Presentation on theme: "Estate Planning and Small Business/Farm Succession and Transfer Eaton County Date: Sept 2, 9, 16, 2004 Roger A. Betz District Extension Farm Management."— Presentation transcript:
1Estate Planning and Small Business/Farm Succession and Transfer Eaton County Date: Sept 2, 9, 16, 2004Roger A. BetzDistrict ExtensionFarm Management AgentMona EllardDirector, EatonCounty MSU ExtensionPhil TaylorExtension Agriculture& Natural Resources Agent
2Why Develop An Estate Plan? Mona EllardMichigan State University Extension
3Why an Estate Plan?Pass assets & business structure to next generationControl transferHow to transfer debtRetirement income – LOTS!Security - health care issuesIssues at passing of 1st spouseIssues - Fairness, equitable, harmoniousDurable Power of Attorney and Patient AdvocatePeace of mindMinor children - care, financesGiftsReduce Taxes
4What Is Your Estate? Who Gets Your Property? Eaton County Estate Planning &Business Transfer SeminarSeptember 2, 9, 16, 2004Targeting Farm and Small BusinessesPhil Taylor – MSU Extension Agriculture andNatural Resources Agent
5Estate Planning wills, probate, & trusts E2120 A discussion of alternative property ownership patterns and estate transfer methods.
6PropertyIntangible and invisible rights, powers, privileges and responsibilities of the ownerReal Property Land Land improvementsPersonal Property (everything not real) Tangible Intangible
7Property Rights Property is not just real estate Numerous separable Rights for an item of propertyLand example: Right of Access, Security right (Mortgage against it), Leasing right, hunting rights, mineral rights, development rights, etc.Truck example: Use rights, leasing rights, gifting rights, lending rights
8Property Rights More than one person can own rights in property Rights can be referred to as “Economic Interests” – there is value to the rightsEconomic Interests are part of a person’s estate and can be transferred
9Real Property = Real Estate Land or improvements upon the landBuildings, fences, timber, growing cropsOil, mineral, and development rights – houses etc.Evidence of ownership: DEEDProvides description of the property
10Personal Property Everything other than Real Property TANGIBLE – “SEE IT”ANDINTANGIBLE – “PAPER”
11Tangible Personal Property * Physical Property that includes……Goods, Wares, MerchandiseClothing, Furnishings Livestock, Harvested Crops Machinery and Equipment
12Tangible Personal Property (cont.) * Titled property (title proves ownership)Cars, Trucks, Trailers, etc.* Other proof of ownershipBill of sale or other document showing ownership
13Intangible Personal Property A claim capable of being enforced on or against other individuals or entities.“Paper Property” – A piece of paper shows ownership.Securities, notes, bank accounts, patent rights, land contract, life insurance contract etc.
14Ways to Hold Rights deed, contract, or other evidence of ownership Fee simple (sole ownership)Co-ownership Joint Tenancy (with rights of survivorship) Tenancy by the Entirety 2.Tenancy in Common (Default)
15Ways to Hold “Own” Property JOINT TENANCYWith Rights of SurviorshipWhoever lives longest – gets the goodsBy the EntiretySame as above, only between husband and wife.Each spouse has equal ½ ownership irregardless of how the property was obtained
16Ways to Hold “Own” Property TENANCY IN COMMONNo rights of survivorshipCo-owners have right to transfer their interestAt death, % ownership transfers subject to will or state law.Two brothers own land Tenancy In Common. What happens to the land if when one brother dies.His portion of the land is subject to his will or state law.Significant effect on multiple owner businesses.
17Methods to Transfer Contract Life Insurance, Annuity, Trust Tenants in Common – goes to heirsJoint Tenancy (rights of survivorship) Ownership vests to survivorsProbate Will State lawTransfer prior to death Complete severance Retained rights
18Methods to Transfer Property Question: My will says my life insurance goes to my son. Who receives the life insurance?
21PROPERTY OWNERSHIP TRANSFER PLAN to your HEIRS. SUMMARYProperty: Know what you own.Ownership: Know how you own it.Transfer: Know when it gets transferred.Plan: Know why & how it gets transferred.Heirs: Know who’s going to get it.PROPERTY OWNERSHIP TRANSFER PLAN to your HEIRS.
22How Do Taxes Affect Your Estate? Roger BetzMichigan State University ExtensionDistrict Farm Management Agent
23Property Transfer Taxes Government Doesn’t Care Which Method You Use, Just Pay the Appropriate TaxGIFTFederal Gift TaxSALEFederal Income TaxMichigan Income TaxESTATE (no inheritance)Michigan Estate TaxFederal Estate Tax
24Federal Gift Tax Excise tax on gifts Lifetime transfers Without full considerationDonor pays tax dueAnnual exclusions (indexed for inflation)$11,000 per donee and per person100% Deductions for GIFT TAX (Income Tax?) 100% Spouse, College Tuition, Medical Caremarital, charitable, partial considerationLifetime exemption above the annual exclusions$1 Million Starting 2002 and beyond
27Gift Tax Calculation (example) Year 1 $6,000 X 18% = $1,080Year 2 $21,000+$6,000 = $27,0003,800 Plus 22% of 7,000 = 5,340–1,080 = 4,260Year 3 $51,000+$21,000+$6,000=$78,00013,000 Plus 26% of 18,000 = 17,680 – 1,080 –4,260=12,340Must add up gifts above the annual exclusion for entire lifetime
28Unified CreditUsed to calculate effective Federal Estate and effective Gift tax exemptionsCurrently the credit is applied to both the Federal Gift Tax and the Federal Estate TaxCredit used for gifts is not available to pay your estate taxesBeginning in 2004 different thresholds exist for gifts versus estate taxesWhat is the Unified Credit for ‘04-’05?Gift Tax =$345,800; Estate Tax = $555,800
29Unified Credit Reduction (Example) Gift Tax Unified Credit (2004 ) $345,800 (1M)Year 2001 used ,080Year 2002 used ,260Year 2003 used ,340Remaining Gift Tax Credit $328,120Died in 2004 with no gifts over limit’04-’05 Estate Tax Unified Credit $555,800Minus U.C. used by the Gifting $17,680Remaining U.C. for the Estate Tax $538,120
30Gift Tax Effective Exemption Gifts are during your Lifetime Increases over years1997 and before = $600,0001998 = $625,0001999 = $650,0002000 and 2001 = $675,000= $1.0 million2011 = $1.0 million ? probablyCongress action?Same as Estate Tax Exemption up to 2004
31Gift Tax Rate Schedule 2001-2011 Red area is where Unified Credit or Exemption is used up
32Filing Requirements IRS Form 709A or 709 - Gift Tax Return Gifts of more than $11,000per donee in any yearReturn due April 15 following the year of the gift
33Gifts: Planning Pointers $11,000 per person per yearSpouse can use spouses annual exemption so $22,000 per yearTwo married people can give two other married people 44,000 per year before starting to use Unified CreditChildren, grandchildren and spouses $44,000 each set
36An Excise Tax It is levied upon the transfer of property at death. Federal Estate TaxesAn Excise TaxIt is levied upon the transfer of property at death.
37Federal Estate TaxTax applies to total estate transferred, after allowing for deductions and creditsTax not affected by relationship of beneficiary to you: Except marital deduction - Special deduction for surviving spouseAmount of tax based on: Estate Size Amount of deductions and Credits
38Estate Tax Effective Exemption Increases over years1997 and before = $600,0001998 = $625,0001999 = $650,0002000 and 2001 = $675,0002002 and 2003 = $1.0 million2004 and 2005 = $1.5 million2006, 2007, 2008 = $2.0 million2009 = $3.5 million2010 = No Estate Tax2011 = ? back to $1mil without congress actionSame as Gift Tax Exemption before 2004
39Federal Estate Tax Rate Schedule Red area is where Unified Credit or Exemption is used up
40GROSS ESTATE“The value of the gross estate includes the fair market value of all property owned by the deceased and all property the deceased had an economic interest even though outright ownership had been transferred to someone prior to death.”
41Appraised at Fair Market Value at date of death or 6 months after Value of Gross EstateAppraised at Fair Market Valueat date of death or 6 months afterPersonal representative chooses dateFactors such as:local salesrental ratesexpert testimonyExceptions:“Special Use Valuation” of certain real property“Family Owned Farms and Businesses” exclusion (Stops beginning 2004)“Qualifying Conservation Easements” - 40%
42Property Value in Gross Estate Kind of Property Value in EstateSole Ownership Entire ValueTenancy in Common % OwnedJoint Tenancy % ContributedWith Rights of SurvivorshipTenancy by Entirety One-half of ValueLife Insurance Policy ValueRetained Life Estate Economic InterestAnnuity % Contributed
43Joint Tenancy with Rights of Survivorship Question:If you add your daughter’s name to the title of a $100,000 piece of your real estate, how much reduction in the size of your estate?
44Joint Tenancy with Rights of Survivorship Reduction in gross size of your Estate??Final Answer:Depends, but probably none.1. Who contributed to buying it?2. Does she bare the burdens and benefits of ownership? Rent income, pay taxes etc.3. Is there debt against it?Who will own it when you die?
45Examples of Economic Interest in Property Retained rights to incomeThe right to change who inheritsThe right to change the future useThe right to change enjoyment
46Adjusted Gross Estate Example: Funeral ,000Administration ,000Losses (casualty, theft) ,000Debt claims against estate ,000State Estate Taxes ( )Mortgages and Liens ,000Adjusted Gross Estate $ 2,134,000
51Delayed Payments of Estate Taxes 1 year extension with interestReasonable causeTen 1 year extensions with interestEach year with reasonable causeInstallment Payments35% or greater of Adjusted Gross Estate in closely held businessDecedent active role in businessShare rent versus cash rent
52Estate Tax Installment Payments Closely Held Business portion of the Tax35% of Adjusted Gross Estate is Family BusinessInterest only first 4 years then 10 year installment payments (total of 14 years)2% Interest rate on first $1.12 million taxableInterest rate on value above $1.12 million is 45% of applicable rate for under payment of tax
55Federal “State Death Tax Credit” 2002 – Reduced by 25%2003 – Reduced by 50%2004 – Reduced by 75%2005 – State Credit is RepealedBut in 2005 to 2009 have a new deduction from the Gross Estate for State Estate Taxes paidPaid within 4 years after Fed Estate taxMichigan will lose revenue. Changes?
56Special Use Valuation (2032A) of Certain Real Property Farm and other real property valued at fair market value - determined on the highest or best use.If this becomes a financial burden then property can be valued as a farm or other closely held business.Cannot reduce value more than $850,000 in 2004 (inflation indexed)
57To Qualify for Special Use Valuation 50% of Adjusted Gross Estate from Farm Property (real and personal)25% of Adjusted Gross Estate from Farm Real PropertyMaterial ParticipationPass to qualifying heirDescendent or family has used real property 5 of last 8 years in “qualified use”
58“Material Participation” Special Use Valuation Rules similar to Self Employment Tax“At Risk” income from trade or businessCrop shareCash rent to family member qualifiesCash rent to non-family member disqualifiesEligible “Qualified Heirs”Meet active management testMakes business decisionsDecedent’s spouseHeir not reaching age 21 who is full time student or who is disabledLineal Descendants may lease property to another descendant on a cash basis
59Special Use Valuation Formula Cash Rent $80.00Property TaxesNet Rental = $63.00Net Rental $63.00= $909/AcreThe 5 yr average effective interest rate for all FLB loans 2004 = 6.93%
60Tax Basis of PropertyBasis on inherited property is the Special Use Value amount as it is passed through the estate.Get as high of basis as possible without paying an estate tax!!!
61If Within 10 Years Property is Sold or Ceases to be a Farm Tax benefits are recapturedIf qualified heir dies without having disposed of the property or converting it to a nonqualified use, or 10 year period lapses, the potential liability for recapture ceases.
62Recapture of Tax Savings from Special Use Valuation (Section 2032A) If sold or family fails to meet Material Participation100 % first 6 years80% 7th year60% 8th year40% 9th year20% 10th year0% after 10th year
632004 Estate Tax Maximums Married Couple 50% Farm Land Split Assets between themUse both Federal Exemptions $1.5MUse 2 Special Use Valuation $850,000Careful planning and can get both to qualify?$4.7 M Transferred with no Estate TaxTax Basis equal to value used for Estate Tax calculation
64Generation Skipping Tax 2001 Excess of $1,060,000 taxed at 55%2002 starts to match annual exclusion for Estate Taxes2002 and 2003 = $1.0 Million2004 and 2005 = 1.5 Million2006 – 2008 = 2.0 Million2009 = 3.5 Million2010 = none2011 = ?
65Example of Generation Skipping Transfer Property owned by A1/ /2IncomeIncomeCTrustTrustDTrust property not taxed at death of C & DGrandchildren
66Annual Inflation Adjustments After 1998 Gifts Annual Exclusion $10,000 (lowest multiple of $1,000) $11,000 in 2004Special Use Valuation ceiling on of real estate $750,000 ($10,000) $850,000 in 2004Generation Skipping Tax exemption $1 million ($10,000) $1,120,000 in 2004Installment Payment ceiling $1 million ($10,000) $1,120,000 in 2004
67Other Provisions of The Taxpayers Relief Bill of 1997 Exclude 40% the value of land in a qualified conservation easement
68Income Tax Basis 40 Acre parcel of Land Paid $500 per Acre or $20,000 in 1974Tax Value Today = 2x S.E.V. = $80,000Land’s been selling for $2,500 per AcreWidowed Mother Gives land to Daughter and Daughter Sells. Taxes?Daughter Inherits land after Death of Mother and then Sells. Taxes?
69Stepped-Up Basis Issues In past full “stepped up basis” of inherited property resulted in no taxable gain to heirs for appreciation that occurred during deceased lifetime.Basis for heirs was the value that passed through the estate and subject to Federal Estate taxesFull Basis Step Up until 2010Step-Up is limited to $1.3 million starting in 2010Additional $3.0 Million for SpouseTotal of $4.3 M Increase in Basis to Surviving Spouse in 2010Records for tracking basis is very important
70Basis Step-Up Planning What year will you die? Size of Estate? Amount of appreciation on assets?Trade offs between Estate Tax and step-up in basis until 2010, 2011?Goal want to capture as much of the step-up as possible without hitting Estate taxes “free money” Who benefits? Heirs
71Why Limits on Stepped up Basis What’s the logic? Tax Revenue for Federal GovernmentGift Tax effectsCapital Gains Tax effectsWhat’s the interplay? Before and after 2001 tax law changes?Remember - Not until 2010???
722004 Estate Planning Strategies Because of Basis & Tax Issues Gift high basis assets now or wait?Capital Gains Tax Rate is lower than Gift tax rateWhat year will you die?Future changes in tax code?Probably a little less advantage to gifting strategies if estate tax continues to be repealed starting in 2010
73Future of Federal Estate Tax? All 2001 tax code changes are scheduled to sunset Dec 31, 2010Avoids arcane budget rule (Byrd rule)One Senator could blockWould take 60% to overturnAs written only majority vote to continueLeaves some uncertainty for planningNot an excuse not to plan – still criticalTax Issues are only part of Estate PlanningSmall down side risk of planning based on the 1 Million per person – Depends?
74INCOME TAXES Michigan & Federal Capital gain or lossDifference between:Sale price and adjusted cost basisAdjusted cost basis in propertyGifted, Purchased, InheritedExampleSale price = $40,000Remaining Cost Basis = $13,000Difference (taxable) = $27,000ExceptionsProperty tradesResidence ($500,000 Married – Joint every 2yrs )
75Allocation of Purchased or Transferred Business Property DepreciableNon Depreciable
76Non – Depreciable Property or Assets Bare LandResidenceTimber (Depletion Allowance)Growing Crops
77Depreciable Property or Assets Farm Buildings & StructuresMachinery & EquipmentGrain StorageFencesField Tile and DrainsWellsOrchardsTenant HouseGood Will
79Michigan State University Extension District Farm Management Agent Taxation on Transfer of Property Methods to Transfer? 1. Sell it 2. Give it away 3. Retain owner ship till deathRoger BetzMichigan State University ExtensionDistrict Farm Management Agent
831999 Taxation of Example Farm Bought 100 ac HOME Farm $ 25,000Land $20,000Buildings $5,000Bought SMITH 200 ac $100,000Built SWINE Facilities $ 50,000Bought JONES 200 ac $200,0001999 FAIR MARKET VALUE/ac $600,000Buildings ,000Machinery and Equipment ,000200 Raised Sows ,000Market Hogs 1,600 Hd ,000Feed ,000TOTAL $960,000No Debt against Estate
84Income Taxes Capital Gain - Max 20% FED rate Income Taxes Capital Gain - Max 20% FED rate % on Income in the 15% bracket % for Income above the 15% rate Ordinary Income (Married Joint 1999) Depreciation Recapture and Sched. F Income Federal Inc. Tax = 15% to 43, % to 104, % to 158, % to 283, % above (Rate after Standard Deduction and Exemptions) 7,200 plus 2,750 per exemption or Itemize Social Security and Medicare Taxes Sched. F Income (earned income) % to 72,600 Soc Sec (.9235) Plus 2.9% Medicare (.9235) [no limit]
85Option #1- Sell Whole Business Cash Sale Home Farm100 ac x 1,200 = 120, ,000 basis =$100,000 (Capital Gain)Buildings30, ,000 basis = $25,000 (Depreciation Recapture)SMITH Farm200 ac x 1,200 = 240, ,000 basis = $140,000 (Capital Gain)JONES Farm200 ac x 1,200 = 240, ,000 basis =$40,000 (Capital Gain)Machinery and Equipment100, ,000 basis = $75,000 (Deprec. Recapture)200 Raised Sows50,000 - ZERO basis = $50,000(Capital Gain)Market Hogs80,000 - ZERO basis = $80,000 (Sched. F Income)Feed100,000 - ZERO basis = $100,000 (Sched. F Income)
86Income Tax Calculations - Option #1 (sell whole farm) 100, , , ,000 $330,000 Cap. Gains (Max 20%)25, , $100,000. Dep. Recapture (Max 39.6%)100, , $180,000 Sched F income (Max 39.6%)Total Taxable Income $610,000Long Term Capital Gains Tax $66,000Fed Income Tax $79,583Social Security $8,291Medicare $4,821Michigan Income Tax $26,594Total ALL Income Taxes $185,289Buyer has new Basis in all property purchased and can depreciate the depreciable property.
87Option #1 - Sell Whole Farm We have paid income Taxes of $185,289So now Net Worth is 960, ,289Equals 774,711What’s the Estate Tax on this?750,000 taxable = 248,300 tax24,711 taxable X 39% = 9,637 tax248, ,637= 257,937 total tax257, ,300 (99) = $46,637 net tax
88Option #1 - Sell Whole Farm Income Taxes = $185,289Estate Taxes = $46,637Total Taxes = $231,926If you sell your assets, does this reduce the size of your estate?What does it do?“Freeze it”? Depends on how reinvested.
89Option # 2 - Give it All Away Home Farm 100 ac X 1,200 = 120,000 GIFT ,000 basis to doneeBuildings 30,000 GIFT, 5,000 basis to depreciateSmith Farm 200 ac X 1,200 = 240,000 GIFT 100,000 basis to doneeJones Farm 200 ac X 1,200 = 240,000 GIFT ,000 basis to doneeMachinery and Equipment 100,000 GIFT 25,000 basis to donee to depreciate200 Raised Sows 50,000 GIFT, ZERO basis to donee to depreciateMarket Hogs 80,000 GIFT, ZERO basis to doneeFeed 100,000 GIFT, ZERO basis to donee
90Tax Calculations Option #2 (give it all away) Capital GainsNONE to DonorDepreciation RecaptureOrdinary Income Sched. FCapital Gains = ZEROFed Income Tax = ZEROSocial Security = ZEROMedicare = ZEROMich Tax = ZERO
91Option #2 Give it All Away Total All INCOME Taxes = ZERO (donor) What about the donee (receiver)? What tax bracket?Donee has OLD Basis in property and can depreciate only what was left on the depreciation schedule. If sold in one year with same tax attributes, then would have the same $185,289 of income taxes.GIFT TAX - 1 person to 1 person in 1 year960, ,000 = 950,000 subject to Gift Tax326, ,300 unified credit = $115,000Donor has used up his/her unified creditTotal Taxes paid for the family = $300,289
92Option #3 Retain Ownership Until Death Income Tax = ZeroEstate TaxesSame Estate Tax implications as the Gift option but the heirs receive a step up in basis to the fair market value but would lose the $10,000 annual exemption. (10,000X 39%)Total Estate Taxes paid = $118,900Step Up in Basis is Very Useful Tool to Retain Financial Value for Family.Michigan Estate Tax = $30,960Federal Estate Tax = $87,940
93Opt. #4 Combinations This is what most people do. Option #1 Sell Whole Farm = $231,926Option #2 Give it all Away = $300,289Option #3 Retain Till Death = $118,900Option #4 Proper CombinationsAll Tax = $”ZERO”
94What If? (1999 example)1. The Estate was split between Husband and WifeTwo 650,000 Exemptions - Tax would be Zero and FULL STEP UP in Basis for heirs, no restrictions from other tools below2. Utilize the Special Use Valuation Method 2032A500 acres Land valued at 700 versus 1,200 per Acre960,000 less 250,000 = 710,000 Taxable ValueEstate Taxes would be $22,200 (37% of $60,000)Limitations Placed on Business3. Utilize the Family Owned Farm and Business exclusion 2033AIf estate qualifies, then can have up to 1.3 million Estate tax would = ZeroLimitations placed on Business
95Gifts: A Flexible Tool for Estate Planning Roger BetzMichigan State University Extension
96GIFTS: Flexible Tools For Property Transfers The greatest gains from sound estate planning come when the transfer starts before death, while the owners still have the ability to guide and affect the outcome.
97Possible Benefits of Gifts Opportunity for Children to Participate in the Management of Family BusinessReduce size of estate for Estate TaxesReduce Administration ExpenseIncome Tax Savings for Family
98Completed Gifts Requirements for Present Interest A competent donor and doneeA clear intent to divest title & control over propertyTransfer of legal titleDelivery of titleAcceptance of gift by donee
99Valuation of Gift Fair Market Value Date of Transfer Organized market activityProfessional AppraisalIncome potentialTax assessment
100Direct Gift ExamplesCash or Property (real, personal-tangible or intangible)Forgiveness of a Debt (like cash)Interest Free Loans(act like payments made then given back)Creation of a Joint Tenancy in real estateTransfer of Equity in a BusinessPercentage ownership, stock sharesIrrevocable TrustLife Insurance Policy (3 year)
101Selecting Property to Give General Considerations Low gift/high estate tax valueAppreciated propertyAssets not likely to be soldHigh income-producing propertyProperty unsuitable for testamentary distributionIncome tax bracket of children
102Dividing Gifts to Save Taxes Gift Splitting (Husband and Wife)Bargain saleInstallment sale & cancel notesMortgage property before givingGift of limited interestCreate undivided fractional shareSubdivision of real estateGift of a future interest
103Property Unsuitable for Gifts (for tax savings) Shrinking assetsAssets producing income lossesBusiness property if using “Special Use Valuation”Principal residence - $250,000 per personProperty donor intends to use(provide own support)Depreciable propertyProperty that can gain “Step-Up-in-Basis”
104Practical Considerations in Lifetime Giving Plus FactorsEscape property managementEliminate estate transfer costsFulfill a business obligationAssist donee’s financial progress
105Practical Considerations in Lifetime Giving Possible NegativesLoss of property controlDonor may need fundsDonee’s income tax on appreciated propertyDonee’s use of propertyNo “Step Up in Basis”
106Guidelines to Making Gifts Donor’s financial securityComplement a transfer planDonee’s financial judgmentBenefit the doneeLife motives for making giftsLastly - Tax reduction
107Probate, Wills, Durable Power of Attorney, Patient Advocate Dave Smith, AttorneyCharlotte, MI
108E.P.I.C. Estate Protection & Individual Code - After April 1, 2000 Changed Rules for Opening ProbateInformalFormalSupervisedSmall Estates(less than $15,000 that is probated)
109Property Distribution EPIC no will/state law after 2000 Married with full blood children Spouse - $150, /2 balance; Children - 1/2 balanceMarried with ½ blood children (not of spouse) Spouse - $100,000 + ½ balance; Children ½ balanceMarried with parents, no children Spouse - $150, /4 balance; Parents - 1/4 balanceMarried without parents or children Spouse - all propertySingle with children Children - all propertySingle without children Parents - all property or brothers & sisters or next-of-kin
110E.P.I.C. Informal Probate Administration If No Problems AnticipatedQuicker, Easier, CheaperDon’t Meet with JudgeApplication with Probate Court RegisterMost Popular 75%
111E.P.I.C. Formal Probate Administration File a Petition for Proceeding before a Judge with notice to all interested persons - 25% of Probated EstatesHearingIf in Informal can move to Formal and back to Informalperhaps need help on a single issue
112E.P.I.C. Supervised Probate Administration Involves Court Supervision of all Estate ProceedingNot many done like this, Only when problems within familyLess Than 1% of Probated Estates
113Probate Administration Cost Filing Fee $100Small Estate Filing Fee $25Inventory Fee for Probated Assets$1 Million Probated Estate = $1,175$2 Million Probated Estate = $1,488$5 Million Probated Estate = $2,425Certificate Letters of Authority$11 Each (Stocks)Petitions to the Court $15 (Supervised)
114Trust: Tool in Estate Planning Steven Peters, AttorneyTrust Dept National City Bank
115Trust Uses in Estate Planning One of the most flexible toolsBecause of the -wide variety of ways it can be designedIt can help you reach your estate planning goals
116What is a Trust?Fiduciary relationship in which one person (trustee) holds title to property (trust estate) for the benefit of another (beneficiary)Terms of trust are detailed in a trust agreement
117Trustee Who holds trust title? Individual - private trust Institution - commercial trustPrivate trustFamily member or friendGrantorCommercial trustCorporate employeeCo-trustee
118Types of Trust Living trust - separate agreement - Revocable - IrrevocableTestamentary trust- Part of will
119Two Types of Lifetime Trusts Living - inter vivos - “between lives”created during lifeproperty doesn’t pass through probateprivacymanagement of securitiesrecipient of insuranceIrrevocable Trustproperty given away for goodgift tax considerationscannot be altered, amended, revoked
120Testamentary Trust It does not exist during the life of the grantor created by willtrust is beneficiary of the estateA grantor creates the trustkeeps direct control during lifeupon death the trust comes into beingproperty managed in accordance to agreementProperty passes through probatecosts and taxes paidfew tax savings possibleprovides management of propertytrust department acts is supervisory manner
121Creation of a Trust Step 1 Owner Grantor Step 2 Transfers Property to TrusteeStep 6GoalsReachedStep 3Trust AgreementDirects TrusteeStep 4Manages & ControlsHas Legal TitleStep 5Beneficiary ReceivesIncome & Benefits
122Example of Trust Used by Married Couple Property owned by ATransfer at A’s death1/ /2Transfer at B’s deathIncomeSpouseBTrustTrust property not taxed at B’s deathChildren
123When would a Trust be a good tool for Husband and Wife to use? 1. Large estate when want to utilize both exemptions (until 2010?)2. Manage affairs when/if disabled3. Reduce future administration cost4. Privacy issues versus Probate
124Advantages of a Trust Minimize Estate Taxes Reduce Estate Administration CostProvide Professional Management Services
125Trust Limitations Trustee will not operate business Heirs cannot control propertyAnnual trust feeCan not solve all goalsTitle must be transferred
126Checks and BalancesTrustees are required by law to operate under the prudent man rule.Regular inspections of trust depart. by state and federal bank examiners.Reputation of the bank or individual.Size of staff.Built into the trust itself. Agreement allows the beneficiary to change trustee if not satisfied with income or officers.Careful Planning Pays
127Costs and FeesThe more complex the duties of the trustee, the higher the fees will be.
128Life Insurance Tool in Estate and Business Planning Steve Shook, AgentRussell and Schrader
129Sample Term Policies Level Death Benefit Decreasing Term Insurance Face Value of PolicyDeath BenefitPremiums are fixed for a period of time, but gradually begin increasing.Decreasing Term InsuranceDeath BenefitPremiums are level for the term of time selected.
130Term Life Insurance Advantages: Low cost at early ages makes insurance available when cash flow is lowDisadvantages:Gets very expensive in later yearsHas no provision to be paid-upLess than 1% is paid as claimsBuilds up no cash value
131TYPICAL WHOLE LIFE POLICIES DividendsTYPICAL WHOLE LIFE POLICIESLevel-Fixed PremiumsDeathBenefitParticipatingWholeLifeFace Valueof PolicyCash ValuesStartAge 100Level - Fixed Premiums AreLower than Participating PolicyNon-ParticipatingWholeLifeFace Valueof PolicyCash ValuesDeathBenefitStart Age 100
132Whole Life Advantages: Cash values help policy solvency in later years Dividends can by paid-up additions which will increase the death benefitCan pay premiums in later yearsPolicy operates at the guaranteed levelCan have term ridersDisadvantages:Cost more going inNot quite as flexible as Universal Life
133One Policy - Two Approaches Universal Life Flexible PremiumsInterest Sensitive Cash ValuesDeathBenefitIncreasing Death BenefitFace Valueof PolicyStartAge 100Flexible PremiumsInterest Sensitive Cash ValuesLevelDeathBenefitFace Valueof PolicyDeathBenefitStart Age 100
134Universal Life (A Whole Life Policy) Advantages:Great FlexibilityInsurance AmountPremiumHas cash value with competitive interest rateCash values can be withdrawn or policy loanPolicy can be paid-up (current amount or reduced)Death benefit can be increasing or level
135Universal Life- (A Whole Life Policy) DisadvantagesWithdrawal Privilege sometimes lets the policy be under funded in later yearsDoes not have dividents - no paid-up additions.Probably cost more than other Whole Life Policy over a life time
136A B C D Jones Family Farm Life Insurance Policy Problem: Son “A” wants to buy the family business, sons “B, C, and D” deserve the inheritance.Solution:Son “A” enters into a purchase agreement with Dad. He also purchases Life Insurance on Dad. Thereby guaranteeing other siblings their inheritance.
137Partners agree to purchase each others share if death occurs Partnerships or LLC$200,00on “B”Partnership$400,000$200,00on “A”Partner“B”Partner“A”Partners agree to purchase each others share if death occursProblem:Partners want control of their business should they lose their partner.Solution:They buy insurance on each other, have an agreement that they must purchase deceased partners share of the business.
138To Summarize 1. The need for liquidity in estates 2. Sources of liquidity3. Life Insurance being the best source4. Kinds of Life Insurance:Term, UL, Whole Life, Combination, Second to Die5. Life Insurance, the tool used in:Debt, Purchase AgreementsBuy-Sell, Key PersonWith Irrevocable Trust6. Questions
139Transferring The Family Farm/Business Roger BetzMichigan State University ExtensionDistrict Farm Management Agent
140What Mom and Dad Want! Slow Down, more time off Getting Tired Minimize RiskProtect assetsPay off debtsGet Son/Daughter to work harderTake less responsibility – more to S/DDon’t want to give up controlSon/Daughter should start where they did 35 years ago
141What Son/Daughter Want! Get startedStart where mom and dad left offTake riskEnthusiasm, Try new things!Expand operation, investBuy MachineryBuy LandUtilize Mom and Dad’s Financial PositionHave more money and more time off
142Any Potential Conflicts between the Generations?
148Critical Success Factors Parents ready for “business partner”Younger party committedCommon values, visions and goalsFinancial size, stability and profit of business, expansion potentialPersonal Relationships
149Stage One – Testing Early Assessment Look at present situation, Size, Financial, Goals, ObjectivesCompatible?Should we try to farm?Should it be together?May decide not to farm – OK“Go” “No-Go” “Wait” Decision
150Parents Goals Slow Down Turn over business Maintain some involvement Protect breakup of businessTreat all children equitablyAdequate retirement incomeSecurity, business assetsMinimize income & estate taxes
151Farming Child’s Goals Adequate income Buy into business Participate in managementGain control over timeIncrease business sizeUse new technologyBuild personal equity
152Non-Farm Childs Goals Inherit an equitable share of estate Receive equitable return on investmentParticipate in management if still involved in businessSell equity in business
153All Family Member’s Goals Maintain & improve viability of family businessEnjoy pleasant family and home lifeEnjoy good times with friendsDo new and exciting thingsEngage in community activitiesPursue favorite hobby or sport
154Stage one - Testing Wage/Bonus Wage/Incentive Wage/Share Should we try to Farm?Together or Separate?Holding Pattern?2 or 3 years max“Go” “No-Go” Decision
156Stage two - Commitment Enterprise Agreement Operating Agreement Farrowing Phase, Contract HeifersOperating AgreementProperty, Labor, ManagementSharing of Labor and MachinerySwap ResourcesJoint VenturesParents Co-signs NotesTransfer of Specific Assets Overtime
157Stage Three Established as Separate Units Continue and Expand Operating AgreementsJoint VentureSole ProprietorRental arrangementsExchange Labor MachineryMay phase out the agreements
158Stage Three Established Together Limited Liability CompanyPartnershipCorporationExpansion?Shift personal property/managementBuy/Sell AgreementsLeave Early, Retirement, Death, DisabilityProvide for untimely deathInsuranceProvisions in willPlans for Real Estate Transfer
159Proprietorship Partnerships Liability Co. Corporation Combinations Sole LimitedProprietorship Partnerships Liability Co Corporation CombinationsGENERALLIMITEDMODIFIEDTAXOPTIONSREGULARLease ArrangementWage IncentiveJoint VentureLLCLLPWage ShareEnterprise AgreementLeastMostDegree of ComplexityAlternate business arrangement ranked according to degree of legal complexity.
160Stage Four – Withdrawal of Parents Secure Farm Heir’s Position in FarmingFirm up Transfer PlansComplete Personal Property/Management TransferShift Control/Ownership of Real EstateLLC is Desolved - Buy/Sell AgreementHeir Buys or Rents Parents Share in BusinessAdditional Provisions in Will
161Transferring Business Asset Ownership What Kinds of Assets are there?Personal PropertyMachineryFeed and Market LivestockBreeding LivestockReal EstateBuildingsLand
162Methods for Transferring Property? Sale – income to seller and expense to buyerGift – no income to seller but also no expense to buyer (old basis)Lease - Ordinary Income, F ExpenseInherit? Step-Up in BasisHow long? How old?Depends on Asset, situation, goals
163Sale of Business Property Allows junior partners to own property earlierSeparates business and estate transferReduces inflation of senior partner’s estateSenior partners give-up some control over propertyOrdinary or Capital Gains taxes
164Ways to Transfer Business Property to Delay/Minimize Taxes I. MACHINERYA. Sale-Depreciation Recapture-Depends on Selling Price in Relation to Tax BasisB. Lease-Use Principle & Interest as Guideline-Gifts to Equalize “Principle”-Trade Ins-Depreciation Schedule
165Ways to Transfer Business Property to Delay/Minimize Taxes (cont’d) II. Breeding LivestockA. Sale-Capital Gains - Raised to Seller-Installment Sale-Interest and Depreciation to BuyerB. Lease with New Borns Owned by New Generation - Decreasing with Time
166Ways to Transfer Business Property to Delay/Minimize Taxes (cont’d) III. InventoryA. Feed-Use Unpaid Bill and Pay Later- GiftB. Market Livestock-Use Unpaid Bill or/and Sell In Parents Name-Sale = IncomeC. Supplies and other inventory
167Ways to Transfer Business Property to Delay/Minimize Taxes (cont’d) IV. LandA. Cash Rent to Start OutLong Term Rental AgreementB. Sale or GiftC. Options to BuyBuy From Estate – Step-Up in BasisD. Inherit with Step-Up in Basis
168Ways to Transfer Business Property to Delay/Minimize Taxes (cont’d) V. BuildingsA. Cash Rent to Start OutLong Term Rental AgreementB. May need to move ownership to younger generationC. Sale or GiftD. Options to BuyBuy From Estate – Step-Up in BasisE. Inherit with Step-Up in Basis
169Order of Importance and Time Line for Asset Transfer 1. Working Assets- Livestock, Crops and Inventory2. Machinery3. Buildings4. Land-Center of Operations-Non Critical Land
170Transferring Management Conflicts between parents and childrenHow are Decisions Made?General ManagerFinal authorityEqual VoiceVote, weighted?, arbitration
171Transferring Management Division of Management ResponsibilityEnterprise DivisionFunctional DivisionManagement StylesDifferences are goodNeed to compliment each otherAre we doing things right?Are we doing the right things?
172Dividing Income Percent Contribution 50/50 Capital Labor - guaranteed payments50/50
173Example LLC Business Structure Dad and Junior want to farm together50/50 Business starts out “naked”; doesn’t own anythingBusiness Buys Cows and Calves from Dad - Installment Sale ContractFeed and Inventory- carry as unpaid billMachinery - Business has 10yr Lease with DadTrade ins, Sale in 10yrsBusiness Cash Rents Buildings from DadBusiness Cash Rents Land from Dad
174Inter Generational Business Transfer Critical Success Factors 1. Must have open, honest, continual, communications-spouses too (See Making it Work)2. Get young generation financially involved early3. Have younger generation own large significant portion of operating business(50% cows vs. 10% cows, machinery and land)4. Business must make sufficient profit to provide for comfortable family living and allow business growth
175What Do I Do Now? Putting it all Together Roger BetzMichigan State University ExtensionDistrict Farm Management Agent
176BASIC ESTATE PLANNING FOR EVERYONE 1. Reduce Times Assets can be Taxed - Income and Estate Taxes2. Review How Property is Owned3. Check and Update Wills4. Durable Power of Attorney5. Durable Power of Attorney for Health Care - Patient Advocate Form
177TAXABLE ESTATE LESS THAN $1.5 Million (2.0 M in 2006, 1.0 M 2011) 1. Sales and Leases of Business Property2. Perhaps Some Bargain Sales and Gifts3. Insurance for Risk4. Trust for Management Needs-Disability, Elderly years-Dependant Children
178TAXABLE ESTATE $1.5 Million TO $3 Million (2.0 M to 4.0 M in 2006, 1.0 M to 2.0M 2011) 1. All of the above2. Split Estate to Capture Both $1 Million Exemptions-Separate Sole Proprietor Ownership-Tenancy in Common-Trust for Splitting the Estate and Management.3. Bargain Sales and Gifts
179TAXABLE ESTATE OVER $3,000,000 (4.0 M in 2006, 2.0 M 2011) 1. All of the Above2. Gifts become more Important Tool3. Insurance to Pay the Tax4. Charitable Contributions5. Get Income Producing Assets to Heirs-Bargain Sales and Gifts6. Use Special Use Valuation7. Don’t worry about it
180Extension Bulletins Wills, Probate & Estate Planning E-2120 Record of Important Family Papers E-451Federal Estate and Gift Taxes Ag Econ StaffMichigan Estate Tax E-1348sWhich Business Arrangement is for You NCR-50
181Now What? Continue with your learning and plans Talk to your Family Develop your IdeasMeet with Professionals to further develop and finalizeAct on the Plan – CriticalWill not be perfectReview in future as situations changeEvaluation, Sign up list