Robben estate planning

WOMEN MANAGING THE FARM:

ESTATE PLANNING AND ESTATE TAX ISSUES

Shon C. Robben Arthur-Green, LLP 801 Poyntz Avenue

Manhattan, Kansas 66502 785-537-1345

785-537-7874 fax [email protected]

www.arthur-green.com

February 13, 2014

mailto:[email protected]

http://www.arthur-green.com/

http://www.arthur-green.com/

Estate Planning Objectives

1. Ensure Assets Pass to Intended Parties (Family, Charity, etc.)

2. Minimize Costs • Probate Expenses • Estate Taxes • Income Taxes- Stepped up basis

3. Pass Assets as Quickly as Possible to Beneficiaries • Avoid delays with probate

Estate Planning Objectives

4. Care for Minors • Designate Guardians • Manage assets until minors reach desired age

5. Transfer Family Business to Maintain Continuity

6. Plan for Long Term Care Expenses

What is Probate? Court supervised procedure which oversees the collection and distribution of all your property and the payment of all your debts Expensive:

• Substantial court costs and attorneys fees to have a will and testamentary trust probated

• Attorneys fees can range from $2,000 up to 3% of your

estate • In almost every case the fees for probate exceed the costs for

using a nonprobate transfer

What is Probate? Public Procedure:

• All probate documents become part of public record • Records include an inventory of the estate assets and

persons to whom the assets are distributed

Lengthy Process: • 6 months to several years before procedure is complete • Court supervised and numerous procedures have to be

followed

Forms of Ownership 1. Sole Ownership

• This will cause assets to be distributed under intestate succession or will of decedent

• Probate needed 2. Tenants in Common

• Decedents’ share of asset will be distributed in the same manner as sole ownership

• Probate needed • Creditors of owner can only attach that owner’s interest

3. Joint Tenants With Right of Survivorship • This property will be distributed outside will or trust to surviving joint

tenant • No probate needed • Creditors of any owner can attach asset.

Forms of Ownership 4. Ownership in Trust

• Property will be distributed as provided in Trust document • Avoids Probate • Can be protected from creditors of beneficiaries, except Grantor in

most cases.

5. Life Insurance, pensions and IRA’s • have named beneficiaries • Creditors of beneficiaries cannot attach while owner is alive • Avoids Probate

6. Transfer on Death Asset • Creditors of beneficiaries cannot attach while owner is alive • Avoids Probate • Subject to Medicaid recovery

Options for Avoiding Probate Joint Tenancy Beneficiary Designations-life insurance,

retirement accounts POD-TOD Assets

Distribution Options limited-may not reach desired beneficiaries

No minor beneficiary options Lifetime Gifts

May not be made in time Gifts carry donor’s basis to donee

Options for Avoiding Probate Revocable Living Trust

Definition: legal instrument created during your life under which the trust owns your property and provides for its management and disposition during your lifetime and after your death

In the event you become disabled or incapacitated, the trust allows your successor trustee to step in and use trust assets to provide for your welfare and benefit

After death, the trust provides for the distribution of your assets

Options for Avoiding Probate Revocable Living Trust (cont.)

Living trust does not go through probate Less expensive to administer Trust assets and beneficiaries are kept private Less time to administer and distribute assets

Can carry out complex distributions with a living trust Provide for minor children Provide for spouse and children in second marriage Deal with distribution alternatives and contingencies

Advantages of Will & Trust

Avoid Distribution under Intestate Succession – Kansas Intestacy Laws Spouse Only-all to spouse Spouse and Children-½ to spouse and ½ to

children Children Only- all to children

Can designate recipient of assets


Minor Children Can designate guardian for minor children Defer distributions to minors until desired age

Hold in Trust Discretionary Distribution

Choosing Personal Representative Will – Executor Trust – Successor Trustee


Authorize Sale of Assets and Payment of Expenses

Authorize Continuation of Business Tax Saving Opportunities

Use estate tax exemptions; generation skipping Probate Avoidance – Trust Only

Types of Wills and Trusts Wills Basic Will – Spouse then Children (Adults) Will with Trust for Minor Children or Special Needs Pour-over Will Tax-Saving Will – Creates Testamentary Credit

Shelter Trust or QTIP Trust Trusts Joint Living Trust

Main goal is to avoid probate Surviving spouse has full control and access to assets Include age restrictions for minors Can use both estate tax exemptions with portability Allows management of assets if disabled

Types of Wills and Trusts Credit Shelter Trust

Avoids Probate Uses decedent’s estate tax exemption

QTIP Trust Avoids Probate Lets first spouse to die designate who receives assets after death of

surviving spouse Popular with 2nd marriages

Special Needs/Supplemental Care Trusts Benefits persons with disabilities Trust only supplements public benefits

ILIT Owns life insurance policy Keeps life insurance out of taxable estate

Medicaid Trusts

QTIP Trust- Second Marriage

Example: Sue has $1,000,000 in her trust. She has children from her first marriage, but is now married to Ted. Ted only has $250,000 in assets. Sue wants Ted to have right to use her assets during his lifetime, but wants to ensure unused assets pass to her children.

QTIP Trust- Second Marriage Sue’s Trust $1,000,000

QTIP Trust $1,000,000

-Ted-income for life -Principal if needed for health,

maintenance or support (optional) -At Ted’s death assets pass

to Sue’s children

Sue’s Children

$1,000,000

Ted’s Trust $250,000

Ted’s Children $250,000

Additional Estate Planning Tools

1. Financial Powers of Attorney • Durable Financial Power of Attorney • Homestead Power of Attorney

2. Health Care Directives • Medical Power of Attorney • HIPAA Authorization (Health Insurance

Portability and Accountability Act of 1996) • Living Will • Do Not Resuscitate Order

Distribution of estate among farming and non- farming children. (fair v. equal)

1. Distribute farming assets to child who is

farming. Start with livestock and equipment, then home place or land most important to the operation.

2. Distribute to non-farming children the non-farming assets.

3. Are there enough other assets for “fair?”

Distribution Alternatives Farming & Non-Farming Beneficiaries

1st Right. Allow farming children first right to buy farm land, livestock, equipment or to lease land after parents’ death for an extended period of time. Children selling their share may be able to sell tax free with step up in basis.

No Forced Partnership. Leave separate farms to separate children instead of putting all children on each deed.

Distribution Alternatives Farming & Non-Farming Beneficiaries

Buy/Sell Agreements & Other Provisions

1. Provisions can be placed in Will or Trust documents providing the farming children the option to purchase farm assets. (a) Option to purchase land or livestock and

equipment at either of the following values: (i) Appraised value at death

(ii) Value set in will or trust

(b) Payments can be made over a fixed period of time

(c) Farming child can purchase life insurance on parents and use funds to purchase assets.


2. Require land to be leased to farming child for fair market value

3. Hold farm assets in trust FBO all children, but allow farming child to continue to farm

4. Transfer farm to family LLC (c) Allow farm child to manage/control entity

(b) Restrict ownership to family members


5. In corporations, partnerships or Limited Liability Companies, the buy/sell provisions can be in documents establishing the entity or by separate agreement (a) Can require buy out if person leaves business or dies

(b) Can fix price annually or do it by appraised value

(c) Can use life insurance to provide funding

Planning with Life Insurance

Jim and Sue’s Assets Two Children Farm Land $1,000,000 Bob who is a farmer J&S LLC $1,372,000 Mary is not a farmer Cash & Investments $ 200,000 $2,572,000 Jim and Sue can purchase a second to die policy which pays on the death of

the survivor. Mary could be owner and beneficiary of the policy. The amount would depend on cost of insurance and how much they want Mary to have. One idea would be to purchase a $1,000,000 policy for Mary, and then leave all land and LLC to Bob and life insurance, cash and investments to Mary. Another idea would be for Bob to own the policy and be beneficiary, and then have a buy-out provision in the trust for him to buy Mary’s share of the farm. The parents can determine Mary’s share, and set a value if they wish to do so.

Federal Estate Tax

• The information provided hereafter represents the Federal estate tax law based upon the American Taxpayer Relief Act of 2012 (ATRA).

• ATRA contains no sunset provision, but is always subject to change by an act of Congress.

Federal Estate Tax Charitable and Marital Deductions

• Unlimited charitable deduction • Unlimited marital deduction

• Decedent must be married • Survived by spouse • Spouse must be a U.S. citizen

• Qualified Domestic Trust (QDOT)

Prior Estate Tax Exclusions & Rates (2001 - 2012)

Year Estate Exclusion Amount

Maximum Marginal Estate Tax Rate

2001-2003 $1,000,000 55% - 49% 2004-2005 $1,500,000 48% - 47% 2006-2008 $2,000,000 46% - 45%

2009 $3,500,000 45% 2010 $0 or $5,000,000 0% or 35% 2011 $5,000,000 35% 2012 $5,120,000 35%

Federal Estate & Gift Tax Exemptions (2012 ATRA)

The exemption is indexed for inflation increasing by $10,000 annual increments and based on $5,000,000 exemption in 2011.

2014 Annual gift tax exclusion $14,000 per donee per year indexed for

inflation.

Estate Tax Exemption

Gift Tax Exemption

2013 $5,250,000 $5,250,000 2014 $5,340,000 $5,340,000 2015 and thereafter $5,000,000

Indexed for inflation from 2011

$5,000,000 Indexed for inflation from 2011

Maximum Estate & Gift Tax Rates (2012 ATRA)

2011-2012 35%

2013 – and thereafter 40%

Generation Skipping Transfer Tax Exemptions and Rates (2012 ATRA)

Exemption Maximum Rate

2013 $5,250,000 40%

2014 $5,340,000 40%

2015 and thereafter

$5,000,000 Indexed for inflation from 2011

40%

• Allows surviving spouse to take advantage of unused portion of predeceased spouse’s estate tax exclusion

• If more than one predeceased spouse limited to lesser of the current exemption ($5,340,000 in 2014) or unused exclusion of last such deceased spouse

• Election made on timely filed estate tax return

“Portability” Between Spouses (2012 ATRA)

Example #1 • Husband dies in 2013 with $3,000,000 Estate • Leaves entire $3,000,000 to children from prior marriage • Estate Tax Return filed within 9 months of Husband’s death and

portability election made • Wife’s exclusion amount becomes $7,500,000

Wife’s Original Exclusion $5,250,000 Unused Exclusion of Husband $2,250,000 Total Exclusion $7,500,000


Husband $3,000,000

Wife’s Federal Estate Tax Exclusion $5,250,000

Children From Prior Marriage

$3,000,000

Available Gift/Estate Tax Exclusion For

Wife $7,500,000

$2,250,000 unused by Husband

Estate Tax Return filed for Husband within 9 months


Example #2 • Wife dies in January 2013 with $1,000,000 Estate • Leaves entire $1,000,000 to children from prior marriage • Taxpayer remarries March 2013 • New wife dies in November 2013 with $2,000,000 Estate • Leaves entire $2,000,000 to children from prior marriage


• Estate Tax Returns were filed within 9 months of each death and portability elections made

• Limited to lesser of $5,250,000 or unused exclusion of last deceased spouse

• Husband’s exclusion amount is $8,500,000 rather than $9,500,000 for 2013

Husband’s Original Exclusion $5,250,000 Unused Exclusion of Last Wife $3,250,000 $8,500,000


Wife $2,000,000

Husband’s Federal Estate Tax Exclusion $5,250,000

Children From Prior Marriage

$2,000,000

Available Gift/Estate Tax Exclusion For

Husband $8,500,000

$3,250,000 unused by last wife

Estate Tax Return filed within 9

months


Kansas Estate Tax

Kansas Estate Tax

• No Kansas Estate or Inheritance Tax after 2009

• Repealed effective January 1, 2010

Income Tax Basis Law

Decedent owns the following assets at death in 2012

Decedent’s Cost

Fair Market Value on Date of Death and New

Income Tax Basis Land $200,000 $900,000

Stock $100,000 $800,000

CD’s $100,000 $100,000

No capital gains if sold by heirs following death for value used in the estate.

Lifetime Gifting Joe owns 500 acres of land he paid $100,000 for and is worth $1,500,000 and

wants to gift to his five children in 2013. He is married to Sue who consents to the gift.

$1,500,000 gifted in 2013 Joe and Sue agree to split gifts. ($70,000) = (5 x $14,000 for Joe) use annual exclusion for each child ($70,000) = (5 x $14,000 for Sue) use annual exclusion for each child $1,360,000 gift left ($680,000) $5,250,000 less $680,000=$4,570,000 lifetime gift exemption left for Joe ($680,000) $5,250,000 less $680,000=$4,570,000 lifetime gift exemption left for Sue 0 tax Joe and Sue will each have $4,570,000 of estate tax exemption left Basis to children in land is Joe’s basis $100,000

Planning Without Estate Tax Concerns (Federal Estate Tax 2014)

Planning for estates where assets are less than the federal estate tax exemption of $5,340,000 in 2014

Example #1 John and Mary own: House $250,000 Mutual Funds/Stocks $200,000 Savings $150,000 Farm $1,300,000 Total $1,900,000

One Trust • John and Mary execute one trust that will benefit the surviving

spouse • On the death of the survivor of John and Mary, the trust will

distribute assets as directed by the trust

This planning allows for easy distribution of assets when no estate tax planning is needed. Surviving spouse may change ultimate distribution of assets, if they so desire, including distribution to a new spouse.

If one Trust is used, you must keep track of the Federal Estate Tax exemption in the future to be sure it remains higher than assets in the one trust. You also need to monitor the Kansas law in case Kansas enacts a new estate tax law.

Any chance surviving spouse’s assets will exceed $5,340,000? File estate tax return just in case.


Federal Estate Tax $0

John & Mary $1,900,000

Surviving Spouse $1,900,000

Children $1,900,000


John and Mary Own: House & Land $600,000 Bank Accts $450,000 Mutual Funds/Stocks $1,450,000 Livestock Machinery & Equipment $1,100,000 Farm Ground $2,700,000 Total $6,300,000

Planning with Estate Tax Concerns – 1 Trust (Federal Estate Tax 2014)


John & Mary

$6,300,000

Surviving Spouse $6,300,000

Children $6,300,000

File Estate Tax Return and make

portability election. If not, face estate

tax of up to $384,000

Planning with Estate Tax Concerns – 1 Trust (Federal Estate Tax 2014)

John’s Trust - $3,150,000 John Dies in Jan. 2014 • Estate - $3,150,000

• Federal Exemption - $5,340,000

• Federal Estate Tax --$0

• Principal stays in trust with income to Mary for lifetime. Mary can access principal for health, education, maintenance

and support

Mary’s Trust - $3,150,000 Mary Dies in Nov. 2014

• Estate - $3,150,000 • Federal Exemption - $5,340,000 • Federal Estate Tax --$0

* Both trusts are under $5,340,000 Federal Estate Tax Exemption * Unused exemption of John can be used by Mary if federal estate tax return is filed for John and election is made

Planning with Estate Tax Concerns – 2 Trusts (Federal Estate Tax 2014)

John’s Trust $3,150,000

Mary’s Trust $3,150,000


• Income to Mary • Principal for HEMS • Mary as Trustee


Children $6,300,000


John Dies

Mary Dies

Planning with Estate Tax Concerns – 2 Trusts (Federal Estate Tax 2014)

Reasons To Use 2 Trust Plan

• Assets in credit shelter trust can be directed to children of couple and not to a new spouse

• Appreciation of assets in credit shelter trust; avoid estate taxation at death of surviving spouse

• Creditor protection from claims against surviving spouse

Benefit of 2 Trusts (Removing Growth from Estate)

John and Mary’s Total Assets $10,240,000 • Set up one trust to use portability • John Dies in 2012 All assets pass to Mary

• Assets increase in value 10% in 2013 • Mary dies at end of 2013 with $11,264,000 in her estate • Combined exemption - $10,370,000 ($5,120,000 + $5,250,000) • Estate Tax is $357,600

One Trust Example

John & Mary $10,240,000

Mary’s Trust @ Death $11,264,000

Children $10,906,400

John Dies 2012

Mary Dies 2013


$10,370,000 Exemption

John’s Trust $5,120,000 John Dies 2012 • Estate $5,120,000 • Federal Exemption $5,120,000 • Federal Estate Tax $0 • Income to Mary for Life • Principal for HEMS • 2013 – Assets grow to $5,632,000

Mary’s Trust $5,120,000 Mary Dies end of 2013 • Estate $5,632,000 • Federal Exemption $5,250,000 • Estate Tax $152,800

Kids Receive John’s Trust $5,632,000 Mary’s Trust $5,479,200 Total $11,111,200

* Avoided estate tax on growth in John’s Trust – saved $204,800




John’s Trust at end of 2013 - $5,632,000

• Income to Mary • Principal for HEMS •Mary as Trustee


Children $11,111,200


John Dies Mary Dies at end of 2013

Federal Estate Tax $152,800


Use Value Rules Federal Estate Tax

1. Allows use of alternate special valuation instead of fair market value to determine value of farm or real property used in family business.

2. Limited to reduction amount of $1,040,000 for 2012.

*2013 limitation - $1,070,000 *2014 limitation - $1,090,000

Use Value – Basic Requirements

U.S. Citizenship.

U.S. Real Property owned by decedent or a closely held family business.

Real estate must pass to qualified heir (ancestors, spouse, lineal descendants, lineal descendants of spouse or parent, spouse of a lineal descendant of descendant's parents or lineal descendants).

Use Value – Basic Requirements

Decedent must have been using real property for special use (farming, trade, or business) at death.

Special use for 5 out of 8 previous years.

Value of special use real and personal property must be 50% or more of gross estate.

Special use real estate must be 25% or more of gross estate.

Use Value Appraisal (For Federal Estate Tax) (2012 Land Value Calculation)

Average Pasture Rent $22 per acre

Average Taxes $2 per acre

Est. Average Federal Farm Credit Interest Rate

5.15 percent (2012)

Land Value ($22-$2)/.0515 = $388 per acre

Use Value Appraisal (Jim’s Assets)

Jim’s Assets Fair Market Value

Land Use Value for Federal Estate Tax

3000 Acres of Pasture at $1,500

$4,500,000 3000 Acres of Pasture at ($1,164,000) but limited reduction of $1,040,000

$ 3,460,000

400 Cows at $1000 $ 400,000 400 Cows at $1000 $ 400,000

Equipment $ 800,000 Equipment $ 800,000 Certificates of Deposit

$ 300,000 Certificates of Deposit $ 300,000

TOTAL $6,000,000 ESTATE TOTAL $4,960,000

Use Value Appraisal - 2012

Jim Estate-with use value Estate-without use value

$4,960,000 $6,000,0000

Federal Exclusion $5,120,000

Federal Tax $0

Estate Tax Without Using Use Value

$308, 000

Note: Basis in land is $3,460,000 since use value appraisal is used

Use Value – Recapture

1. Property must be used in family business for 10 years.

2. Qualified heir must materially participate in business for 8 of 10 years.

3. If fail continued use, tax savings is recaptured.

Generation Skipping Transfer Tax

Reduce Estate Taxes by skipping a generation of heirs

Prior to 1976, could make such transfers without limits and completely skip a generation of estate tax

Two Types of GST Transfers:

Direct Skip: Parent bypasses his/her children and gives asset directly to grandchildren or a trust for their benefit

GST Trust: Parent places assets in trust which pays income to child for life, then remainder passes to grandchildren after the child is deceased

Generation Skipping Transfers Direct Skip

Example No. 1: Bob has assets worth $5,000,000. He has 1 son,

Bill, who is single. Bill’s net worth is $7,000,000. Bob doesn’t want his assets subject to estate tax in Bill’s estate. Bob’s trust leaves all of his assets directly to Bill’s children at Bob’s death.

Generation Skipping Transfers GST Trust

Example No. 2: Bob is 85 and has 1 child, Samantha. Bob’s

assets are worth $5,000,000. Samantha’s husband is a spendthrift and Bob doesn’t want Samantha’s husband wasting away Bob’s assets after his death.

Generation Skipping Transfers GST Trust

Solution: Bob’s trust states at his death all of his assets are

to remain in trust for Samantha’s lifetime. Samantha is entitled to income from the trust for her lifetime and principal if needed for health, maintenance and support. The trust has a spendthrift provision protecting it from creditors. At Samantha’s death the trust assets pass to her children at age 30.

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Robben estate planning