Common Mistakes in Agricultural Estate Planning & Leasing

providing timely, critically objective

information to producers, professionals

and agribusinesses concerning the

application of important developments

in agricultural law and taxation

2321 N. Loop Drive, Suite 200 n Ames, IA 50010 n (515) 294-5217

Common Mistakes in

Agricultural Estate Planning

& Leasing

Erika Eckley, Staff Attorney

Center for Agricultural Law and Taxation

http://www.calt.iastate.edu/index.html


Contact Information

Erika Eckley

• [email protected]

• (515) 294-5217

• www.calt.iastate.edu



What is estate planning?

The overall process of making decisions as to how property is to pass to others, during one’s lifetime and at death.

– The key to estate planning is articulating objectives

• The parents together

• The parents individually

• The on-farm heirs

• The off-farm heirs



Common goals include:

• Minimize taxes at death

• Minimize probate costs and delays

• Conserve property during life and after death in accordance with estate planning goals

• Provide financial security

– Parents in retirement

– Family member with a disability



The Eckley Family



Crucial estate planning steps

• Examination of how property is owned or

held

• Review of family insurance program

• Advisability of lifetime gifting

• Alternatives for disposing of property

during life



Federal Estate Tax

• In 2013, the federal exemption is $5.25 million per person or $10.5 million per married couple.

• The tax rate increased from 35% to 40%.

• Portability remains

– Married persons can use combined estate tax exemption when an election is made after death of first spouse

• The annual exclusion for gifting in 2013 is $14,000 per year, per person.



Illinois Estate Tax

• $4 million exemption in 2013

• Top rate is 16%

• Marital deduction exists for assets passing

to certain qualifying trusts for benefit of

surviving spouse



Federal Estate Taxation

• What is included in the gross estate?

– In General

• The gross estate is the totality of property that the

federal estate tax reaches

– All property interests of decedent at moment of death

– The decedent’s portion of tenancy-in-common property

– Property owned in joint tenancy



Gross Estate

• Retained Interests

– The value of property transferred by the decedent over which at the time of death the decedent held a power to revoke, alter, amend or terminate the transfer

• Income retention for life

• Retained life estate

• i.e. Gifting several farm properties before death, but retaining the right to live on the property and landlord’s share under a crop share lease



Gross Estate

• Gifts within three years of death

– Some property that is transferred within three

years of death is pulled back into the estate.

• Retained life estates

• Transfers taking effect at death

• Revocable transfers

• Life insurance policies



Deductions from Gross Estate

• Administrative expenses – If allowed under local law, and are reasonable

and necessary administrative expenses.

• Decedent’s obligations – If founded on promises or agreements that

represent bona fide obligations contracted for full and adequate consideration in money or money’s worth. (Promissory notes given to children or grandchildren without consideration not deductible)



Deductions

• Indebtedness against estate property

– Amounts of mortgages or liens against property

included in the gross estate are deductible

• Taxes

• Marital Deduction

– Unlimited

• Charitable Deductions



Common Estate Planning Mistakes

• Simply doing nothing.

• Not staying informed as to changes in the law that could impact the plan.

• Failure to review (and update if necessary) the plan.

• Not meeting regularly with advisors.

• Making the plan too complex.

• Not being able to find the will.




• Failure to fund a trust.

• Failure to utilize annual exclusion gifts (larger estates).

• Failure to plan to have sufficient liquidity at death.

• Failure to check the beneficiary designations on non-probate property and to keep them up-to-date.

• Not taking into account issues that arise because of order of death of the spouses.

• Failure to check titles to property.

• Not maintaining good records.

• Failure to use disclaimers post-death to correct errors in the estate plan.




• Too much property owned in joint tenancy (large estates) or too little property owned in joint tenancy property (small estates).

• Failure to balance property ownership (in terms of value) in larger estates.

• Utilization of a simple “I love you” will in larger estates.

• Gifting a remainder interest, and retaining a life estate and thinking the property will avoid inclusion in the estate.

• Incorrect ownership of life insurance.




• Not understanding the difference between

“equal” and “fair”.

• Making gifts or loans to the children without

clarification in the will.

• Not discussing succession planning with the

children.

• Not having a well drafted buy-sell agreement.




• Naming only one child as a financial

fiduciary when there are multiple children.

• Not having a medical power of attorney

and living will.


providing timely, critically objective

information to producers, professionals

and agribusinesses concerning the

application of important developments

in agricultural law and taxation


Agricultural Leases:

Common Issues



Agricultural Leases

• Lease not in writing

– verbal leases can be misconstrued

– lack of discipline in negotiating terms

– lack of protections for both parties if problems

– memories fade without documentation



Agricultural Leases

• Failure to properly terminate lease

– In Iowa, Sept. 1 must be sent or lease

continues into next year under same terms;

– In Illinois, notice must be provided four

months prior to end of leases by October 31

(typically) for year to year leases (always

includes oral leases) ending at end of

February.



Agricultural Leases

• Landlord’s failure to reserve access rights.

– Lease grants possession to tenant

– Problems occur if landlord wants right of

inspection, ability to enter land to hunt, or

other reasons for entry without specifying

these rights in the lease.



Agricultural Leases

• Failure to designate timeframe for

payment of rent and amounts



Agricultural Leases

• Failure to keep a copy of the lease after

signing.

– Both parties need a copy

– Have 2 copies that both parties sign

– Keep it in a safe location

– Don’t rely on landlord, tenant, or government

agency to keep copies



Agricultural Leases

• Failure to provide for repayment option for

improvements if lease terminates

– tiling

– storage bin

– upgrade to equipment based on reliance

– Fertilizer/lime application



Agricultural Leases

• Locking in lower than market rates in long-

term leases

– long-term tenant situations with elderly

landlords

– family members taking advantage



Agricultural Leases

• Failure to require documentation of good

husbandry practices

– i.e. addition of lime, potash, etc., from tenant

– include documentation to be provided every

year

– include right to do soil survey



Agricultural Leases

• Not discussing the legal ramifications with family to ensure everyone in agreement regarding rights and responsibilities

– wife signing as spouse to be able to recoup investment in tiling, because she is employee for benefits, but she wants to be able to continue farming and run operation if anything happens to husband and hates signing as “spouse”



Agricultural Leases

• Failing to change form lease terms when

different arrangements negotiated

between parties, creating either an

inconsistency in the lease or failing to

accurately describe agreed upon terms.



Agricultural Leases

• Failure to read the lease before signing.



Thank You

• [email protected]

• (515) 294-5217

• www.calt.iastate.edu


Documents

Common Mistakes in Agricultural Estate Planning & Leasing