
For estate tax, incident of ownership includes death
benefit.
Three-year rule on gift of policy
If policy is gifted, must survive 3 years to avoid
inclusion of death benefit.
Alternative is to sell policy to avoid 3-year rule (grantor
trust can be used to avoid income tax issues).
Life Insurance Trust
Irrevocable Trust
Trust is the owner and beneficiary of the policy (trust is
the initial purchaser or purchases policy from grantor).
Insured cannot be a beneficiary (spouse of insured can
be a beneficiary).
Insured cannot be a trustee with regard to the policy
and must be limited with regard to replacing such
trustee.
Life Insurance Trust
Premium Payment
Premium payments are paid by (or on behalf of) the
trust.
Contributions to the trust are gifts.
Grantor and spouse can use annual exclusion gifts to
fund the trust (need Crummey powers).
Life Insurance Trust
Proceeds Death benefit is paid to trust and is excluded from the
insured’s estate.
Asset protection applies as long as proceeds are held in
trust.
If lifetime trusts for children, then GST exemption is
allocated to all contributions even if all contributions were
annual exclusion gifts.
Can use proceeds to buy assets out of insured’s estate.
Asset Protection
Trust
Asset Protection Trust
Beneficiary’s Creditors
If no spendthrift, then a court may authorize reaching a
beneficiary’s interest in the trust.
Spendthrift Provision
Must restrain voluntary and involuntary transfers.
Saying “spendthrift” in the trust works.
If spendthrift, then beneficiary’s interest may not be
reached unless distribution is made.
Asset Protection Trust
Discretionary Trusts
Creditors cannot compel discretionary
distribution even if it is subject to a standard or
the trustee has abused its discretion.
Interest of a beneficiary who is also a trustee
may not be reached if the trustee’s discretion is
limited by an ascertainable standard.
May vs. shall
Asset Protection Trust
Claims Against Settlor
Revocable Trust (with or without spendthrift)
During settlor’s lifetime, subject to creditors
Irrevocable Trust (with or without spendthrift)
Maximum amount that can be distributed to settlor
If more than one settlor, only settlor’s contributions can be
reached.
Power of Withdrawal (same as revocable trust)
Asset Protection Trust
Overdue Distribution
With or without spendthrift, creditors may reach
undistributed mandatory distributions.
Asset Protection Trust
Portability Election
Allows surviving spouse to use most recent
deceased spouse’s unused gift/estate tax
exemption (both spouses must die after
12/31/10).
Estate of deceased spouse must file a
complete and timely estate tax return (election
is default position if return is filed).
Asset Protection Trust
Better to not rely on portability
No asset protection
No control over future dispositions
Future appreciation is included in survivor’s estate
Portability may not last
Must file complete and timely estate tax return to make
election
Remarriage/divorce could reduce amount available
Questions?
Farm Specific
Planning
Farm Specific Planning
Formation of an entity (or multiple entities)
Create operations entity and land entity
Liability protection (injuries on the farm,
lawsuits)
Valuation discounts
Transfer restrictions
754 election
Farm Specific Planning
Farming heirs vs. non-farming heirs
Allocate farm to farming heir(s) to the extent
possible; non-farming heir(s) receive other
assets and/or a non-controlling/non-voting
interest in the farm.
Give farming heir(s) the option to purchase any
portion of the farm not allocated to their share.
Buy-sell agreement; restrictive transfers
Farm Specific Planning
Special Code provisions
Special use valuation under I.R.C. § 2032A
Must meet certain requirements.
Maximum value adjustment for 2015: $1.1 million
Extended time to pay estate tax under I.R.C. §
6166
Must meet certain requirements.
IRS serves as lender.
Questions?
