1. Presented by: April 2, 2013 Succession Planning for Farmers, Ranchers & Vintners 5555 Lakeview Drive, Suite 201 Kirkland, WA 98033 (425) 803-9500 | office@brislawnlofton.com 5555 Lakeview Drive, Suite 201 Kirkland, WA 98033 (425) 803-9500 | office@brislawnlofton.com

2. C. Dennis Brislawn, Jr. J.D. Principal in The Private Client Law Group Member of a Washington Pioneer Family that homesteaded in Omak & Sprague (Wheat Growers) 25 years as an estate planning attorney with experience in family business transitions including Farms, Dairies, Forest lands and Vineyards 5555 Lakeview Drive, Suite 201 Kirkland, WA 98033 (425) 803-9500 | office@brislawnlofton.com 5555 Lakeview Drive, Suite 201 Kirkland, WA 98033 (425) 803-9500 | office@brislawnlofton.com

3. I/we L ove the Land  “Never sell my land!!” Accepting that Equal is not Fair  Equity vs. Control Family Communications  Do the kids all want/need the same thing?  Should they?  Can they? Farm Family Issues 5555 Lakeview Drive, Suite 201 Kirkland, WA 98033 (425) 803-9500 | office@brislawnlofton.com

4. Big Farm Family Issue “Exit” can be a planned or an unplanned event! What “Value” Does Our Farm Have to Players? –Heirloom? –Investment? –Commodity? What Should We think about? –Cash Flow –Fairness –Risks & Rewards –When to “Let Go”

5. Right to Harvest Sell Develop Or Subdivide Exclusion Right of Use Water Rights Access Bundle of Property Rights

6. Bill & Mary’s Story Pasture of Perfection Dairy Farm Family 3 rd generation, same land One kid involved in business, lives on farm, has grandchildren One kid, professional, in city, has grandchildren

7. The Kids Today Susan is a “gem” –Dependable –Good with money John loves the farm –Good with farm; can make anything grow –Not so good with business –All like John

8. Bill and Mary’s Farm Plan Estate of $2,000,000 Retired & Secure Goals Met –Preserve Farm –Care for each other –Cut hassle & taxes –Help kids, keep peace How Did They Get Here?

9. Three Phases of Planning You are healthy. You are legally incapacitated. You have passed on.

10. What should my plan do? 1. Protect Your Life Savings 2. Apply Assets for Your Benefit 3. Keep You in Control 4. Keep you retired! 5. Preserve Assets for Your Heirs 6.Fulfill your legacy 7. Produce Peace of Mind!

11. First – Adopt a Process ESTATE PLANNING Financial Goals

12. The Three Liability Dragons  Catastrophic Risk  Loss of Control  Income and Estate Taxes  Catastrophic Risk  Loss of Control  Income and Estate Taxes

13. Scary Facts We are living longer and saving less. 3 out of 5 people over 65 will spend time in a nursing home as a result of being incompetent Up to 65% of nursing home residents spend their entire life savings within the first 12 months Millions of lawsuits are filed in American courts each year 7 of 10 people have no estate plan You get one chance to get it right… Is a plan just a document? Or does it take some time and careful introspective thought?

14. Some Business Facts 80% of all U.S. businesses are family owned or managed –Accounts for 50% of the employment in the U.S. and the GNP –30% of family owned businesses survive past the first generation –15% survive past the second generation 14

15. Small Business Succession Conflict among family members accounts for 60% of succession failures Heirs who are not prepared to manage the business are 25% of the failures Only 10% of failures result from taxes … and you worked decades for this. 15

16. Second – Business Plan ESTATE PLANNING Financial Goals

17. Tools for Farm Success Form of Business Landowner in business, and business will remain after incapacity or death of the landowner. Asset protection is a key planning issue. Form of business will impact income flow and taxes. Most small farms will form as partnership, S Corporation, or Limited Liability Company (LLC). Selection of a business structure should be done in consultation with an attorney and accountant.

18. Comparison of Business Structures* Corporation –C Corporation –S Corporation General Partnership Limited Partnership LLC *Make sure to discuss taxes, fees, etc.

19. Partners GENERAL Control, gets share of profits, compensation Unlimited Liability Exposure LIMITED No Right to Management, gets share of profits No Liability Exposure Limited Transfer Rights, Return of Capital Later

20. Limited Liability Companies Owned by members Managed by member or manager(s) Eliminates or minimizes corporate formalities Flexible tax treatment Disregarded entity (Sole proprietorship) Partnership S or C Corporation

21. Corporations Owned by shareholders Overseen by Board of Directors Managed by officers President/CEO Treasurer/CFO Secretary Vice President(s)

22. Review of Critical Documents Articles of Incorporation/Certificate of Incorporation State Filing (Specific information) Business Name & Trade Names Resident Agent/Agent for Service of Process Business Purpose Capital Structure Voting Rights Indemnification

23. Review of Critical Documents Corporate Bylaws State Specific (to a degree) Corporate Governance Board of Directors Statutory Officers Voting Rights Indemnification of Officers and Directors

24. Review of Critical Documents LLC (Operating) Agreement State Specific (to a degree) Entity Governance (Member vs. Manager) Designation of Officers (Optional) Member Rights Democracy or Dictatorship? Concerns re Applicable Restrictions? Business Purpose

25. Consider Exit Planning “Exit”, “succession”, or “transition” planning is the controlled transfer of the farm to someone else.  Consider that without a plan…  You can mess it up.  Family can mess it up.  Partners can mess it up.  Employees can mess it up.  Cash flow can mess it up.  Taxes can mess it up.

26. Third – Estate Plan ESTATE PLANNING Financial Goals

27. The First Dragon  Catastrophic Risk  Catastrophic Risk

28. Creditor Claims STRESS ! Loss of Privacy Delays and Hassle Attorney Fees Accounting Fees Court Costs STRESS ! Loss of Privacy Delays and Hassle Attorney Fees Accounting Fees Court Costs

29. Types of Claims Officer/Director Liability (Corp.)Officer/Director Liability (Corp.) Employee SuitsEmployee Suits Business or Professional LiabilityBusiness or Professional Liability DivorceDivorce Tax LiabilityTax Liability Creditor LawsuitsCreditor Lawsuits Officer/Director Liability (Corp.)Officer/Director Liability (Corp.) Employee SuitsEmployee Suits Business or Professional LiabilityBusiness or Professional Liability DivorceDivorce Tax LiabilityTax Liability Creditor LawsuitsCreditor Lawsuits Vicarious Liability for Other People Partnership Liability Car Accidents (Elderly?) Unknown Claims –Product Liability –Environmental Liability Vicarious Liability for Other People Partnership Liability Car Accidents (Elderly?) Unknown Claims –Product Liability –Environmental Liability

30. How do you mitigate catastrophic risks? Catastrophe Odds Insure ? House fire: Risk 1:1200Yes Auto accident:Risk 1:240 Yes Medical event:Risk 1:15Yes LTC Risk: 1:2Yes DO YOU PAY OR DOES AN INSURANCE COMPANY? USE OTHER TOOLS TO ENHANCE INSURANCE…

31. The Second Dragon  Loss of Control

32. Losing Financial Control Financial Loss of Control – Adequate income now? – Adequate principal now? – What about the future? – How do I analyze my current and future needs and compare to my “plan?” – How do I protect myself against the unknown?

33. Protect the Business “Engine” This is business “succession” or “transition” planning  Transfer of the property or operation to another.  First priority – Landowner & family considerations.  Second priority – discussing decision with others.  Third priority – establish the right legal tools. Note: Tax considerations may be important.

34. Losing Legal Control (Disability) Guardianship is a “Trial” – Public Proceeding – Court decides what is “best” – Can be Humiliating – Inter-family strife and dissension – Costly in terms of money, time, emotions

35. Durable Powers of Attorney Inexpensive BUT Generally Give Absolute Power –Blank Checkbook for ALL Property –Few Instructions, If Any –Financial Institutions May Refuse Easy to Abuse

36. Losing Legal Control (Death) Probate is a “Trial” – Public Proceeding (?) – Court oversees settlement – Provides a Forum for disputes – Arguably costly in terms of money, time, emotions – Many estates are not well-planned

37. Option – a Living Trust Plan Retain Control Disability Plan –Detailed Guidelines Distribution Plan –Avoids Probate(s) –Retains Privacy –Detailed Guidelines Components –Funding DPOA –Health Care DPOA –Living Will –Limited CP Agreement –Trust (+/- Tax Provisions) –Pour Over Will

38. Lawyer’s Primary Tool Kits Revocable Living Trust –Customized Trust –Pour Over Will –Power of Attorney –Health Care Directive –HIPAA Waiver & Living Will –Property Agreement Will Plan –Customized Will –Power of Attorney –Health Care Directive –HIPAA Waiver & Living Will –Property Agreement

39. Lawyer’s Advanced Tool Kits Irrevocable Trusts (Gifts) –QPRT –Children’s Trust –Asset Protection Trusts –Dynasty Trusts, etc. Business Systems (Gifts) –Family LLC or LP –Buy-Sell Agreements Philanthropic Systems –Conservation Easements –Charitable Trusts

40. Estate Plans for Kids John’s Plan –Cotrustee –Primarily for Needs –Some now, later –Some for retirement –Asset Protection features (marriage, business failure, etc.) –Runs the farm Susan’s Plan –Elective Cotrustee –Liberal Distributions above Needs –Asset Protection features –Has say indirect say in farm –Dynasty Plan?

41. The Third Dragon  Taxes

42. Income Taxes Rates are High and may go higher “Inflation Tax” Fewer Deductions –No “Fun” Write-Offs Hard to Pass Income to Other Family Members Rates are High and may go higher “Inflation Tax” Fewer Deductions –No “Fun” Write-Offs Hard to Pass Income to Other Family Members

43. Death Taxes Federal and State Estate Taxes Generation Skipping Transfer Taxes THEY’RE STILL HERE! Federal and State Estate Taxes Generation Skipping Transfer Taxes THEY’RE STILL HERE!

44. Techniques for Funding Estates Taxes Irrevocable Life Insurance Trust or Others  May be useful for meeting the estate tax burden of an estate composed of illiquid assets  May provide liquidity for buyouts Create New Family Business Entities

45. A Family Investment Company LLC (Stocks, Bonds, Etc.) LLC 2 - Land LLC 1 - Apt. Manager(Entity?) LLC (Farm Ops)

46. Benefits for Family Bill & Mary keep control Bill & Mary receive management fee & distributions Bill & Mary can share “fairly” with kids –Management of estate is better through training and succession –Family income taxes may decrease –Estate tax is reduced

47. Opportunities for Children Real estate partnerships –If children own the operating entity, keep rents low (to keep estate from growing as fast) –Mechanism for giving of partnership interests to non-active family members Operating partnerships –Allocation of current earnings to younger generation 47

48. More Opportunities for Children Withdrawals by older generation create effective redemption of partnership interest –Each year, the older generation’s percentage ownership declines Gifts of partnership interests to children while maintaining control Upon death, discounts available Leverage business loans to children 48

49. Reducing Estate Tax Creative Use of Entities  Defer Tax on a Family Business (6166 – deferral)  Reduce estate tax by discounting… adjusting value of the business as a “going concern”

50. Valuation Adjustments What is Your Company Interest Worth? –Can’t be Easily Sold or Transferred –Can’t be Pledged –Can’t Demand Distributions –Can’t Force a Liquidation Going Concern Value is Substantially Less than the Liquidation (Asset) Value!

51. Valuation Adjustments Liquidation Value –Is the Asset Value Desired by the IRS –$1.00 of assets is $1.00 in share value Fair Market Value –Is the Going Concern Value –$1.00 of assets is $0.70 or less in share value

52. Selling or Giving Assets 52

53. Family Business Planning Family Involved as an Economic Unit Elder Generation May Retain Control Investment Efficiency - Work a Plan

54. Family Investments Active Business –C Corporation –Sales Company –Services Company Passive Business –Public Stock –C Corp Stock –LP or LLC Real Estate –Apartment Buildings –Raw Land Insurance Cash

55. Techniques for Minimizing Disputes In all cases prepare a Buy-Sell Agreement requiring the active children to buy out the passive children and vice-versa. Puts and Calls Long term buyouts to not jeopardize liquidity Valuation with or without minority discounts

56. Equalizing Gifts Among Heirs 1. Create two classes of ownership The class received by the active children would have managerial duties and would receive both a salary and a distribution from profits. The other class would not have managerial duties and would not receive a salary, but would still receive a distribution from profits 2. Create two LLC’s The Farm Operations LLC will be distributed to the active farming children. The other LLC would own the farmland and lease it on a long term lease to the Farm Operations LLC

57. General Rule – Hackl Test –Donee right to immediate use, possession or enjoyment of property or income therefrom –That provides substantial economic benefit Facts and circumstances Governing documents critical 5555 Lakeview Drive, Suite 201 Kirkland, WA 98033 (425) 803-9500 | office@brislawnlofton.com

58. Gifts of Interests in Closely-Held Businesses IRC 2503(b) Must be “present interest” gift “An unrestricted right to immediate use, possession or enjoyment of property or income from property …” Treas. Reg. § 25.2503-3(b) 5555 Lakeview Drive, Suite 201 Kirkland, WA 98033 (425) 803-9500 | office@brislawnlofton.com

59. SALE OF LAND Can sell various interests in the property. May retain a life estate interest. Can do installment sale (cash flow, defer tax) Requires market analysis of the property, including buildings and equipment. Especially important for sale to one child if landowner has others. Tax considerations for sale.

60. SALE OF ASSETS Capital gains or ordinary income tax –Where might rates go? Installment sale benefits Increase in tax basis for depreciation purposes for buyer 60

61. LEASE OF PROPERTY Lease - Two forms: Crop-share or Cash Farm Lease 1.Crop-share = where rent is paid by a share of crops produced. 2.Cash Farm Lease = traditional lease agreement. a.To a third party. b.Landowner retains interest in property. c.Lessee receives right to use the land and to remove crops. d.Lease should define acceptable use, water use, responsibilities for care of the land.

62. TRANSFER OF DEVELOPMENT RIGHTS Farmland preservation tool with significant potential to provide added income to rural landowners, while meeting growth management objectives for density in urban areas. Right to develop property is part of the “bundle of rights” that comes with property ownership. This development right can be sold and separated from the property. Local governments can allow for the transfer of the development right of one parcel to another parcel.

63. Whiteacre 40 Acres Zoned Rural Ag 1:5 Right to develop sold Developer owns developm ent right Whiteacre Deed Restriction Limited to 1:40 City allows greater density in certain areas with rural DR Developer project increases density in city area with TDR Transfer of Development Rights

64. Preserving the Land Conservation Easements (share with public)  Allows land to be preserved  Income tax deduction/reduces estate tax  Lifetime or testamentary 5555 Lakeview Drive, Suite 201 Kirkland, WA 98033 (425) 803-9500 | office@brislawnlofton.com

65. CONSERVATION EASEMENTS Common charitable legal tool for the long-term protection of farm and forest land… a transfer of part of landowner’s right to develop or alter the land. Provides immediate income to the landowner, income tax deduction, estate tax reduction in some cases. Rights can be parceled in many ways:  Right to develop  Right to graze  Right to produce crops  Right to harvest crops  Removal of valuable resources (i.e. minerals, timber)

66. CONSERVATION EASEMENTS Examples:  Easement to protect prairie habitat – may allow only limited grazing.  Easement to protect trumpeter swan habitat – graze only at certain times.  Purchase of development rights – landowner may not build on or subdivide the property.

67. Fourth – Passing the Torch ESTATE PLANNING Financial Goals

68. Bill and Mary’s Legacy Estate of $2,000,000 Retired & Secure Goals Met –Preserve Farm –Care for each other –Cut hassle & taxes –Help kids, keep peace Their Story

69. Tools of Farm & Forest Transfer 5555 Lakeview Drive, Suite 201 Kirkland, WA 98033 (425) 803-9500 | office@brislawnlofton.com Estate Disability Tools –GDPOA vs. Living Trust –Health Care Documents –Liquidity Issues –Care Issues Death & Tax Planning –Will vs. Living Trust –Tax Exemption Planning –Remarriage Planning –Liquidity Issues Business Entities –LLCs –Corporations Business Agreements –Leases –Management Contracts –Buy-Sells Special Conservation Easements Dynasty Protection Trusts

70. 5555 Lakeview Drive, Suite 201 Kirkland, WA 98033 (425) 803-9500 | office@brislawnlofton.com Financial Tools Agreements –Land use leases –Management contracts Sale – Selling to family – Selling to 3 rd party – Value… – Rights Development Grazing Crop production, harvest Protecting the Land Charitable Leverage –Conservation Easements Income tax deduction Estate tax reduction Perpetuate land use Tools of Farm & Forest Transfer

71. Interdisciplinary Approach Legal –Control Tools –Risk Management –Quality of Life Plan –Legacy Financial/Insurance –Resources –Financial Plan –Risk Analysis –Policy Reviews Tax and Compliance –Tax Review –Tax Reduction and Deduction Plan

72. Call us if we can help The Private Client Law Group 5555 Lakeview Drive, Suite 201 Kirkland, WA 98033 (425) 803-9500 | office@brislawnlofton.comoffice@brislawnlofton.com PLAN FOR YOURSELF … BUT NOT BY YOURSELF 5555 Lakeview Drive, Suite 201 Kirkland, WA 98033 (425) 803-9500 | office@brislawnlofton.com