What is estate planning? Talk with three or four professionals and you may get three or four answers. However, the only answer that really matters is your answer. Do you have a plan? The correct answer here is yes!
It may be a plan you've developed or a plan developed for you by the governor as each state has laws dealing with asset transfer on death. In almost all cases, your plan developed and reviewed on a regular basis will be far superior in accomplishing your goals.
Many producers with whom I visit view "estate planning" as purely a financial matter, but it is much more than that. Under today's estate tax law, a married couple can accumulate $10 million in value before writing a check for estate tax. The tendency can be "Our net worth is less than $10 million, so I don't need to worry about estate planning." I cannot stress enough that this is a false sense of security. For starters, the $10 million figure is only good until December 31, 2012. On January 1, 2013, the amount drops to $1 million per spouse.
Quite frankly, many family-owned farming businesses are not worth a net $10 million (after debt). So it really is the "non-financial" aspects that are important under today's law. For those operations with a net equity value in excess of $10 million, financially planning for estate transfer is definitely important but it is still only half the plan.
Talking about your death and what happens to what you worked hard for all your life is a difficult topic, no doubt. But what's even more difficult is not talking about what happens to your farm, your spouse and the family members who depend on it for their livelihood. (Remember no planning is volunteering to use the state law plan.) Estate planning, or what I like to call wealth transfer, asset protection and family values or heritage transfer, is a necessary step to having a say in what happens after you die and protecting the ones you love. Estate planning is not a simple process, emotionally or technically.
Non-Money Side of Things
Growing up on a cattle operation myself, I know that the day-to-day struggle is to keep things operating, to make sure crops and animals are healthy. Each day is a challenge. For most of us it is a way of life. Why work so hard and yet not have a plan to transfer that way of life?
In addition to growing good and valuable crops, we want to grow good and valuable children-contributors to society. Passing on the family name, family values and core belief system may be more important than passing on millions of dollars in family wealth. In estate planning vernacular, we call this the "dis-inheritors." We want to pass on enough for the child to be able to do "something" but not so much that the child doesn't need to do "anything." As parents, we want our children to be better that we were. Passing too much wealth at an early age can ruin a child. It may also leave a surviving spouse with not enough assets to support their remaining life.
Depending on the stage of life you are in, estate planning can also encompass raising children. If something were to happen to both of you, who would you want to do that? And how would they protect the assets used for their support? Is your spouse qualified to run the operation if you are not around or incapacitated? How do you protect your assets from bankruptcy or lawsuits? How should assets be titled? Who should be the beneficial on financial contracts, IRA's, life insurance, buy-sell agreements between family members or non-family related business partners, etc.?
As you can see, it can get complicated quickly and easily emotionally charged. Please see the sidebar (page 23) for other non-financial items you need to consider.
Getting Frank with Your Financials
Not many of us are eager to write a check to the government if we don't need to. Financially planning your business affairs and estate or business succession can certainly decrease your exposure to the "estate" excise tax.
Where do you start? Start by making a list of all your assets and their estimated value-take an "inventory of your estate." Don't forget to include items such as death benefit on life insurance and other intangible assets that will have value on your date of death. And don't forget to subtract liabilities. Compare this net value to the $5 million exclusion allowed per spouse.
Under current law, the exclusion amount is "portable"-meaning the surviving spouse can use the "unused" portion of the first spouse to die, thus $10 million per couple. However, the exclusion (or the unified credit) amount has been a moving target in the tax code for the last 10 years and remains so today. See our sidebar with rates and amounts for the last 10 years.
If your estate is subject to tax, there are many options to reduce or eliminate that tax. Obviously it's beyond the scope of this article to list out every estate-planning technique or structure. The point here rather is to start you thinking about estate planning and the process of transitioning family wealth and values. The $10 million under the current law will be only $1 million per spouse if Congress doesn't act in the next 16 months or so.
If you take anything away from this article, take this: it's never a bad idea to revisit your estate plan. While you may be protected today, what is your exposure if the exclusion amount reverts to $1 million on January 1, 2013?
Siblings and the Farm: What's Fair Isn't Always Equal
A common struggle for parents in estate or business transition planning is what assets do we leave to Child A and what assets to Child B? Or, as life gets tricky, how do we treat all children fairly when some stay on the farm and some don't? When Mom and Dad are both gone, all the children tend to show up, wanting their equal share of the farm.
I will tell you from my experience that equal is not always fair. If one child has stayed home to work in the operation (thus oftentimes helping create, build or increase value), to divide things equally may not be "fair" to the child who has made it a livelihood or way of life. In most situations, farming operations are land or asset rich and cash poor. Aside from estate tax considerations, parents may want to leave assets together because it takes a certain land base to be successful, yet not leave all the land to the stay-at-home child. If they were to sell out, they be may become unjustly rich at the expense of other siblings.
This can take some careful navigation and the assistance of an advisor.
Other non-financial considerations include:
Sharing your vision
Protecting key employees
Charitable intentions
When you retire, who will replace
you?
If you pass on prematurely, how
will your loved ones be protected?
Training future leaders
Transferring family values
Special-needs children
Cash flow for retirement
Maintaining a lifestyle
Controlling from the grave
(using trusts)
Buy-sell agreements.according to the language of the trust document
Trusts
Trusts are a common tool in estate planning; however, there are many misconceptions. To make sure we are on the same page, a brief definition of a trust is needed. In a trust, there are three key players (roles):
1) The Trustor, or Grantor - the person placing assets into the trust
2) The Trustee or Fiduciary - the person or entity charged with responsibility to manage and care for the assets owned by the trust and to carry out the duties and wishes of the grantoraccording to the language of the trust document
3) The beneficiary - the person or entity receiving the benefits of the assets held in trust.
Typically there are two types of beneficiaries, the income beneficiary and the remainder beneficiary. For revocable trusts, the same person can (and often does) fill all three roles. For irrevocable trusts, the roles-at least the trustee or fiduciary-are different individuals.