FARM ESTATE PLANNINGFARM ESTATE PLANNINGWhat to do with the family farm

Presented by: Ted Gudorf, J.D., LL.M.

8141 North Main Street • Suite C • Dayton, OH 45415Tel: 937.898.5583 Fax: 937.898.5584

Downtown: Kuhns Building • 15 W. Fourth Street • Dayton, OH 45402

WHAT IS “ESTATE PLANNING?”

Estate Planning is a Lifetime Process whereby:g y

• I control my property while I am alive and well• I take care of myself and my loved ones if I become

disabled• I give what I want to whom I want when I want and• I give what I want, to whom I want, when I want and

the way I want• I do so with the lowest possible amount of p

professional fees and court costs

WHAT ARE YOUR HOPES, DREAMS, AND VALUES?AND VALUES?

Let’s List ThemLet s List Them

WHAT ARE YOUR FEARS?

Let’s List Th AlThese Also

LOSING THE FARM TO CREDITORS OR PREDATORS?OR PREDATORS?

Yo r son in la FredYour son-in-law, Fred

• Hasn’t had a job since 2006j• Belongs to a religion that you

consider a cult• Sells T-shirts at concerts by a bandSells T shirts at concerts by a band

called “Phish”• You suspect he is fond of chemical

substancessubstances• Thinks it’s great that he has

rich in-laws

I h i t t h lf f h tIs he going to get half of whatyou leave to your daughter!?

LOSING THE FARM TO THE “PRODIGAL SON”?“PRODIGAL SON”?

Your son, SeanYour son, Sean• Has started three businesses

and two real estate “deals”• All have failed• Has asked you to financially back

each oneeach one• Has asked you to bail him out of

each one• Recently filed bankruptcy• Recently filed bankruptcy• Owes $12,000 in legal fees and

back taxesAre you sure you want to leaveAre you sure you want to leaveyour life’s work to him? No strings attached?

LOSING THE FARM TO YOUR SPOUSE’S NEXT SPOUSE?NEXT SPOUSE?

Elaine your husband’s next wifeElaine, your husband s next wife• In the month since your death, has brought

“home-cooked” meals to your husbandhome cooked meals to your husband six times

• Each time she visits, wears a skimpier outfit

• Can’t wait to redecorate your home, especially that hideous wallpaper you chose

• Thinks there is no good reason that money g yearmarked for your children shouldn’t be spent on more important things like jewelry, sports cars, and European spa vacations

Do you want her to get your children’s heritance?

PLANNING

• How can you avoid these catastrophes?

• YOU NEED TO PLAN!• “If you don't know whereIf you don t know where

you're going, you'll probably end up somewhere else ”somewhere else.”

- Yogi Berra

WHAT ARE SOME OF THE MORE COMMON ESTATE PLANS?COMMON ESTATE PLANS?

• Do nothing: 80% of adult AmericansJ i t hi ith• Joint ownership with spouse or kids

• Giving away assets during lifetime• Beneficiary transfers• Will

R bl Li i T t• Revocable Living Trust• Irrevocable Trust• Limited liability companyy p y

DOING NOTHING

• Means dying intestate• The State will decide by a series of laws how

your property will be distributedyour property will be distributed• You have absolutely no control• Property may go to persons you don’t wantProperty may go to persons you don t want

and in a way that you do not want• Dying intestate means no tax planning• Dying intestate means:

“Let the chips fall where they may.”

I OWN EVERYTHING JOINTLY WITH MY SPOUSEWITH MY SPOUSE

• Planning may be necessary after first spouse’s death g y y pwhen still in period of grieving

• Does not avoid probate on second death• No re marriage protection:• No re-marriage protection:

• Your assets may end up with people you never dreamed of

• Piles up everything in second spouse’s estate, which results in loss of the estate tax exemption

• No time for planning if both spouses die• No time for planning if both spouses die simultaneously

• Assets subject to predators and creditors

I OWN JOINTLY WITH MY CHILD

• Parent loses control• Parent loses control over property

• Property becomes p ysubject to child’s creditorsUnbalanced estate• Unbalanced estate plan – what about my other children

• Gift implications for Medicaid

GIVING AWAY ASSETS

• You lose controlYou lose control

• May cause huge Medicaid problems ifMedicaid problems if medical assistance is needed

• You may lose significant tax benefits (although, properly done you mayproperly done, you may gain some)

BENEFICIARY DESIGNATIONS

● Life Insurance

IRA 401(k)● IRAs, 401(k)s

● Pay on death bank and● Pay on death bank and brokerage accounts

PROBLEMS WITH BENEFICIARY TRANSFERS

• Trumps a will or a trust• Transfers occur at death, but there could be court

interference if beneficiary:interference if beneficiary:• Is incapacitated or a minor• Dies first or at same time

• May result in “Unbalanced Estate”• May leave no money for funeral, burial, and estate

taxestaxes• No predator or creditor protection • Reduced tax planningp g

WHAT IS A WILL?

• A formal document• A formal document useless until death

• Only transfers property you own at death

• Ineffective for jointly owned property, beneficiary designationsbeneficiary designations, life insurance, and pay on death accounts

A WILL GUARANTEES PROBATE

• A court proceeding• A court proceeding• Notice in the newspaper

and to your creditors• Everything is public

information: your will and inventory of yeverything you owned

• Delay • Invites fights by your• Invites fights by your

heirs – will contests

A WILL IS NOT A “LIVING DOCUMENT”

A Will does nothing for o hile o are• A Will does nothing for you while you are alive

• Does not avoid Guardianship if you become incapacitatedbecome incapacitated

A WILL IS USELESS FOR INCAPACITY PLANNINGINCAPACITY PLANNING

What is Guardianship?What is Guardianship?• Often called “Living

Probate”• A court proceeding• Someone else decides if

you are incapacitatedyou are incapacitated• Someone else decides

who will control your propertyproperty

• Someone else decides how your property is handled

WHAT IS A TRUST

• A Trust is a legal entity apart from the person or persons h t it hi h i d i d t h ld d t l thwho create it, which is designed to hold and control the

distribution of property• A Trust is composed three separate roles:

• The TRUSTMAKER (also referred to as the Grantor or Settlor) creates and funds the Trust

• The TRUSTEE holds the property and administers the Trust

• The BENEFICIARY receives benefit from the Trust• Note that the same person can serve in each rolep

WHAT PROPERTY CAN BE HELD IN A TRUSTIN A TRUST

• A Trust can hold almost any property including• A Trust can hold almost any property, including• Homes• Farms• Cottages• Condominiums• Income producing real estatep g• Personal property• Cars, boats, and airplanes• Bank accounts• Bank accounts• Stocks and bonds• Business interests• Oil, mineral and gas rights

HOW IS A REVOCABLE LIVING TRUST DIFFERENT FROM A WILL?DIFFERENT FROM A WILL?

• A Revocable Living Trust is a private document not• A Revocable Living Trust is a private document, not subject to becoming public record

• Assets of the Trust are distributed without notice being published in the newspaper or mailed to creditors

• Trust administration is much more efficient, and has ,lower professional costs

• Contests are very unlikely• Revocable Living Trusts can be useful for minimizing• Revocable Living Trusts can be useful for minimizing

estate taxes

REVOCABLE LIVING TRUSTS ENABLE MORE SOPHISTICATED PLANNINGSOPHISTICATED PLANNING

• Revocable Living Trusts make it possible to control what h t th t f th T t k b th d i thhappens to the assets of the Trustmaker both during the Trustmaker’s life and even years after death

• This, in turn, facilitates the provision of:• Creditor/predator protection• Spendthrift protection• Remarriage protectiong p• Estate tax minimization• Additional care for children (or spouses) with special

needsneeds• Also, Revocable Living Trusts are useful for incapacity

planning

HOW IS AN IRREVOCABLE TRUST DIFFERENT FROM A REVOCABLE TRUSTDIFFERENT FROM A REVOCABLE TRUST

• Someone else should be Trustee• Cannot make changes• Access only to income but no principalAccess only to income but no principal• Can make gifts

IRREVOCABLE LIVING TRUSTS ENABLE MEDICAID PLANNINGMEDICAID PLANNING

• Five year ruley• Fully protected• Medicaid pays nursing homeMedicaid pays nursing home

LIMITED LIABILITY COMPANIES (LLCs)

• Limited Liability Companies are highly flexible and customizable tools that hold many benefits for smallcustomizable tools that hold many benefits for small business owners (including farmers)

• Limited Liability Companies can be thought of as a cross between a Partnership and a Corporation

• Organizing the family farm as a Limited Liability Company will:Company will:• Provide present benefits• Expand the possibilities to lower estate taxesp p• Assist in equalizing gifts among heirs

PRESENT BENEFITS

• Allows control to be maintained by the Organizersg• As opposed to gifting, for

example• Limits personal liability• Limits personal liability

• Debts of the company and judgments against the company do not become the obligation of the Organizers or Members

LOWER ESTATE TAXES

• Minority/marketability discountsThi i l f th• This is an example of the whole being greater than the sum of its parts

• Gifting of ownership interests• An opportunity to utilize the

l ift t l iannual gift tax exclusion (currently $13,000 per year, per person) to reduce the size of what will become the decedent’s estate

EQUALIZING GIFTS AMONG HEIRS

• One way to equalize the inheritance received by children h ti i th ti f th f ith thwho are active in the operations of the farm with those

who are not is to create two classes of ownership• The class received by the active children would

h i l d ti d ld i b thhave managerial duties and would receive both a salary and a distribution from profits

• The other class would not have managerial duties d ld t i l b t ld tilland would not receive a salary, but would still

receive a distribution from profits • Another way in which LLCs can be used to

li i h it i t B S ll A tequalize inheritances is to prepare a Buy-Sell Agreement requiring the active children to buy the farm from the estate, the proceeds of this sale would then benefit the passive childrenpassive children

ADDITIONAL TECHNIQUES FOR MINIMIZING ESTATE TAXESESTATE TAXES

• Special Use Valuation – IRC 2032AAllows farmland to be valued as farmland, as opposed tobeing valued at fair market value, for estate tax purposes

• Conservation EasementsAllows land to be preserved and provides an income taxdeduction and estate tax reduction

• Estate Tax Installment Payments – IRC 6166yAllows estate tax attributable to ownership interest in asmall business to be paid over time

• Irrevocable Life Insurance TrustMay be useful for meeting the estate tax burden of anestate composed of illiquid assets

ONE MORE FINAL THOUGHT

We ha e met the enem and he is s!• We have met the enemy and he is us!Procrastination is the major obstacle to effective estate plans – not the IRSeffective estate plans not the IRS

THANK YOU FOR YOUR ATTENTION, ANY QUESTIONS?ANY QUESTIONS?

8141 North Main Street • Suite C • Dayton, OH 45415Tel: 937 898 5583 Fax: 937 898 5584Tel: 937.898.5583 Fax: 937.898.5584

Downtown: Kuhns Building • 15 W. Fourth Street • Dayton, OH 45402

www.DaytonEstatePlanningLaw.com