Estate Transfer Issues You Built It - Now What Do You Do With It? John Mangus Custom Ag Solutions United States Department of Agriculture Risk Management Agency (RMA) February 25, 2011

2 Program Sponsorship, Coordination, and Delivery USDA / Risk Management Agency (RMA) –Oversees $90B Federal Crop Insurance Program –St. Paul, MN, Regional Office (One of Ten) –Relatively Few Employees (About 500) –Main Offices in Washington, DC, and Kansas City, MO Custom Ag Solutions –Crop Insurance Education Programs –Risk Management Tools (BeefBasis.com and CTRAT) –Rural Appraisals –Technology Development

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7 Disclaimer Custom Ag Solutions is neither your legal counsel nor your tax advisor. This presentation is intended to inform, but not advise. Before taking any estate planning steps, you should consult with competent legal and tax professionals.

8 Planning For Transition Why Should I Plan? Provide for Retirement Provide for Heirs Minimize Tax Burden Ensure a Legacy Family Unity

9 Estate Transfer Issues Build a Succession Team Inventory Your Assets Identify Goals of Affected Parties Build Succession Vehicle Costs Example

10 Building a Succession Team Who is on My Succession Team? Owners (all owners) Successors Legal Counsel Tax Advisor

11 Estate Transfer Issues Build a Succession Team Inventory Your Assets Identify Goals of Affected Parties Build Succession Vehicle Costs Example

12 Inventory Your Assets Identify Assets to Pass On  Business  Personal Assess Earning Potential and Value Include Liabilities Full Disclosure and Documentation

13 Estate Transfer Issues Build a Succession Team Inventory Your Assets Identify Goals of Affected Parties Build Succession Vehicle Costs Example

14 Identify Needs and Goals: Owners Retirement Security Family Harmony Reward Control

15 Identify Needs and Goals: Successors Where is My Work Taking Me? Planning for My Future Expectations  Financial  Family  Other Successors

16 Estate Transfer Issues Build a Succession Team Inventory Your Assets Identify Goals of Affected Parties Build Succession Vehicle Costs Example

17 Build a Succession Vehicle Limited Partnerships Limited Liability Companies Corporations Trusts and Wills Others

18 Limited Partnerships Distribute ownership Retain control Business purpose Operating agreement Limits liability Tax considerations

19 Build a Succession Vehicle Limited Partnerships Limited Liability Companies Corporations Trusts and Wills Others

20 Limited Liability Companies Liability protection Business purpose Shared Control Operating agreement Tax Considerations

21 Build a Succession Vehicle Limited Partnerships Limited Liability Companies Corporations Trusts and Wills Others

22 Corporations More complicated than LLCs and LPs C vs. S corporations Ownership restrictions (S) Dividend restrictions (S) Tax considerations are the key decision factor

23 Build a Succession Vehicle Limited Partnerships Limited Liability Companies Corporations Trusts and Wills Others

24 Trusts and Wills Trusts Bypass Probate Revocable Irrevocable Grantor Trustee Beneficiary Wills Miscellaneous assets Personal effects “Pour-over” wills Guardians

25 Build a Succession Vehicle Limited Partnerships Limited Liability Companies Corporations Trusts and Wills Others

26 Other Succession Vehicles Mortgages Life Estates Charitable Remainder Trusts (CRTs) Joint Tenancy Beneficiary Designation Payable on Death Account

27 A Few Observations Avoid shared ownership Plan for the end of the ride Entities can survive multiple generations Avoid conflicts of interest Seek professional help

28 Estate Transfer Issues Build a Succession Team Inventory Your Assets Identify Goals of Affected Parties Build Succession Vehicle Costs Example

29 Costs Costs vary widely depending on size, market, and complexity Attorney, Tax Advisor, Other Professionals Small estates may cost as little as $1,000 Larger estates may take well over $10,000 or more If necessary, the plan can be developed and implemented in small steps

30 Estate Transfer Issues Build a Succession Team Inventory Your Assets Identify Goals of Affected Parties Build Succession Vehicle Costs Example

31 Real World Example Bob & Betty Johnson (55 years old) 1,200 acres, $6 million land value If leased, would produce NOI of $120,000/yr Three married sons, the oldest (John) works on the farm

32 Key Issues Retirement Equal treatment of children Minimize estate taxes Real World Example

33 Estate Transfer Issues Build a Succession Team Inventory Your Assets Identify Goals of Affected Parties Build Succession Vehicle Costs

34 Real World Solution Entities Johnson & Johnson Trust Johnson Family Limited Partnership John Johnson LLC Documents Will Operating Agreement _____________________________________ Living Will Durable Power of Attorney Health Care POA

35 Real World Solution Johnson & Johnson Trust Personal Assets (97%) Limited Partner Ownership (3%) General Partner Ownership

36 Real World Solution Johnson & Johnson Trust Personal Assets 22% Limited Partner Ownership 75% Limited Partner Ownership Three Johnson Sons (each get 25%) (3%) General Partner Ownership

37 Real World Solution Johnson & Johnson Trust Johnson Farm Johnson Family Limited Partnership Personal Assets General Partner Interest (3%) The Three Johnson Sons Limited Partner Interest (97%)

38 Real World Solution Johnson Family Limited Partnership Life estate John Johnson LLC leases farm General partners compensated with lease income Right to purchase remaining interest

39 Johnson Cash Flows John Johnson, LLC Bob & Betty Living Expenses $80,000 Johnson Family Limited Partnership $50,000 Partnership Interest Purchase $30,000/Yr $40,000 FamLimPart Investment Reserve Lease Income: $90,000/YR John Johnson

40 Wrapping It Up Life estate expires John becomes general partner Purchases 50% interest  1/3 from cash reserve  2/3 using a mortgage to brothers Trust allows sons to avoid probate Pour-over will

41 Final Thoughts Start now Communicate Utilize professional help

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