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Estate planning for farmers: a basic primer

Estate planning for farm families in 2015. Common problems to avoid. A/B plans need updating?

Farm families have the same issues as families from other professions. “As estate planners, we mustn’t get stuck into one thing and think that’s all these families care about,” said Stan Miller of Little Rock-based McChain, Miller & Nissman, at the April 17 Mid-South Agricultural and Environmental Law Conference, co-sponsored by Delta Farm Press. “As planners we must open the aperture and look at the entire range of issues that are important to farm families.

“Farm families, again, have the same problems as others. Some have children with marital problems, some have children with drug and alcohol problems, some have children that won’t ever achieve a level of financial maturity so you’d want to hand over a meaningful inheritance. There are some with children engaged in businesses or professions associated with risk and the potential to be sued and lose the inheritance. In thinking about this, I’ve constructed a ‘farm family estate planning wish list.’ You know, ‘if I could accomplish every objective I wanted it would be these things.’”

On the list:

• Don't disqualify me from farm program benefits.

• Don't tangle me up in the court process.

• Keep the farm in the family.

• Treat family members fairly.

Fair and equal aren’t necessarily the same thing, Miller stressed. “That’s a challenge any time we do planning for any type of business owner. But it’s especially a challenge in planning for farm families.”

Families on smaller farms have to think about how to avoid having to sell the farm to pay the costs of a nursing home for a few years.

The families also want to avoid paying an estate tax. “The word hasn’t yet gotten out to everyone yet that the estate tax exemption has risen to the point now where almost no one has to pay it. That’s still an anxiety, though.”

A few documents

The objective is that if Miller’s client, or clients, “become incapacitated we have a plan in place that has designated a sequence of persons or institutions that can immediately step in and exercise authority on behalf of that family. Also, we have someone designated in advance to step in and make healthcare choices and end-of-life decisions for the family.”

All of those things can be dealt with through only a few legal documents. “One is a successor living trust coupled with a general power of attorney. In our practice we make certain the successor trustees are the same persons named as the agents of the general power of attorney. You need the general power of attorney because the client may have assets like an IRA account and any number of things that cannot, or choose not to, put into the living trust. We also create a healthcare power of attorney, HIPA documents and a living will.

“Then, you need to have a conversation with the family about what objectives we wanted to accomplish. They need to know this isn’t just some lawyerly-type stuff, this is what they really want. So, we can accomplish a lot of objectives with a simple living trust plan.”

Miller advises estate planners to spend time with clients in conversation. “For an hour, or two, ask non-directive questions. One thing you’ll discover is your clients have issues they’ve never articulated to themselves or each other.

“Something I discovered while doing our own estate plan was quite surprising. My mild-mannered wife – sometimes inappropriately deferential to me – said, ‘if something happens to me, I don’t want you to hook up with (another woman), give her the money and cut the kids out.’”

That exchange taught Miller “that clients come to us with issues and concerns that have to be teased out. This is a conversation that people don’t often have sitting around the dinner table.”

This second marriage issue is a concern in about 40 percent of the cases Miller plans for. “And that percentage is higher if they go to church every Sunday. That’s because what women have discovered is that the widows at church – and there are many more than there are widowers – all have casseroles in the freezer and are prepared to use them in six hours. And they do.

“When talking to clients, what I do is tell the story about my wife and wait seven seconds. If this isn’t an issue for them, they’ll say something within that seven seconds. If they don’t say anything by then, it’s an issue and we need to plan for it.”

Protections

How to protect children from divorces and lawsuits? “It isn’t something that clients come in thinking about but if you bring it up, 95 percent want that protection in the plan. They know that divorce happens with regularity and people get sued. They want to know the inheritance they leave their children can’t be taken away through judgment.

“You don’t have to tell them about immaturity. They know which of their children are, or aren’t, capable handling an inheritance. Here you have people that have worked hard, borrowed and saved. They’d rather not see what they’ve worked their entire lives for wasted on foolishness. That’s why they invest money with us for protection.”

Miller’s clients also like to protect their IRA, as well. “But they’d like to protect it in a way that makes certain it qualifies as a long stretch-out benefit.

“I spend a lot of time speaking with clients about heirloom property. I find the largest percentage of family fights come from dividing heirloom property. At the end of the day, really and truly, clients, after they’re gone, they want their families to still show up for Christmas dinner. They want the kids speaking to each other when it’s said and done.”

The new estate tax

Miller believes that “basis step-up” is the new estate tax. “A new tax is a far bigger deal (than an estate tax), that is far more costly to almost every family – the capital gains tax. It’s now 20 percent federal. In Arkansas it’s 4.9 percent. And there’s a 3.8 percent Obamacare tax.

“When an individual dies, unless it’s tax qualified money, there’s a basis step-up on the assets to the fair market value on the date of death. So, a big part of what we’re doing as planners going forward is to make certain that we don’t clients mess up the opportunity to get a basis step-up and thereby cause the children to have to pay a capital gains tax.

“There are more or solutions, but I’ll talk about two or three.”

First up: change your client’s A/B plan. “For years, we’ve been saying you don’t want to waste one of your exemptions when the first spouse dies and in order to prevent that from happening we have to create an A/B trust. That way, when the first spouse dies we can take the property of the deceased and front this credit shelter trust with it so when the second spouse dies those assets won’t be estate tax included.”

All those plans are still out there. “Most people haven’t reviewed them for a very long time. If someone dies and has a plan like that you can’t just pretend it isn’t there. You have to carry out the instructions as written and fund the credit shelter trust even if it’s a $2 million to $3 million estate. It will never be more than $5 million at any point.

“What that means is when the first spouse dies, we get a basis step-up on those assets. Say the wife lives 15 years more than her husband. Those assets inside the credit shelter trust may double in value again. But when she dies, the assets in credit shelter trust won’t be includable in her estate. They won’t get the basis step-up even though, if they were included, her estate still wouldn’t be estate taxable. So, from a tax perspective, her kids are worse off than if there had never been a plan.

“So, this is a massive opportunity for us to go back to clients and say, ‘this one reason alone is a very compelling reason to reevaluate your estate plan.’”

One of the pluses to A/B planning is the collateral benefits. “With an A/B plan, even if taxes aren’t the driving reason, it does accomplish a second marriage protection objective. If I die and my assets go into a credit shelter trust – especially if there’s a co-trustee – and my wife goes out and gets married again, that guy can’t use my money to open up a new restaurant or open a golf driving range. My co-trustee would never agree to that.

“That’s a pretty good reason to leave an A/B plan in place. But I’d suggest a better solution for a client whose estate will never be large enough to ever be taxable – even if all the assets are included in the surviving spouse’s estate – is to replace the credit shelter trust with a QTIP trust. You can accomplish all the second marriage and asset protection objectives and cause the assets to be includable in the surviving spouse’s estate at the second death.”

There are two or three other solutions. “One thing we’re doing now is drafting credit shelter trusts in a way that gives the trustee or trust protector the ability to grant surgical, general powers of appointment. That allows certain, specific assets to be included in the surviving spouse’s estate.”

A different route

Miller warned that clients need to be very careful not to make outright gifts to children of appreciated assets. “That comes up all the time because people know it costs a lot of money to be in a nursing home.

“We still have clients where the estate tax is still an issue. What I tell them is a few things. First, get the life insurance out to a life insurance trust.

“Then, I like to create an entity to own farmland. Here’s a story: there’s a tradition back in the old days in Texas. When people had a large ranch they’d go see a lawyer and say, ‘divide my land up between my kids.’ That’s how it was done for multiple generations. What would happen is a big ranch would be divided up, divided again and eventually you’d have a bunch of ‘ranchettes.’”

In 1914, a family of Texans decided to go a different route. “They created a corporation and took the ranch and contributed it. Then, when they died the ranch wasn’t divided. They kept the ranch in place and passed stock along to the next generation. The stock was then passed to the next generation.

“Now, 100 years later, there are a few hundred shareholders in the King Ranch Corporation.”

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