Estate Planning

Some Thoughts As We Begin the New Year

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As 2014 quickly fades into the rear-view mirror, now is a good time to reflect.  The past year saw a number of changes to the agricultural landscape for beginning farmers.  In no particular order:

  •  The Farm Bill passed early in the year with a number of provisions aimed at beginning farmers.  From increased lending limits on microloans to increased cost-sharing for EQIP contracts and revival of the Conservation Reserve Program’s Transition Incentive Program, beginning farmers have some new resources at their disposal.  As we enter 2015, and before the crop year begins, now is a good time to research how many of the updates in the Farm Bill can help with your operation.
  • The Nebraska Department of Agriculture launched new websites for the Nebraska Beginning Farmer Tax Credit.  The NextGen website contains all the information and forms you need to apply for the Nebraska Beginning Farmer Tax Credit.  The website also lists upcoming workshops and clinics for young and transitioning farmers and ranchers.
  • The 2014 crop year was one in which some beginning farmers and ranchers faced financial headwinds.  The 2015 crop year may intensify those headwinds.  However, one-on-one clinics to discuss financial concerns are available throughout the year.
  • New crop insurance products are rolling out, including changes in the Noninsured Crop Disaster Assistance Program.  These products will assist beginning farmers weather the headwinds identified above.  These products also address how beginning farmers are farming in today.
  • And last but certainly not least, ARC and PLC are coming down the pike.  ARC and PLC replace direct payments.  Now is the time to begin considering what product to enroll in for the best potential benefit to your operation.

The upcoming year has the potential to change your operation, in both positive and negative respects.  If you ever want to take some time to discuss your operation, your options, and what programs are available, feel free to contact us.

First, some definitions.

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When I was in high school and college, I was a competitive debater.  Every debate began the same: by defining the terms of the debate.  While we are not engaging in a debate on this blog, it is nonetheless useful to start with definitions.

As we more fully delve into estate planning on this blog, it is useful to keep definitions in mind.  The definitions are not difficult but nonetheless, it may be possible that these are terms that are not encountered in your day-to-day life.

Beneficiary:  This is the person who is is designated to receive benefits (such as money or income) from an insurance policy, retirement policy, a will, or trust.

Decedent:  The person who has died.

Estate:  This is all the property, both personal and real, that a decedent has at the time of death.  This is similar to a probate estate, which is all the property within a given jurisdiction.  Thus, if a decedent has land in both Nebraska and South Dakota, the decent has a probate estate in Nebraska and South Dakota.

Executor:  This is the person responsible for collecting all the assets of an estate, distributing all the assets to the proper beneficiaries, paying all claims made to the estate (e.g. final medical bills), paying taxes, and appearing at probate proceedings if required by the jurisdiction.  Also called a personal representative.

Heir:  A person designated to inherit some or all of an estate when the decedent dies without a will.  The difference between an heir and a beneficiary is the existence of a will or other estate planning document.

Intestate:  Also intestacy.  This is the state law that controls inheritance when a decedent dies without a will.

Joint Tenancy:  Joint tenancy, as opposed to tenants in common, allows individuals to transfer property with ‘right of survivorship’.  This means each each co-tenant shares an undivided, fractional interest in the property.  As each co-tenant dies, the undivided fractional interest passes to the remaining co-tenants.  Joint tenancy is most commonly found among husband and wives.  Each spouse has an undivided 50% interest in the property.  When the first spouse dies, his 50% interest passes to his wife.  The wife then has 100% undivided interest in the property.  Joint tenancy is a non-probate transfer of property.

Non-probate property:  Property that is not subject to probate.  This can include, but is not limited to, insurance policies, annuities, retirement accounts, property in trust, payable-on-death bank accounts, transfer on death deeds, and other such property that is paid directly to a beneficiary upon death from a source other than the decedent’s estate.  Non-probate property transfers automatically upon death and is not subject to probate proceedings.

Probate:  A proceeding in state court that is the administrative process for distributing an estate, whether by will or intestacy.

Tenants in common: Like joint tenancy, co-tenants share an undivided interest in property.  However, unlike joint tenancy, when a co-tenant dies, the undivided interest passes not to the other co-tenants but to those beneficiary/beneficiaries designated by the decedent.  For example, a husband and wife are tenants in common and each own a 50% undivided interest in property.  The wife’s will states that the beneficiary of her estate is the couple’s only child.  If the wife dies prior to her husband, her 50% interest does not automatically transfer to her husband (such as it would with joint tenancy), but rather, her 50% interest passes to her child.  Thus, the husband owns a 50% undivided interest and the child owns a 50% undivided interest in the property.

Testate:  Dying with a will.

Trust:  When property is held by a person or entity, called the trustee, for the benefit of beneficiaries pursuant to a written instrument known as a trust.  The trust articulates how the trustee can and should manage the trust assets for the beneficiaries.  There are many kinds of trusts and trust documents to list here.

Will:  A will is a document that details how a decedent wants his or her estate property to be distributed.  A will is subject to the probate process.  A will does not detail how non-probate property is distributed.

Portability of the estate tax exclusion amount

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Due to the passage of the American Taxpayer Relief Act of 2012 (ATRA), taxpayers saw the portability election made permanent.  What exactly does this mean for the average Nebraska and South Dakota farmer or rancher?

First, we have to discuss what portability election is.  As you likely know, in 2013, every taxpayer has a unified credit of $5.25 million.  This means a taxpayer can pass at death or gift throughout his or her lifetime $5.25 million prior to the imposition of the estate and gift tax.  But what if a person does not use the entire $5.25 million?  In other words, what if the total assets of a person total $3.25 million?

Assuming you are married (sorry … this won’t work if you are unmarried), you have the option of making a portability election.  A portability election is a mechanism for spouses to ensure full use of each of their exemptions, totaling $10.5 million in 2013.  Portability allows a surviving spouse to use the deceased spouse’s unused exclusion amount for estate and gift taxes.

An example is the best way to understand the math of the portability election.  Assuming no other estate planning, the taxable estate of the deceased spouse is $3.25 million.  Most of that amount is due to the value of farmland.  The deceased spouse’s unused exclusion amount is $2 million.  The surviving spouse can then elect to “port” the $2 million unused exclusion amount, thus raising the surviving spouse’s exclusion amount to $7.25 million.

The election to port, however, must be done on an estate tax return for the deceased spouse.  This means an estate tax return must be filed even when no estate tax is due.  If you are filing an estate tax return solely for the purposes of a portability election, a good faith estimate of asset value is required.  The estate tax return is due nine months after the deceased spouse’s death, before any extensions for filing are requested (an extension is typically six months).

Why is knowledge of the portability election important?  Portability can function as a default estate planning tool to ensure the maximum exclusion amount between spouses is used.  No prior planning is required, unlike with a trust, will, or business entity.  It does require, however, the timely filing of an estate tax return after the deceased spouse’s death.

The portability election can be especially important as land values continue to rise.  The ability to transfer the deceased spouse’s unused exclusion amount to the surviving spouse may allow farm and ranch land to be transferred without imposition of the estate and gift tax.  As many farmers and ranchers know, land values are rising faster than the rate of inflation.  There may be a legitimate concern that the estate tax exemption, which is indexed to the rate of inflation, may not be able to keep up with land valuations.  Thus, while the taxable estate of the deceased spouse may not reach the estate tax exemption (in 2013, $5.25 million), the taxable estate of the surviving spouse may exceed the estate tax exemption because the rate of inflation is lower than rising land values.  Portability is a means to capture the deceased spouse’s unused exclusion amount, which may provide enough of a cushion to ensure the estate tax is not paid due to the combining of the surviving spouse’s exclusion amount and deceased spouse’s unused exclusion amount.

Other things to keep in mind: the portability election is for the deceased spouse’s unused exclusion amount.  If the surviving spouse remarries and does not use the deceased spouse’s unused exclusion amount and the second spouse passes, the surviving spouse no longer can use the unused exclusion from his or her first spouse.  Additionally, while it is likely that the portability election will remain in the tax code permanently, that can all change in an instant with new legislation.  Finally, there is no method to retroactively elect to port the unused exclusion amount — the election must be done in the nine months (or after any extensions have been been granted) after the deceased spouse’s death.

Portability may be an option or other “traditional” estate planning techniques such as trusts may be required.  Do you want to discuss the possibilities?  You are welcome to contact us for a one-on-one mentoring session, attend a workshop or attend a clinic.

Don’t just trust that your trust reflects your current wishes.

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A few weeks ago, I came across a case from the Indiana Court of Appeals that demonstrated exactly why, when creating a trust, it is also necessary to: (1)  review the provisions of the trust periodically, and (2) ensure that all the property you wish to place in the trust is, in fact, in the trust.

In the Indiana case, the settlor (the person who created the trust) created the trust in 1991 and stated that all real estate went to his brother.  The remainder of the trust assets were to be divided among nineteen individuals.  Then, in 1993, the settlor purchased a farm.  In 1998, the settlor also executed a last will and testament stating that any property not in the trust would “pour-over” into the trust for distribution according to the terms of the trust.  (By this point in the story, you can probably guess the ending.)  The trust was amended in 1998, stating the brother could purchase the farm if the brother survived the settlor and his wife.  The amendment also stated after distribution to the brother, the remainder of the trust would pass to the nineteen individuals via cash distributions.

Long story short, because the farm was never in the trust, that meant the farm “poured over” into the trust and was distributed to the nineteen individuals and not the brother (more accurately, the brother’s two children as the brother was deceased).

The lesson: make sure your estate planning documents do what you want them to do and that, should you have a trust, the property you want to be in the trust is deeded to the trust.   I speak with many farmers and ranchers, and a significant number have a revocable trust.  Many of the trusts were written five, ten, even twenty years ago and do not reflect changes in the operation and changes in wishes.

What should farmers and ranchers be doing to ensure that what they want in their estate happens?  First, take a look at your estate planning documents once a year.  A good time to do this would be when you are drafting your balance sheets or doing other annual paperwork.  Make sure that the estate planning documents reflect your wishes.  Double-check that all property you wish to be in the trust is deeded to the trust.  Second, whenever you purchase property, make sure it is properly deeded to the correct person, trust, or business entity to effectuate your estate plan.  The same is true when you sell property; ensure that property sold and the use of the sale proceeds do not hinder your estate plan.  Third, and unfortunately, life happens while we make other plans.  When unexpected changes occur, such as to your operation or a divorce, review your estate plan and make sure it reflects the life change.

Are you a farmer or rancher who wants to discuss their estate plan and ensure it does what you want?  You are welcome to contact us!

The Transfer on Death Deed … Say What?

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We’ve spent some time discussing taxation, contracts (and more contracts with some more contracts thrown in) but I want to turn our focus to estate planning issues.

As of January 2013, Nebraska introduced a new tool in estate planning — the transfer on death deed, or TOD deed.  This blog post gives an overview of the TOD deed but you are encouraged to speak with your attorney or contact us if you have further questions about TOD deeds or estate planning generally.

What is a TOD deed?  It is a deed filed with the Register of Deeds in the appropriate county that allows real property (e.g. land) to transfer upon the owner’s death to the beneficiary designed on the TOD deed.  A TOD deed does not require probate because it is considered a non-probate transfer, just like bank accounts or life insurance policies with beneficiary designations.

What are the requirements?  The TOD deed is only for real property, such as land or residences.  The property must be in the State of Nebraska.  The person transferring the property must be an individual acting only as an individual.  The designated beneficiary may be an individual, corporation, estate, trustee of a trust, partnership, limited liability company, association, joint venture, public corporation, a government or governmental subdivision, agency, or any other legal or commercial entity.

The TOD deed must be signed by the transferor and two disinterested witnesses.  At the same time, a Notary Public must be present to witness all three persons and their signatures on the TOD deed.  The transferor (person make the transfer) must have the same capacity as the capacity required to make a will.

When is a TOD deed filed?  Per Nebraska law, the TOD deed must be filed within thirty days at the appropriate county office where the real estate is located.  If the TOD is not filed within 30 days of its execution, it is invalid.  Additionally, the TOD deed must be filed prior to the death of the transferor.

What if I change my mind?  The TOD deed may be revoked.  Because the TOD deed does not transfer real property until the death of the transferor, the TOD deed may be revoked.  The transferor must filed a revocation of the TOD deed in the same appropriate county office within 30 days of executing the revocation.  A divorce automatically revokes a TOD deed if the now-divorced spouses are a transferor and beneficiary respectively.

In short, the TOD deed is a tool in the estate planning toolbox.  Each specific estate plan requires different questions and considerations.  Thus, feel free to attend our workshops or contact your attorney for further information about your estate planning goals.

Friday Facts, Fun and Food

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As another week comes to a close, our thoughts are with those in Oklahoma.

Study concludes that internet access increases small farm gross income approximately $2,200 to $2,700 per year.  For purposes of the study, small farm was defined as a farm with a gross cash farm income of $250,000 or less.

Here’s an interesting post on the progress of corn planting but why we are below the record pace of planting.

The ACRE deadline is approaching quickly — the deadline to apply is June 3.

SDSU offers its drought outlook for South Dakota.

Farmers especially should consider estate planning sooner rather than later.  As part of that consideration, this is a great overview of why to involve the entire family during estate planning.

Interested in free ice cream?  Then head over to the University of Nebraska – Lincoln’s Food Processing Center on East Campus on June 9 from 1-5 p.m.  Also available are tours of the Center’s pilot plants, as well as interactive displays on sensory testing, marketing, food safety, and more.

Want something a little different for Memorial Day weekend?  May I suggest Lime Marinated Grilled Chicken?