Annie’s Project – Education for Farm Women Annie’s Project – Education for Farm Women a 501(c)(3) organization.

Estate Planning Part One Estate Planning Concepts The estate tax was enacted in 1916 to help pay for World War 1.

What is Estate Planning The overall process of making decisions as to how property is to pass to others, during one’s lifetime, at death or after death. Estate tax planning is much more than trying to minimize taxes. It deals with figuring out what you have, how it is owned, how you want to transfer your assets and when do you want to transfer – before death (gifts or life estate), at death, or after death.

Who Should Do Estate Planning Everyone…it is not just about money Unless you are happy with the plan provided by the state Estate planning is not just for the wealthy. It may involve other issues as well such as business planning, succession planning, and retirement planning. The state has a plan if you don’t have a will or a trust. However, a will or a trust allows for you to nominate guardians, executors, specific directions on personal assets in addition to the issues involving real estate. Estate planning often involves other issues such as a living will, medical power of attorney or durable power of attorney.

We Are Not Giving Legal Advice We are providing non-biased educational information. Seek out your own legal council. The purpose of this program is to provide educational information; not legal advice. Individuals should seek out their own legal council as the application of laws, court cases and the individual’s situation require specific legal council for each set of facts.

Who Is the Estate Plan For? Is it to pass a business to the next generation? Is it to plan for retirement? Is it to jump start the kids’ ambitions? Is it to avoid taxes? An individual may have several different goals that they are trying to achieve by the distribution of assets. It takes a lot of thought and communication with others to fine tune the goals. This impacts how the plan is set up, the tools used in the plan, and the time frame required to accomplish the goals. People often say they want to avoid taxes, however most estates won’t have to pay any estate taxes so managing for income or inheritance taxes may be important.

Your Goals What are your most important goals? Individual Family Retirement Business Spiritual Other Are your goals realistic? What is the timeframe for the goals? What are the barriers to achieving your goals?

Key is to Articulate Goals The parents together The parents individually The on-farm heirs The off-farm heirs Are your goals compatible with your spouse’s? What can be done to get them to match up better? What are your expectations for your on-farm heirs? For off-farm heirs? How will you deal with the issue of fair versus equal?

Develop Goals Develop goals under various circumstances: What to do it spouse dies Receive income? Sell interest? Participate in management? What to do if both die? What to do if entire family dies? Most people’s plans don’t go according to the plan they have laid out. People get sick or die or divorce. Businesses have financial set backs. What would want to have happen to your assets under a variety of outcomes? If your spouse dies first what would you do with the assets? How would you manage those assets? Or liquidate?

Common Estate Planning Goals Minimize taxes at death Minimize probate costs and delays Conserve property during life and after death in accordance with goals Provide financial security: Parents in retirement Family member with a disability Providing for retirement is often the number one priority. Transferring certain assets, such as a farm, may be another goal. Remember, you can borrow for children's college but not many lenders are going to loan you money for retirement!

Key Areas of Concern Guardian for minor children or adult children with special needs. Providing income for a surviving spouse or children. Management of estate property, assets, investments. Minimization of probate and settlement expenses. Just some suggestions for areas to think about when planning.

Key Areas of Concern Minimization of estate and inheritance taxes. Flexibility. Liquidity for necessary and unavoidable expenses. Gift planning. Continuation and/or transfer of the business.

Put Together a Team of Advisors Start with referrals, then interview potential advisors: Accountant Banker Insurance agent Investment advisor Lawyer Financial Planner If you have significant assets you may need to put together a team of people to help you figure out your estate plan and help put it together. There is a publication http://www.extension.iastate.edu/agdm/wholefarm/pdf/c4-61.pdf that can help you work through a process for finding advisors. http://www.extension.iastate.edu/agdm/wholefarm/pdf/c4-61.pdf

Getting Started Determine what you own and how much it is worth. Who do you want to receive your bounty? When do you want them to get it? Review any past estate planning. Review of family insurance program. Advisability of lifetime gifting. A good starting point is to have a current net worth statement. The you might want to find a form such as: http://www.extension.iastate.edu/agdm/info/eyep/c4-57.pdf where you can input information that a lawyer might want as they help develop the plan. This will cut down on legal expenses and help clarify some issues. When do your heirs receive the assets – before, at or after your death? What planning have you done in the past? What changes are you contemplating? How much and how is life insurance owned? Is gifting appropriate and which assets are appropriate? The form at the web site is the same one that is in the workbook. You can fill it out on line and save and update as needed. http://www.extension.iastate.edu/agdm/info/eyep/c4-57.pdf

Important Considerations Types of Assets Inventory Depreciable Machinery and equipment Permanent improvements Real Estate Land Personal residence Tax Basis Alternative forms for disposing of property during life Inventory items such as grain may not get a step up in basis. There are income tax issues in the sale of these assets from the estate. Depreciable property gets a new basis at death which would allow the heir to start depreciating them again or sell them without a tax liability. Real estate will get an adjustment in basis as well. Personal residences are separated out because personal residences can be sold during life tax free so this may be important when you are looking at retirement planning. During life you can sell or gift property or a combination of the two and this may be important when looking at your estate plan.

Fair Market Value of Real Estate You may be pleased! May be one of your greatest stores of wealth. Land values have recently increased creating substantial net worth for many land owners. Land is normally valued based on what a “willing seller” and a “willing buyer” would agree on. In larger estates the land may be appraised by a certified appraiser to value the property for estate tax purposes. Even if the land is not going to be sold it is important to determine what the new basis will be for the heirs. This is an audit area for many state departments of revenue.

Ownership/Control Fee simple Life estate or life tenants Remainder interest. Leaseholds Tenants in common. Joint tenants with right of survivorship. Property can be owned many ways between spouses and non-spouses. The Federal government gives ownership interest but it keeps several rights. It keeps the right to tax it, to condemn it and to zone the use of the land. If you own land as “fee simple” you have all of the rights such as mineral rights, water rights and have use of the property subject to the rights the government kept. A life estate or life tenant means you have the right to occupy the property and receive the income from the property, but also must maintain the property. The right ends when an event occurs such as the donor dies or the life tenant dies. The property is then transferred to the “remainderman” who then has title to the property. A “leasehold” has control of the property for a certain length of time at a certain price. These ownership interests (such as remainderman) can be sold unless forbidden in the agreement. TIC and JTWRS are discussed in the next slides.

Forms of Co-Ownership Tenancy in common: Each tenant holds an undivided interest in the property. Upon a tenant’s death, the interest passes in accordance with the tenant’s will (or state law if no will.) The decedent’s estate includes only the decedent’s interest. Can be multiple owners. Can have unequal shares. Can be divided by the use of a partition action. Partitions can be voluntary or they can involve the courts dividing the property or selling the property and dividing the money. Voluntary partitions are normally tax free with basis being prorated. Can sell ownership interest.

Forms of Co-Ownership Joint tenancy: Passes by survivorship designation. Precludes use of life estate/remainder arrangement as to non-marital portion of the estate. Magic words of conveyance. Takes precedence over the will. Joint tenants have equal ownership such as 50% each if two owners. The title passes equally to the survivors, not to the decedent's estate. The decedent’s will has no impact on the transfer of the property. Can sell ownership interest but may convert ownership to tenants in common.

Forms of Co-Ownership Tenancy by the entirety (not allowed in all states): Husband and wife can together convey a fee simple but neither can unilaterally sever the tenancy. Individual states may have other forms of ownership as well. Generally provides more protection for spouses from other spouse’s creditors on personal residence. Cannot sell to non-spouse.

Estate Planning Implications of Property Ownership Forms Spousal joint tenancies: The property is treated at the first death as belonging 50% to each spouse for federal estate tax purposes. “Fractional share” rule. When a spouse dies it is assumed that if the property is owned jointly that half of it belonged to the deceased spouse and the other half to the surviving spouse. The spouses are each considered to have contributed one half to the purchase of the asset even if only one did. It’s know as the fractional share rule. A major problem with joint tenancy is that it can create a heavy tax burden at the survivor’s death. Since property is transferred outright to the survivor, the entire value of the property is included in the estate of the survivor. If property is not owned correctly for estate planning purposes remember that you can make unlimited gifts between spouses without any tax consequences on the transfers.

Estate Planning Implications of Property Ownership Forms Non-spousal joint tenancies: Property is taxed in the estate of the first to die except to the extent the surviving owner proves contribution for its acquisition. “Consideration furnished” rule. Property included in decedent’s estate receives a new basis at death. The value of the real estate that is included in the decedent’s estate is based on several factors. One is the “consideration furnished” rule, applicable to all joint tenancies except those involving only husbands and wives, the full value of the property is included in the estate of the first person to die for federal estate tax purposes (and the full value receives a new income tax basis), except to the extent the survivor can prove he or she provided the money when the property was acquired or the mortgage paid off. For example: Aunt Mable puts your name on a $100,000 CD as joint tenant with right of survivorship. Aunt Mable dies. You get the CD because you are the survivor. Aunt Mable’s estate has to include the full value of the CD. Aunt Mable’s estate pays the tax if any due. There is no change in basis because the market value and basis are the same.

Legal Terminology Vocabulary Matching Exercise and complete Class Activity Find the Legal Terminology Vocabulary Matching Exercise and complete Have them start through. The answers are on the back page.

Homework Assignment Find “Last Will and Testament.” Find ten of the terms listed in the Activity Worksheet in your will. Check the titles on all real estate to see how it is owned. Review the Estate Planning Questionnaire found in the book.

Annie’s Project – Education for Farm Women Annie’s Project – Education for Farm Women a 501(c)(3) organization.