PREPARING FOR THE TRANSITION: FARM TRANSITION AND ESTATE PLANNING

Paul Goeringer, Extension Legal SpecialistMid-Atlantic Women in Ag Webinar

April 26, 2017

DisclaimerThis presentation is intended to provide general information over farm transition issues and should not be construed as providing legal advice. It should not be cited or relied upon as legal authority. State laws vary and no attempt is made to discuss laws of states other than Maryland. For advice about how these issues might apply to your individual situation, consult an attorney.

SO WHAT DO YOU NEED TO BE DOING?

Where are you?

Where are you?• Today is about getting to where you want to go

• Communicate with your family and other heirs

• Develop the business plan and estate plans

WHAT ARE GOALS?

What are goals?

What are goals?

What Are Goals?• Goals are statements of what you hope to achieve

• Goals will change based on circumstances and over time.

• Will have reevaluate and updated

What are Goals?

• Goals will be unique to you and your family

• Goals will reflect your values and beliefs

• Potentially mean compromise between you and your family

DEVELOP SMART GOALS

SMART Goals• SMART Goals are:

• Specific

• Measurable

• Action-oriented

• Reasonable

• Timely

SMART Goal Example

• Diversify farm operation to include agritourism operation to increase farm income by $20,000/year by fall of 2016

Prioritize Goals• What goals are important?

• Do short term goals help you achieve long term goals? Do they impede long-term goals?

• What goals are important?

Implement goals

• Set the roadmap for implementing

• Work with family and other stakeholders to achieve goals

• Look for potential problems in implementing

Reevaluate

• Recognize that life changes and goals may too

• Take time to see if goals are being met or need to reevaluate

DEVELOPING AN ESTATE PLAN

Developing the Estate Plan

• Majority of farms do not have an estate plan or transition plan

• Recent survey found 52% of Americans do not have an estate plan

Develop The Estate Plan

• Guardian nomination for minor children

• Beneficiary designations

• Powers of attorney• Business• Healthcare

• Advanced directive for health care

• Will

• Trust (?)

• Life insurance (?)

Dying Without An Estate Plan• Without at least a valid will, you will be consider to have died intestate and state laws will govern how your property is distributed.

• Intestate is a person who dies without a valid will

Dying without an Estate Plan

Interstate succession laws are designed to divide your property up among your family members, regardless of the relationship you had with that family members

Who Can Make a Will?• As one state Supreme Court has pointed out “Let it first be

stated that one does not have to be a genius, a college graduate, a high school graduate, or even have attended grade school, to make a will.” Harwell v. Garrett, 393 S.W.2d 256, 260 (Ark. 1965).

• Any person of sound mind over the age of 18 can make a will

• A will is one estate planning tool everyone should consider having.

Holographic Wills• One exception to the properly

witnessed requirement is a holographic will.

• A holographic will is a will written entirely in the testator’s handwriting and signed at the end by testator

• Only valid in Maryland if made by a member of the armed services and signed by the testator outside the United States.• Void one year after discharge

Changing the Will

• A will can be changed or amended by drafting a codicil that amends the earlier will or the person can draft a new will.• The codicil, or document

amending the prior will, will need to meet all the requirements of a valid will to be valid

Property Outside the Will

• Life insurance policies – you have selected the beneficiary of the policy on your death

• Payable-on-death bank accounts – you have selected

Property Outside the Will

• Joint bank accounts

• Real property held as joint tenants with rights of survivorship

Trusts• Unlike wills, trusts as an estate planning tool are not for

everyone

• People who should consider using a trust• Those with estates approaching federal estate tax limits, for 2017

that is estates over $5.49 million

• Those with children or a disabled family member to provide for their care if the parents were to unexpectedly pass away

• Family members that can no longer manage their own affairs, such as an elderly parent

Trust terminology• Grantor, Trustor, or Settlor – various ways to describe the person who creates the trust

• Trustee – is the person that manages the property in the trust

• Beneficiary – is the person that the trust benefits

Testamentary Trust

• Trust created in a will upon the death of the grantor

• Typically used to provide for the benefit of minor children or disabled family members

Living Trust• Is created during the trustor’s life and continue after the trustor’s death.

• Used by many people as a way to avoid the probate process upon their death.

• Revocable – You retain control of the trust to change the beneficiaries, trustee, terms, and can even choose to dissolve the trust

• Irrevocable – permanent and retain no power to change the trust

Living Trust• Reasons to consider a living trust

• Avoid probate costs• Allows for the transfer of property in different states• Allows for managing of assets if you become incapacitated • Distributes property to the beneficiaries faster than probate process

• Reasons to not consider a living trust• Expensive to set up and update, requires a lawyer to draft trust

documents and to administer• Expenses can outweigh benefits

Develop the Estate Plan

Pros of Wills

• Control property till death

• Can direct who gets property

• Select executor and guardians

• Once property distributed will no longer needed

Cons of Wills

• Have to probate it

• Easily contested (even with no contest clause)

• Takes time and public process

• State specific

Develop Estate Plan

Pros of Living Trusts

• Eliminates need for probate

• Not public info

• Difficult to contest

• Do not need guardian to hold assets for minors

Cons of Living Trusts

• Potentially have trustee fees

• Adds complexity to asset management

• Need to coordinate with other estate tools

• Still need a will

Durable Power of Attorney

Appoints an “attorney-in-fact” or agent to handle your business and financial issues that could arise if you become incapacitated and this power lasts until the authority is revoked or at your death

Health Care Proxy• Similar to a durable power of attorney, but with a health

care proxy you appoint an agent to make health care decisions for you if you become incapacitated

• Agent only receives decision making power when the primary doctor determines you are no longer able to make medical decisions

• If the health care proxy’s authority is not limited, then the agent could be entitled to make decision involving whether or not to remove life sustaining methods

Living Will

• A living will, also known as an “advance health care directive” is a specific set of instructions given by a person in the event they are no longer able to make decisions about their health.

• Typically, this document specifies the type of medical treatment that you do not want to receive in certain situations.

Living Will

Takes burden off family

Specifies when you want medical treatment

Decisions made when you can’t make decisions

Issues to Consider• Transferring farm data:

• Equipment on farms is producing more data.

• Important to plan for how that data will be shared

• Access to social media accounts• (ie make sure they know

the passwords).

TAX CONSIDERATIONS

Before We Go Further

• Disclaimer: I am not a tax expert and I do not pretend to be one.

• If you have detailed tax questions then will need to check with your accountant.

WE GOOD?

Federal Estate Taxes

• Federal estate tax exemption• Pegged to inflation –

goes up each year

• 2017: $5.49 million

• For couple, double that amount

Federal Estate Taxes• Portability:

• Allows surviving spouse to use unused federal estate tax exemption

• Has to file the appropriate tax forms and can not get remarried

Maryland Estate Taxes

• In 2014, Maryland “recoupled” the state’s estate tax exemption to the federal rate.

• Starting in 2015, increases each year till fully recoupled in 2019.

Dates AmountJan. 1, 2017 to

Jan. 1, 2018 $3 million

Jan. 1, 2018 to Jan. 1, 2019 $4 million

Jan. 1, 2019 and onward

Check federal exemption in

2019

Maryland Estate Taxes

• Maryland, has special exemption for agricultural property.

• Exempts $5 million of ag property and have to agree to keep in agriculture for 10 years.

Other Tax Issues

• Gift tax• 2016 & ‘17 is $14,000 to

any individual

• Portion used for gifts counts against federal estate tax exemption ie it goes down

• Strategies involved in all of this

OTHER ISSUES

Other Issues

• How to handle farm kid v. city kid?• Equal ≠ Equitable

Business Entities

• Ways to divide:

• Business entity• Ownership of farm resides

in entity owed by heirs• Control given to on-farm

successor • Participation to off-farm

heirs

• Use of business entities can facility estate plan

Conservation Easements• Conservation

easements:

• Potentially help equalize shares between farm and non-farm kids

• Can potentially utilize cash from sale of easement to equalize share

What About Sweat Equity?

• Not enforceable

• Creates ill will between family members

• Need to formalize relationship and create enforceable solutions

Thought on Marriage and Divorce

• If heir gets married during implementation of plan consider:

• Prenuptial Agreements• Want to make clear that

spouse will not have claim to farm/business in a divorce

Other reasons to consider prenup

• “Complex” families:• Husband and wife both

have children from previous marriage and no plan to have additional kids

• Want to insure each spouses’ assets go to their heirs.

WHAT ARE YOU TO DO?

Assemble a Team

• This is why you will work with a team of professionals

• Team will potentially include:• Accountant/Tax

professional• Attorney• Etc

IMPLEMENT, EVALUATE, AND REVISE

Reasons to Consider Revising?

•Birth•Death•Marriage•Divorce•Disability

•Major acquisition

•Major disposition

•Major legal change

•Regular basis

Reasons to Consider Revising

Changes in estate taxes• What Congress or the

General Assembly giveth

• The same bodies can taketh away or increase.

Reasons to Consider Revising

• What if on-farm successor passes way?

• What if on-farm successor no longer wants to farm?

WRAP UP

Wrap Up

• Family Business Institute has found:

• 88% of current family business owners believe same family will be controlling business 5 years down the road.

• But what do the numbers tell us?

Wrap Up

• Family Business Institute has found:• 30% survive to 2nd

generation

Wrap Up

• Family Business Institute has found:• 30% survive to 2nd

generation

• 12% survive to 3rd

generation

Wrap Up

• Family Business Institute has found:• 30% survive to 2nd

generation

• 12% survive to 3rd

generation

• 3% survive beyond the 4th generation.

Wrap Up• Why do businesses fail generation transitions:

1. Failure to prepare next generation or incompetent successors

2. Unclear succession plans

3. Family rivalries

4. Insufficient capitalization

Wrap up

• Have I frightened you?

• Point is not to be scared but prepared

• Talk to your stakeholders and work with qualified professionals

RESOURCES AVAILABLE

Resources Available

• Over summer launched: UME page Farm Transition and Estate Planning

• https://extension.umd.edu/agtransitions

Resources Available

• Through University of Minnesota’s Center for Farm Financial Management: AgTransitions

• https://www.agtransitions.umn.edu/

Resources Available

• Through Oklahoma State University Extension: Farm Transitions

• http://agecon.okstate.edu/farmtransitions/

Resources Available• This one is not free

• Book by Neil Harl at Iowa State

• Walks you through the process

• Book is $25 to $25 http://www.agrilawpress.com/shop/farm-estate-and-business-planning/

THANKS!ANY QUESTIONS?

Email: lgoering@umd.eduPhone: 301-405-3541Twitter: @AgLawPaulList of publications: www.aglaw.umd.edu/paul-goeringer