Estate planning should begin early
In recent years, estate tax rules have changed the way farmers look at succession planning. Higher exemptions of more than $5 million for an individual reduce the pressure to transfer and allocate assets among family members for estate tax purposes. However, according to Connie Haden, an agricultural estate lawyer for Columbia law firm Haden & Byrne, as land values increase many people don’t realize they still have estate tax issues despite the increased exemption amount. Still, Haden said taxes aren’t often the main reason for farm families to plan estate transitions.
“I think the bigger issue has always been family relationships,” she said. “The overriding factor has always been how do we preserve this family relationship and how do we preserve the family farm?”
That’s exactly what Phil Manson wants to achieve with his estate plan. Manson farms near Keytesville, Mo., and finished his estate plan last summer. “My main goal was to have a plan so that the day we passed, our children take over the operation without any issues,” Manson said.
Haden encourages parents to involve their children in the planning and details of succession. For some families, it can be difficult to start this discussion. Parents may not be open about finances and assets, and children may struggle to broach the topic.
“The best plans really come when [parents] involve the next generation,” Haden said. She begins the process by determining asset values and how the parents want to structure succession.
“We went for years with nothing but a will. That was a terrible mistake.” – Phil Manson
“That’s usually where we have to start—if one of you were gone, what would happen? I want to hear about my client’s vision for the future, and then I can build the structure toward that vision,” she said. “The more information I gather, the better the plan is.”
Haden usually meets with the parents first to determine their desires and goals. “The parents are my clients. I want to get their feelings about what should happen, and then I like to involve the kids,” she said.
Once she understands the parents’ vision, Haden develops a plan and discusses the arrangements with the family. After the family gives a final review and signs the proposed plan, Haden recommends they reevaluate the plan every three to five years or after any major change in the family or operation. “Clients often think they have it done, check it off the list and put it on the shelf,” Haden said. But since she can change the plan at any time, Haden wants families to review the plan for relevancy.
No two estate plans are the same, and there are many factors to consider when structuring a plan. Insurance policies and non-agriculture investments can change how Haden approaches planning. Families should also consider how they will pay for possible long-term care expenses. Other plans may include non-agriculture real estate or stock investments in addition to the farm. If these variables aren’t handled right, they can lead to taxation upon the parents’ death or when their heirs later sell the property. Haden said good planning is key to avoiding unnecessary taxes.
“The driving force is getting the farm intact to the next generation that is going to be farming, while still treating the children equally,” Haden said. This process is challenging. Families want to be fair to their children and keep relationships healthy.
However, Haden said being fair doesn’t always mean giving the estate to all the children in equal shares. It’s a common mistake. “A lot of times, when your estate plan says ‘divide it equally,’ you haven’t actually solved any problem at all, you’ve just postponed it,” Haden said.
Many parents use a beneficiary deed alongside their will to divide assets equally. A beneficiary deed transfers ownership of real estate to the beneficiary upon the parents’ death. This deed allows the family to avoid probate. Parents can allocate an asset to one or more children by listing them as a beneficiary on the deed. However, this grants equal power to all individuals on the deed, and can lead to problems. Although the parents’ will lists one individual as executor, a beneficiary deed is separate from the will, so the executor doesn’t have authority over the deed. “If one sibling wants to cause problems, they can hold up the whole thing even if they are only a one-fifth owner,” Haden said. “I usually see a beneficiary deed as practical only if there is a single heir or if you expect all the children to just sell the property and divide the proceeds.”
Instead, she typically uses a trust as the workhorse of the estate plan. Haden handles both irrevocable and revocable trusts, but advises caution when using the former. “You can’t change an irrevocable trust,” Haden said. There are specific reasons to use an irrevocable trust, but the consequences should be carefully considered. An irrevocable trust can transfer property out of a client’s name to make them eligible for Medicaid under specific conditions. It can also separate a life insurance policy from the estate if that policy increases the estate size too much.
Haden uses a revocable trust for most estate plans. A revocable trust can be as elaborate or simple as necessary and revisions are easy to make.
“Most people aren’t aware that if they have a will, it doesn’t actually avoid probate court. It just provides direction to the court,” Haden said.
Manson discovered this in time to change his plan. “We went for years with nothing but a will. That was a terrible mistake,” he said. After challenges with his parents’ estate, Manson wanted to get a clear and solid plan ready for his children. “We started the process several times when we were young and never completed it,” Manson said. After researching estate planning and transition, Manson visited Haden a few times to map out what he and his wife wanted to accomplish. They made a goal to complete the entire process over the summer. Manson said it was overwhelming at first to arrange and organize everything. But once the process began, it was easier than expected, thanks to Haden’s guidance. “Get an attorney that is going to be aggressive about completing it,” he said.
Similar to the executor of a will, a trustee handles a trust. The trustee can be an individual or financial institution. Haden said a farm estate trustee is often a family member. The trustee is responsible for managing monetary funds, land and other assets included in the trust. They follow the directions of the trust and have may have some discretion over use of the assets.
Parents can tailor how their children will receive assets. Some trusts may instruct the trustee to divide assets right after the parent’s death. Other plans may specify for annual payments made to the beneficiary. Still, the parents may choose to allow their children access even while the assets remain in the trust. To access funds, the children often must visit with the trustee to gain approval. If the beneficiary is a minor, guidelines are more specific and designed to prevent dependence on the trust for all the child’s financial needs.
Haden also creates LLCs to form a business structure for estates. This can help limit liability exposure and can set the farm up for easy transition to the next generation. The LLC often works hand in hand with the trust. The LLC provides management instructions to the younger generation.
Manson’s trust governs his entire estate and provides clear instructions in allocating assets and giving guidance in managing the farm. Fortunately for Manson, his son already serves as co-manager for the farm.
However, not every family has that luxury. For that reason, Haden recommends involving children in the operation earlier than later. She admits this can be a difficult transition because most people don’t want to give up control. But if parents expect their children to run the operation successfully, they need to have more experience early on. “They need to develop the skills to make some decisions and be allowed to fail before mom and dad are gone,” Haden said.
For Manson, transferring management was easy, but allocating ownership and responsibility was more challenging. His three daughters all work off-farm and have minimal involvement in the operation. Manson wanted to give an equal portion of the estate to each child, but he recognized his son earned a larger share for dedicating his life to the farm.
“It’s not an easy decision but he has devoted a lot of time, energy and effort. This is what he loves,” Manson said.
Parents can choose if siblings are required to purchase assets at market value or a reduced price. They can also set guidelines for financing. The options are flexible and Haden considers factors including financial stability of the children and how many siblings are involved. Haden said families often consider a reduced price if the parents want the children to all remain on the farm. “The biggest issue can be determining fair market value,” she said. If market value is difficult to determine, Haden may get several appraisals and use the average.
Manson’s children will all receive partial ownership of the estate, but Manson wrote the plan so his son will have first opportunity to buy if any siblings want to sell. He divided responsibilities for farm management, finances and health care between his four children. The family all understands Manson’s desire for a smooth transition. “We try to keep our children informed of what we have done and where they need to go,” Manson said.