No matter what size your farm is, you should have an estate plan, says Alan Schroeder, associate professor with the Department of Agricultural and Applied Economics at the University of Wyoming.
“Your responsibilities can range from your children to your parents to employees who may have been injured,” Schroeder says. “Many people depend on you. If you died, how will their needs be addressed? If you don’t plan, things might fall through the cracks, things that might be important.”
Schroeder, Cole Ehmke, extension specialist at the University of Wyoming, Lucy Pauley, mediation coordinator with the Wyoming Dept. of Agriculture, and Carolyn Paseneaux, a consultant, have published a retirement guide for growers called “Passing It On,” which includes everything growers should know about estate planning.
They suggest to begin with questions. How do you, your spouse and your children envision the future of the farm?
“If you want a fair distribution of your assets among your children, what does fair look like?” Schroeder says. If one child has been working on the farm and hasn’t received other benefits, then splitting the farm equally might not be fair. Can the child who wants to inherit the farm handle it? Would they be able to buy the others out?
Allocating your personal assets can be a source of conflict within a family, Ehmke says. Often, the ones that have more sentimental value than financial cause the biggest problems.
It’s important to get estate planning advice from professionals. A good place to begin is with someone who has solid general information, like an educator, Ehmke says.“These are truly difficult decisions,” he says, but the implications of not talking about them are serious.
Your university extension department or county office may have a specialist in estate and transfer planning. These educators often also have mediation skills and might be able to provide insights into how to have these conversations. Others who can help include CPAs, financial planners, estate planning attorneys, insurance agents and appraisers.
An estate plan is the accumulation, preservation and distribution of assets during the planner’s lifetime, says Schroeder.
Add up your assets, including the farm itself and any other real estate, vehicles and farm equipment, savings and retirement accounts, investments, life insurance policies and other personal property. Then, add up your debt and subtract it from your assets. This gives you your net worth.
Once you’ve decided how to distribute your assets, talk to your family about your decisions. Then, start implementing your plan.
Estate planning instruments
“Everyone’s got an estate, and the state has a predefined will in its statutes,” Ehmke says. “If your idea is different, you should have a will.” Among the things to include are your assets and how you want them distributed, the name of the executor of your estate, and, if you have minor children, the name of their guardian and the manager of their assets.
Probate is the process used to prove a will, Schroeder says. Probate identifies that it is a will, deals with the appointment of its administrators, and carries out the payment of debts and the distribution of assets according to the will.
If the estate is small, many states have informal procedures that allow it to settle without going through probate, he says. If you transfer your property during your lifetime, you can avoid having the court distribute your assets, which is the more time-consuming and costly part of probate. If you have assets in your name, they will go through probate.
Experts strongly advise having a living will, which tells your doctors your wishes regarding life support if you become terminally ill, and durable powers of attorney for financial and health care.
“Durable powers of attorney are a good and necessary part of an estate plan,” Ehmke says. “With agriculture being as dangerous a profession as it is, durable power of attorney for both financial and health care are necessary. They’re inexpensive, easy to set up and could save your family a tremendous amount of trouble.”
They authorize a person of your choice, usually a family member or close friend, to make financial and health care decisions for you if you aren’t able to make them yourself. They’re used only when and how you stipulate, and you can revoke them at any time.
Life insurance can be another important part of estate planning. “If you need more assets, you’re going to have to do some growing of your estate,” Ehmke says. “Insurance people can cover an element for growers wanting to build up their estate.”
A tax-related consideration is capital gains. Capital gains are the increases in the value of assets, including property.Having life insurance provides an infusion of cash for many needs. For example, it can compensate children who aren’t involved in the farm, pay off business debts, pay for probate, estate or other expenses, and fund a trust for a special-needs child.
In general, if you give your children the farm before your death, its “basis” is the time you acquired it. If they sold it, they would pay capital gains tax based on the amount it increased in value since then, less any amount that was spent improving it. But, if they inherit the farm from you, its basis is its fair market value at the time of your death, or its “stepped-up” basis. If they sell it, their capital gain is the difference between the stepped-up basis and their selling price.
Another part of estate planning is how spouses own a property. For example, many own property as joint tenants with the right of survivorship. The surviving spouse automatically owns the entire property when the first spouse dies, so there is no probate then. Without a good estate plan, the entire estate goes through probate at the death of the second spouse.
When spouses own property as tenants in common, each one can leave his or her share to the heir, or heirs, each chooses. The property goes through probate and the heirs receive it with a step up in basis.
There are many kinds of trusts, but they all have the same elements: the grantor creates it, the trustee manages it and the beneficiary benefits from it.
A living trust comes into effect during your (the grantor’s) lifetime. You can name yourself as trustee and beneficiary, as well. Many are set up to avoid probate costs. Most are revocable, so as trustee you can modify the terms, add or subtract assets, or cancel at any time.
“People have a revocable trust because they recognize there may be a need to change it,” Schroeder says. “The cost is that you lose any estate tax savings you may have.”
An irrevocable living trust reduces estate taxes, but you give up the right to revoke or amend it and to control the assets in it.
A testamentary trust is revocable until your death, when it comes into effect. Assets have to go through probate before they go into this trust.
Conservation easements also can be part of an estate plan, Ehmke says. “They set limits on the rights to develop a property in the future for a tax incentive. It may keep the farm in operation, but can you live by the restrictions?”
“Generally, you can set up an estate so that it will be taxed at its use value instead of its fair market value,” he says. “I’d recommend looking at that first. I think it’s preferable to retain the rights to sell the land for development purposes in case you need them.”Property owners can donate or sell the rights to either a conservation organization or government agency. The disadvantages are that they lose the right to sell the property for development, as well as reduce the size of their assets, Schroeder says.
There are a number of other tax-related areas. For example, the federal annual gift tax exclusion allows individuals to give up to $12,000 per year to as many people as they wish without paying gift taxes.
The unified credit in 2008 allows each spouse to transfer up to $2 million tax-free during their lifetime, and in 2009, $3 million, Schroeder says. The exemption will disappear completely in 2010 and may or may not be reestablished by Congress.
Long-term care insurance is something else that people should seriously consider, Ehmke says. It’s expensive, but if your health isn’t good, you may need it for a long time. Shop around because policies vary widely. Make sure it covers what you want at a reasonable cost.
Once your estate plan is in place, re-evaluate it occasionally and revise it if necessary. We’re living longer, and some people are outliving their retirement funds. One of your children may become ill or have a special needs child, Schroeder says.
“Neither death nor taxes is all that certain right now.”
Wyoming Agriculture and Natural Resource Mediation Program
The Wyoming Agriculture and Natural Resource Mediation Program provides mediation services to Wyoming’s farmers and ranchers involved in an agricultural conflict. Over the last few years, the program has become more involved in estate planning. Mediation can play a role in helping a family come together and make decisions for the future.
Any party can request mediation. During the mediation, a mediator lays out ground rules for the process and answers questions. Both parties have the opportunity to talk about the situation, then the mediator identifies the main issues that need to be discussed and helps parties explore options to resolve the conflict. When the mediation is successful, both parties agree to a solution. If they can’t agree, they’re free to explore other ways to resolve it.
To find out if your state has a USDA-certified agricultural mediation program for estate planning, contact a representative of your state: http://spectre.nmsu.edu/dept/academic.html?i=1851&s=sub
From “Ten Rules of Transition Management” by David M. Kohl, Alex White, Dixie Reaves and Amanda Wilson, Farm Management Update, June 1996.
The author is a freelance writer based in Altadena, Calif.