1. 1 Page 1 of 79 Farm Estate Planning Strategies

2. 2 Page 2 of 79 The Need for Estate Planning One of the challenges of Planning is to make people aware that they need to take action. Nowhere is that more of an issue than with the family farm. * Iowa Farm Bureau

3. 3 Page 3 of 79 Why is First Resources Involved? 1.One of the most common methods of paying Estate Taxes is Insurance – We sell insurance. 2.One of the risk factors for farms is Long Term Care – We sell LTC. 3.Investments are a key element in planning – We advise investors.

4. 4 Page 4 of 79 Three Levels of Planning 1.Family Plan 2.Elimination of Tax 3.Management of Asset Cost and Continuity of Business

5. 5 Page 5 of 79 Level 1 360 Acres @ $3,000 per acre. 1.Who receives the farm? 2.How do I treat other children? 3.Who will handle the estate? 4.How do I protect the farm from unexpected expenses?

6. 6 Page 6 of 79 Level 2 800 Acres @ $3,000 per acre. Design wills/trusts that eliminate tax How do I treat other children? Who will handle the estate? Unexpected expenses?

7. 7 Page 7 of 79 Level 3 1500 Acres @ $3,000 per acre 1.Minimize Estate Tax 2.How do I treat other children? 3.Who will handle the estate? 4.Unexpected expenses? 5.Management of Tax Payments?

8. 8 Page 8 of 79 The Need for Estate Planning The tendency to listen to politicians in Washington discourages effective action. For 40 years, they have talked about solutions and we still have a tax of 45% for all values over $2,000,000. Minnesota tax is imposed for values over $1,000,000.

9. 9 Page 9 of 79 What is Estate Planning?  Arranging your property to accomplish these goals. À Determining goals with respect to your property both during life and at death. Â Protecting your assets from depletion risks.

10. 1010 Page 10 of 79 Who Needs Estate Planning?

11. 1 Page 11 of 79 Everyone Needs to Plan Their Estate Property ownership that fits a plan. Wills that distribute according to your wishes. Appointment of responsible people to handle the estate. Reduce or eliminate taxation. Power of Attorney.

12. 1212 Page 12 of 79 Property Ownership Joint Tenancy Bypass the will Non-probate Reduces stepped up basis Can be fully subject to Medicaid claims Tenancy in Common Proportionate Ownership Does not transfer to other owner at death Can raise questions of % ownership Subject to transfer by will or intestacy rules Probate

13. 1313 Page 13 of 79 The Need for Estate Planning Everyone has an estate plan! If you don’t develop one, the state has one for you.

14. 1414 Page 14 of 79 State Provided Plan

15. 1515 Page 15 of 79 Article I If no children, All to Spouse State Provided Plan

16. 1616 Page 16 of 79 Article II If children only from marriage of husband and wife: $70,000 to spouse ½ of excess to spouse State Provided Plan

17. 1717 Page 17 of 79 Article III If all children are not from this spouse: ½ to spouse State Provided Plan

18. 1818 Page 18 of 79 Article IV Children receive equal shares by right of representation. State Provided Plan

19. 1919 Page 19 of 79 Article V If a child has pre-deceased the parent without grandchildren, then to parent(s) of child; if not alive, then escheat! State Provided Plan

20. 2020 Page 20 of 79 Election Against The Will Years of Marriage % Share____________________ 1 year= Supplemental Amount ($50,000) 1-2=3 2-3=6 3-4=9 4-5=12 5-6=15 6-7=18 7-8=21 8-9=24 9-10=27 10-11=30 11-12=34 12-13=38 13-14=42 14-15=46 15+=50

21. 2121 Page 21 of 79 Who Needs Estate Tax Planning? 3,000,000 2,000,000 1,000,000 4,000,000 1,500,000 2,000,000 3,500,000 1,000,000 200 6 200720082009201020112005

22. 2 Page 22 of 79 Stepped-up Basis Congress giveth and taketh away! While there is estate tax, the basis of property is “stepped-up” to the value at date of death or 9 months after death (Alternative valuation). If death occurs when there is no estate tax, stepped up basis is limited or eliminated.

23. 2323 Page 23 of 79 Simple Will Husband’s Estate ($3,000,000)

24. 2424 Page 24 of 79 Simple Will Wife’s Estate ($3,000,000) No Federal Estate Tax Husband’s Estate ($3,000,000)

25. 2525 Page 25 of 79 Simple Will Wife’s Estate ($3,000,000) Husband’s Death* No Federal Estate Tax Husband’s Estate ($3,000,000) Federal Estate Tax $460,000 Wife’s Death* Wife’s Heirs ($2,551,700) * Assumes death in 2006.

26. 2626 Page 26 of 79 Simple Will Result No taxes at first death. Entire estate is taxed at second death. Advantages Transfer of maximum amount of property to spouse outright. No federal estate tax at first death. There may be substantial federal estate tax on death of surviving spouse.

27. 2727 Page 27 of 79 Unified Credit Trust Will Husband’s Estate ($3,000,000) Husband’s Heirs $2,000,000 No Tax* Unified Credit (By-Pass) Trust $2,000,000 * Assumes death in 2006 - 2008 Wife Income

28. 2828 Page 28 of 79 Unified Credit Trust Will Husband’s Estate ($3,000,000) Unified Credit (By-Pass) Trust $2,000,000 Husband’s Heirs $2,000,000 No Tax* No Federal Estate Tax Wife’s Estate ($1,000,000) Wife’s Heirs $1,000,000 No Tax* *Assumes death in year 2006.

29. 2929 Page 29 of 79 Increased Unified Credit If death occurs in year... 2003 2004 2005 2006 2007 2008 2009 2010 2011 Amount passing estate tax free $1,000,000 1,500,000 2,000,000 3,500,000 Repealed 1,000,000

30. 3030 Page 30 of 79 Life Insurance Improperly Owned $4 Million Estate

31. 3131 Page 31 of 79 Life Insurance Improperly Owned $1,000,000 of the Estate is Life Insurance Estate Life Insurance

32. 3232 Page 32 of 79 Life Insurance Improperly Owned Estate Life Insurance Estate Taxes 0 Estate without Life Insurance but with a unified credit trust: $0 Taxes With Life Insurance in the Estate: $460,000 Taxes

33. 3 Page 33 of 79 Life Insurance Properly Owned Individuals Trust Life Insurance $4,000,000 Estate $0 Taxes

34. 3434 Page 34 of 79 The Need for Estate Planning?

35. 3535 Page 35 of 79 Financial Burdens Estate settlement costs are too high Probate fees Death taxes Debts

36. 3636 Page 36 of 79 Financial Burdens Estate Settlement costs are too high Probate fees Death taxes Debts Estate assets are improperly arranged Liquidity Cash flow

37. 3737 Page 37 of 79 Financial Burdens Non-Liquid Assets Liquid Assets

38. 3838 Page 38 of 79 Common Mistakes No written plan. Improper ownership of assets. Life insurance is improperly owned.

39. 3939 Page 39 of 79 Alwin C. Ernst Estate Gross Estate $12,642,431

40. 4040 Page 40 of 79 Alwin C. Ernst Estate Debts $1,014,314

41. 4141 Page 41 of 79 Alwin C. Ernst Estate Debts $1,014,314 Admin. Costs $78,862

42. 4242 Page 42 of 79 Alwin C. Ernst Estate Debts $1,014,314 Admin. Costs $78,862 Estate Taxes $ 4,335,000

43. 4343 Page 43 of 79 Alwin C. Ernst Estate Net to Heirs $6,571,548 45% Shrinkage

44. 4 Page 44 of 79 Discuss Here the “Estates of 4 Famous People” Handouts

45. 4545 Page 45 of 79 Advanced Directives The Advanced Directive or “Living Will” is the best method to control medical care when you’ve lost communication Assign an Agent Describe your desire for pain relief Limit medical treatment, if desired

46. 4646 Page 46 of 79 Power of Attorney Assign Responsibility and ability to act on your behalf.

47. 4747 Page 47 of 79 Protecting Assets from Medicaid

48. 4848 Page 48 of 79 Protecting Assets from Medicaid The Homestead Rule Detached Property Asset Retention Limits Equipment and Other Business Assets Income Limitations Spend-down Liens

49. 4949 Page 49 of 79 Protections for the Community Spouse Community Spouse Resource Allowance (CSRA): –Minimum $28,001 –Maximum $99,540 Increased CSRA: –Permitted, but rarely used. Minnesota follows the income-first rule. Annuities –Actuarially sound annuities are permitted (but restrictions apply; check with attorney). Monthly Maintenance Needs Allowance: –Minimum $1,604.00 –Maximum $2,488.50

50. 5050 Page 50 of 79 Transfers Average monthly cost of nursing home care according to state: $4,198.00

51. 5151 Page 51 of 79 Income Is the state an “income cap” state? NO

52. 5252 Page 52 of 79 Estate Recovery Has the state expanded the definition of “estate” beyond the probate estate? –No (but exceptions apply; check with attorney) Has the state included a hardship? –Yes

53. 5353 Page 53 of 79 Common Estate Planning Strategies

54. 5454 Page 54 of 79 Common Estate Planning Strategies Outright Gifts Family Farm Owned Business Deduction Grantor Retained Trusts Charitable Remainders Trusts Irrevocable Insurance Trusts Wait-and-See Trusts Family Limited Partnerships

55. 5 Page 55 of 79 Outright Gifts $12,000 donor/donee

56. 5656 Page 56 of 79 Gift tax annual exclusion amount is $12,000 for gifts made in 2006, and is subject to indexing in the future. $12,000/donor/donee Parent Child 1 Child 2 Outright Gifts

57. 5757 Page 57 of 79 Gifting Through the Unified Credit Husband - $2,000,000 ► Gift to Children Wife - $2,000,000 Requires a gift Tax Return No Stepped-up basis Cannot retain control or enjoy the benefit of Gifted property

58. 5858 Page 58 of 79 Gift Challenges Estate Growth exceeds tax free gifts Gift assets may be essential to owners Gifting the Farm requires restructuring and valuations

59. 5959 Page 59 of 79 Family Farm Business Deduction If elected, Applies To Estates Prior To 2004 or After 2010 The deduction is the lesser of the unified credit equivalent or the adjusted value of the business The business must pass to a qualified heir The business must be operated by a qualified heir for five of any eight year period in the first 10 years after decedent's death Many other rules apply

60. 6060 Page 60 of 79 Common Strategies Grantor Retained Trusts Charitable Remainder Trusts Irrevocable Insurance Trusts Wait-and-See Trusts Family Limited Partnerships Outright Gifts

61. 6161 Page 61 of 79 Grantor Retained Annuity Trust Parent can RECEIVE INCOME from the asset Granto r GRAT Parent transfers “REMAINDER INTEREST” in an asset Child

62. 6262 Page 62 of 79 Clearance Sale! 20 - 30 - 40% Off! Common Strategies

63. 6363 Page 63 of 79 Common Strategies Outright Gifts Grantor Retained Trusts Charitable Remainder Trusts Irrevocable Insurance Trusts Wait-and-See Trusts Family Limited Partnerships

64. 6464 Page 64 of 79 Charitable Remainder Trusts Donor Spouse or Children Charitable Remainder Trust CHARITY Assets Income Remainder

65. 6565 Page 65 of 79 Donor Heirs Charitable Remainder Trust Charity Assets Income Remainder Irrevocable Life Insurance Trust Income from CRT Beneficiary Charitable Remainder Trusts & The Wealth Replacement Trust

66. 6 Page 66 of 79 A sizable gift has been made to donor’s favorite charity. Charitable Remainder/Wealth Replacement Results

67. 6767 Page 67 of 79 A sizable gift has been made to donor’s favorite charity. A current income tax charitable deduction is available for the gift of remainder interest. Charitable Remainder/Wealth Replacement Results

68. 6868 Page 68 of 79 A sizable gift has been made to donor’s favorite charity. A current income tax charitable deduction is available for the gift of remainder interest. The assets transferred to charity escape estate taxation. Charitable Remainder/Wealth Replacement Results

69. 6969 Page 69 of 79 A sizable gift has been made to donor’s favorite charity. A current income tax charitable deduction is available for the gift of remainder interest. The assets transferred to charity escape estate taxation. Donor receives cash flow from CRT (to pay premiums in the wealth replacement trust). Charitable Remainder/Wealth Replacement Results

70. 7070 Page 70 of 79 A sizable gift has been made to donor’s favorite charity. A current income tax charitable deduction is available for the gift of remainder interest. The assets transferred to charity escape estate taxation. Donor receives cash flow from CRT (to pay premiums in the wealth replacement trust). Amount passing to heirs has been preserved. Death proceeds in irrevocable trust provide attractive replacement for assets given to charity. Charitable Remainder/Wealth Replacement Results

71. 7171 Page 71 of 79 A sizable gift has been made to donor’s favorite charity. A current income tax charitable deduction is available for the gift of remainder interest. The assets transferred to charity escape estate taxation. Donor receives cash flow from CRT (to pay premiums in the wealth replacement trust). Amount passing to heirs has been preserved. Death proceeds in irrevocable trust provide attractive replacement for assets given to charity. Death proceeds are not includible in donor’s estate. Charitable Remainder/Wealth Replacement Results

72. 7272 Page 72 of 79 Common Estate Planning Strategies Outright Gifts Grantor Retained Trusts Charitable Remainder Trusts Irrevocable Insurance Trusts Wait-and-See Trusts Family Limited Partnerships

73. 7373 Page 73 of 79 Attorney drafts trust Client contributes cash to Trustee Purchase life insurance policy Mechanics of Irrevocable Life Insurance Trust

74. 7474 Page 74 of 79 Insurance Policy Irrevocable Trust Insurance Proceeds $ $ $ $ U.S. Treasury for Estate Taxes Assets or Loans CC Estate C C How the Irrevocable Insurance Trust Provides Estate Liquidity

75. 7575 Page 75 of 79 Common Estate Planning Strategies Outright Gifts Grantor Retained Trusts Charitable Remainder Trusts Irrevocable Insurance Trusts Wait-and-See Trusts Family Limited Partnerships

76. 7676 Page 76 of 79 Wait-and-See Trust Today...own policy After one spouse dies Policy After Second Death Death Benefit Cash TRUST

77. 7 Page 77 of 79 Common Estate Planning Strategies Outright Gifts Grantor Retained Trusts Charitable Remainder Trusts Irrevocable Insurance Trusts Wait-and-See Trusts Family Limited Partnerships

78. 7878 Page 78 of 79 Family Limited Partnerships Corporate General Partners

79. 7979 Page 79 of 79 Family Limited Partnerships Corporate General Partners 1% Family Limited Partnership

80. 8080 Page 80 of 79 Family Limited Partnerships Corporate General Partners 1% Family Limited Partnership 99% Limited Partners

81. 8181 Page 81 of 79 Benefits of a FLP Reduces current income tax liability. Centralizes ownership of assets. Shields assets from malpractice & liability claims. Lowers the value of your taxable estate. Minimizes probate expenses. Assets are not publicly displayed. Flexible, nothing is irrevocable.

82. 8282 Page 82 of 79 Common Estate Planning Strategies Outright Gifts Grantor Retained Trusts Charitable Remainder Trusts Irrevocable Insurance Trusts Wait-and-See Trusts Family Limited Partnerships

83. 8383 Page 83 of 79 Valuing the Farm What is the Fair Market Value of a Farm? ”The price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” Remember…the reality is that the estate must make a good faith valuation of the property and the IRS can challenge that value. The best method to obtain a value that will withstand scrutiny is to hire a competent appraiser

84. 8484 Page 84 of 79 Three Common Methods of Valuation 1.Market Data – An arms length sale of the property being valued, or if available, comparable values.

85. 8585 Page 85 of 79 2.Capitalization of Income – The projected net income of the property from the highest and best use of the property capitalized at a rate that reflects a fair return on this investment.

86. 8686 Page 86 of 79 3.Redemption Cost – An estimate of the cost of replacing a structure combined with an appraisal of the land.

87. 8787 Page 87 of 79 Alternative Valuation The highest and best use provision is eliminated and the property is valued as a farm under section 2032(a) of the Internal Revenue Code.

88. 8 Page 88 of 79 1.Must be elected. 2.The owner must be a citizen or resident of the U.S. 3.Cannot reduce the value by more than $840,000 (2003). 4.Must have been farmed for 5 of the last 8 years (retirement or disability exceptions).

89. 8989 Page 89 of 79 5.50% of the adjusted gross estate consists of farm that was passed to a qualified heir. 6.25% of the adjusted gross estate is farm real property. 7.Must continue to be operated as a farm for 10 years.

90. 9090 Page 90 of 79 The most commonly used method of valuation under this provision is the cash rental approach: Annual Gross Cash Rental, minus Property Tax, all divided by the Federal Land Bank Loan Rate

91. 9191 Page 91 of 79 How You Can Help! Estate inventory

92. 9292 Page 92 of 79 Creating a Transition Plan 1.Establish a process – Meet with the owners to lay the foundation of the process. Which advisors will be used? Who is in the first meeting? (Usually just the owners and a primary advisor)

93. 9393 Page 93 of 79 2.Establish Goals. What must be done to effectively transfer the business. What are their security needs now and in retirement? Do they have an intended buyer or someone who will receive the farm?

94. 9494 Page 94 of 79 3.What are the impediments to reaching these goals? Is there an equality issue? What would disability do to the plan? How do they execute the plan with the least tax and legal cost?

95. 9595 Page 95 of 79 Establishing the Process – The first meeting. Who do you want the farm to go to? When do you plan to transfer the farm? What is the value of the farm? What terms do you want for the sale or other transfer of the farm?

96. 9696 Page 96 of 79 What are your retirement goals? Is the farm the only source of income? Have you diversified the risk of having adequate funds for retirement?

97. 9797 Page 97 of 79 If the children will not be receiving or keeping the farm, do you have a potential buyer? Do you want a full buy-out or will you carry a note on the property? Are you willing to rent the farm for some period of time? Will you consider a reverse mortgage?

98. 9898 Page 98 of 79 Who do you want in the next meeting? What do you want to accomplish (e.g. determine if children want the farm, when, and under what terms). Have you discussed this topic with the children to determine their interest and issues? What is your plan to ensure harmony, if possible?

99. 9 Page 99 of 79 The process should end with wills, advanced directives, Power of Attorney, insurance, and agreements for purchase if appropriate.

100. 100100 Page 100 of 79 The Second Meeting… A family meeting Communication, Communication, Communication Review discussions of first meetings Focus on results Design the family goals

101. 101101 Page 101 of 79 Goals List the most important goals for the family. The following are examples…

102. 102102 Page 102 of 79 1.Establish the who and how of transition of the farm. 2.Determine which children, if any, have an interest in working the farm. 3.Discuss and plan for equality of treatment between family members. 4.Establish a retirement plan, and a method of funding it.

103. 103103 Page 103 of 79 5.Account for events that can deter the plan and implement methods of dealing with those risks. 6.Establish wills and advanced directives and Power of Attorney. 7.Execute any documents that are needed to implement the plan.

104. 104104 Page 104 of 79 Risk Reduction There are risks to any transition plan: Disability Nursing Home Costs Change

105. 105105 Page 105 of 79 Disability A severe disability can significantly reduce income causing acceleration of transfer or general dissolution of the plan. –Rental Income –Social Security Disability –Private Disability Plans –Outside Income Group Plans –Retirement Plans

106. 106106 Page 106 of 79 Nursing Home Costs Rental Income Retirement Income Long Term Care Insurance

107. 107107 Page 107 of 79 Dealing with Transition The best laid plans often go astray. Never has this been truer than with farm transition planning.

108. 108108 Page 108 of 79 1.It must be updated periodically. 2.It requires an impetus at time of implementation. (Who’s in charge of starting the transition) 3.The owners must deal with the emotional issues of change. (The Hero’s Farewell by Jeffrey A. Sonnenfeld).

109. 109109 Page 109 of 79 Final Tips Volunteer to be the quarterback. Start Now Communicate openly with family members about the transition goals and plan.

110. 110110 Page 110 of 79 Establish a vision and execute the documents to enable it to happen. Deal with family equity. Select advisors and empower them to do their job.

111. 111111 Page 111 of 79 Build a plan that makes you feel comfortable, and makes your family members feel they are being heard. Implement the tools that you feel are necessary to reduce the risks in the plan. Review the plan regularly.

112. 112112 Page 112 of 79 Thank You! Thank you for attending today. Please fill out the evaluation form.