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

2. Estate Planning Part Two
Methods of Asset Transfer

3. Homework Review Did you find your will? Date on it?
Did you find terms not on the Vocabulary Exercise
Did you find anything surprising when looking at the titles on property?
Questions about the Estate Planning Questionnaire?
Ask participants about finding wills and how long since done or redone. Ask about vocabulary words used in wills. Ask for any words in wills not listed in vocabulary list. Talk about “surprises” on the way property was titled. Ask if they had any problems filling out parts of the estate planning questionnaire.

4. Methods of Asset Transfer
“Four” Methods
Buy
Gift
Inherit from Estate (after death)
Steal it!
Combination of two or three
There are differences in tax implications
I am not sure how popular stealing is. May depend if you ask the siblings!

5. Property Transfer Taxes
SALE
Federal Income Tax (potentially at capital gains rate)
State Income Tax (potentially at capital gains rate)
GIFT
Federal Gift Tax
The method used in transferring property impacts the type of taxes and the amount of taxes. Most states have a transfer tax but usually very small – pays recording fees. Some states have an estate tax but it is a credit towards the federal tax. Some states have an inheritance tax but there may be exceptions for family members and different rates for family members depending on the type of relationship.

6. Property Transfer Taxes
ESTATE
State Estate Tax
Federal Estate Tax
STATE INHERITANCE
Varies by state
Also state “Transfer Taxes” on real estate
The method used in transferring property impacts the type of taxes and the amount of taxes. Most states have a transfer tax but usually very small – pays recording fees. Some states have an estate tax but it is a credit towards the federal tax. Some states have an inheritance tax but there may be exceptions for family members and different rates for family members depending on the type of relationship.

7. Basis and Capital Gains
“Basis” means “cost” = “what you paid for it” “cost of improvements” – “income tax depreciation” -or- “what it was worth when you inherited it”
what you paid for it
+ cost of improvements
subtotal
- income tax depreciation
BASIS/COST

8. Basis and Capital Gains
If asset sold, capital gains tax is paid on difference between the sale price and the basis, with some adjustments
Current maximum rate is 20% ( for those in the % income bracket) Federal plus State C.G. Tax (no 15.3% Social Security tax)
Basis is the tax value after adjustments (add improvements, subtract depreciation). If an inherited asset won’t be sold for a long time the basis may not be very relevant. Capital gain rates can change and probably will be impacted by any tax legislation.

9. Income Tax Basis Example
40 Acre Parcel of Land:
Paid $500 per acre or $20,000 in 1974
Tax value today: 2 x S.E.V = $140,000
Land has been selling for $4,000 per acre
Widowed mother gives land to daughter and daughter sells. Taxes?
Daughter inherits land after death of mother and then sells. Taxes?
In many states the “property tax value” may have little to do with the “market value”. The basis is $20,000 and the tax value is $140,000 and the fair market value is $160,000. Gift – daughter sells and has $140,000 capital gains ($160,000 - $20,000). Inherit – daughter sells for $160,000 tax is zero as property received a “step-up” in basis to fair market value.

10. Basis Example Current Land Value $4,500 per acre Purchase Price
$1,000 $4,500 $6,000
Die $4,500 $4,500 $4,500
Gift $1,000 $4,500 $4,500*
Sell $1,000 $4,500 $6,000*
* gifting or selling to family, 2 year rule
Ask “if you have three farms that are all the same quality and equal value ($4,500), but you want to give one away, you want to sell one and you want to keep one, which farms go where?” Generally, give the kids the farm where FMV = basis ($4,500), keep (die) owning the one with the low basis ($1,000) and sell the one you paid too much for to create a capital loss. Can’t sell at a loss to children and take a tax loss. Can’t give a farm to kids and have kids get a basis higher than fair market value. If you wanted to “penalize” the kids for selling the farm you could gift them the farm with the lowest basis creating the biggest tax penalty for selling. Sometimes we use a combination of two or three of these!

11. Critical Concept The UNIFIED CREDIT
A “credit” that exempts transfers of assets from federal transfer taxes
“Unified” because it is a single credit against both gift and estate taxes
Each person has one unified credit

12. Unified Credit – Gift Tax
How much can each person transfer during life without incurring a gift tax?
$5.45 million per person for 2016
Credits used for gift tax reduces amount available to use against estate tax
This is scheduled to be adjusted for inflation.

13. Unified Credit – Estate Tax
How much can each person transfer at time of death without incurring estate tax liability?
If have not used any during lifetime:
$5.45 million per person for 2016
Adjusted for inflation in the future
Scheduled to be adjusted for inflation. There is no sunset in the current legislation.

14. Gift Tax Effective Exemption
GIFTS ARE DURING YOUR LIFETIME
Increases over years
1997 and before = $600,000
1998 = $625,000
1999 = $650,000
2000 and 2001 = $675,000
= $1.0 million
2011 and 2012 = $5.0 & 5.12 million
2016 = $5.45 million
Doesn’t include gifts that qualified for the annual gift exclusion.

15. Gift Tax Filing Requirements
IRS Form 709A or Gift Tax Return
709A =<$28,000
Gifts of more than $14,000 (2016) per donee in any year
Return due April 15 following the year of the gift
Filing starts “statue of limitations”
No statute of limitations for gifts not declared. So if gifts could be revalued 20 or 30 years later and the values of those gifts challenged you may want to file a gift tax return even if not required. Gifts such as shares of stock in a privately traded business would be an example.

16. Gifts Elements of a gift.
Must have a donor.
Must have a donee (recipient) of the gift.
Must have actual or constructive receipt of the gift.
Gifts must be given free of any restrictions.
Gifts in any amount are not income to the recipient.
Gifts in excess of $14,000 (2016) per year to any one recipient will affect the gift tax credit.
Gifting of shares in a family held business may not qualify for a “gift of present interest” which is needed to qualify for the annual exclusion. When gifting shares in a company that place restrictions on transfer, valuing, etc. one should seek expert legal advice on the transfer.

17. Federal Gift Tax Below market interest rate loans Below market rents
Annual exclusion
Marital deduction
Charitable deduction
Unified credit
Example of other types of gifts:
Below market interest rate loans
Below market rents
Gifts to minors – Uniform Transfers to Minors Act or trusts
There isn’t any limit on gifts between spouses. If property needs to be retitled for estate planning purposes property can easily be retitled. No limit on the amount of gifts to qualifying charities. For larger gifts you may want to use your “Unified credit” especially if the asset is expected to increase in value in the future. You may make gifts and not realize that you have such as below market interest loans or rents. Many states have rules regarding gifting to minors.

18. Gifts: Planning Pointers
$14,000 per person per year
Spouse can use spouses annual exemption so $28,000 per year
Two married people can give two other married people 56,000 per year before starting to use Unified Credit
Children, grandchildren and spouses $56,000 each set
Husband and wife can both make gifts even in the funds below to only one of the spouses. These gifts can be made to anyone, not just family. If parents have three children and they are married the parents could give away $168,000 at Christmas and then another $168,000 right after the first of the year so can move a lot of money in a short time with the $14,000 exemption.

19. Federal Estate Tax
Your taxable estate is your gross estate less allowable deductions:
Debts
Attorney fees
Executor fees
Court costs
Burial expenses…
The big items are often debts, spouse and charities. Unlimited deduction for assets given to a spouse.

20. Federal Estate Tax cont’d...
Your taxable estate is your gross estate less allowable deductions:
Marital deductions
Charitable deductions
Inheritance tax
Part of Federal tax paid in previous 10 years
The big items are often debts, spouse and charities. Unlimited deduction for assets given to a spouse.

21. Valuing Property
Appraised at fair market value at date of death or six months later
Exceptions include:
“Special Use Valuation” based on a capitalization rate, often reduces value at least 25 percent. Capped at a limit of $1,110,000 reduction for Pre/post death test.
Discounts for “minority shareholders”
“Qualifying Conservation Easements” - 40%
Only use later date if it reduces tax. Over the years there have been special programs to reduce the tax liability for farmers and small family owned businesses. If you have a “large” estate seek legal advice to see if you qualify or what you could do to qualify for these programs.

22. Types of Ownership TYPE OF OWNERSHIP ENTIRE VALUE Sole Ownership
Joint tenants – spouse
One-half of value
Joint tenants – non-spouse
Percent contributed

23. Types of Ownership cont’d...
TYPE OF OWNERSHIP
ENTIRE VALUE
Tenants by entirety
One-half of value
Life insurance – owned
Policy value
Retained life estate
Economic interest
Annuity
Percent contributed
How much of the value of the property is included in the estate depends upon how it is owned and if it is owned with a spouse or a non-spouse. If Aunt Mabel adds your name to a $100,000 CD as joint tenant the value of that asset will be included in Aunt Mabel’s estate since she “furnished” all of the money. If you die before Aunt Mabel none of the value would be included in your estate. If my spouse owns the life insurance policy on me none of the value is included in my estate. If you own a policy on your spouse and you die approximately the value of the “cash value” will be included in your estate. If you give your house to your children but keep the right to live in it for life it will all be included in your estate and it will get a basis adjustment. Annuities are valued at the benefit available for survivors. For additional information see

24. Economic Interest in Property
Examples:
Retained rights to income
The right to change who inherits
The right to change the future use
The right to change enjoyment
“economic interest” can be illustrated in several ways.

25. Joint Tenancy with Rights of Survivorship
Question:
If you add your daughter’s name to the title of a $100,000 piece of your real estate, how much reduction in the size of your estate?
Daughter is not a spouse. So “considered furnished rules” apply and so you need to look further.

26. Joint Tenancy with Rights of Survivorship
Final Answer:
Depends, but probably none.
Who contributed to buying it?
Was there a gift to reduce the estate?
Does she bear the burdens and benefits of ownership?
Rent income, pay taxes etc.
Is there debt against it? Who is making payments?
Who will own it when you die?
If daughter didn’t help buy it, didn’t get any of it gifted to her, and can’t show that she helped pay off any debt and doesn’t get any of the benefits of ownership the daughter is not going to be able to show any of the value is hers. The daughter will inherit the property because “title takes precedence over the will”.

27. Gross Estate Three-year look-back rule: Life estate.
Transfer was to occur at death.
Revocable transfer.
Transfer of life insurance.
Includes:
Retirement benefits
Taxable gifts after 1976
Some assets may be brought back into the estate if those transfers happened within three years of the transferor's death. Having an unrecorded deed laying in a lock box will not get around look back rules. If you keep strings attached so you can pull it back it will also be brought back into the estate. Retirement benefits may be a huge issue for many people. Rules vary dependent upon where you have started to withdraw from them before you die or not.

28. Adjusted Gross Estate Example: Gross Estate $1,600,000 Funeral (8,000)
Administration (15,000)
Losses (casualty, theft) (5,000)
Debt claims against estate (12,000)
State Estate Taxes if any (0)
Mortgages and Liens (125,000)
Adjusted Gross Estate $ 1,435,000
Simple calculation of Adjusted Gross Estate without any gift tax issues.

29. Estate Tax Filing Requirements
Estate Tax Return must be filed when gross value exceeds the exemption equivalent
File within 9 months after death. Tax is DUE!
May qualify for installment payments
Federal Estate Tax Return 706

30. Portability of Unified Credit
Unused exclusion amount of spouse dying after 12/31/2010 may be used by surviving spouse
Only available if election made on timely filed estate tax return of predeceased spouse – whether estate tax return is otherwise required
A new concept in the 2011 tax code. Was included in new tax law. A way to deal with unequal estates when the first spouse dies utilizing less than their full unified credit.

31. Portability of Unified Credit
Spouse 1 dies in 2011 transferring $3 million in assets (spouse 1 had to own this amount)
Election is made by Spouse 1 estate tax return to allow Spouse 2 to use unused exclusion amount
Spouse 2 exclusion amount becomes $7 million (years ’11 and ’12) plus adjustments for inflation
It allows a surviving spouse to “reach back” and grab the unused unified credit of a deceased spouse and add it to their own unified credit. If the law is extended it would be a great tool to use if spouses hadn’t structured the ownership of property correctly or if the surviving spouses assets increased substantially in value and needed a greater unified credit.

32. Portability of Unified Credit
Still a good idea to include disclaimer trust in estate plan
Portability is a significant change in the law
Will require careful review of regulations and forms once promulgated by IRS
Spouses may still want to be able to disclaim assets to allow assets to be transferred to the children to be able to utilize the full amount of the unified credit. The concept of portability is very new, has few court cases and many regulations to understand to make it useful. Should one file a estate tax return and claim the credit even if the surviving spouse doesn’t need it today? Probably!

33. Probate Procedures and Wills
A legal process (court proceeding)
Accomplishes transfer of property
Settles decedent’s debts
Pays taxes
Testate – having died with a valid will
Intestate – dying without a valid will

34. Will A will is revocable – can be changed
Revocable is to be preferred: circumstances and wishes change
A will typically requires probate
Wills often include “testamentary trusts”. Large estates need to review estate plans almost annually.

35. What is Probate?
Probate is the legal process of administering the estate of a deceased person by resolving all claims and distributing the deceased person's property under the valid will.
Someone has to start the process, not automatic
Petition court to probate will
Notice of hearing
“Contesting the Will” would commence here
Some states have adopted the Uniform Probate Code. See more information at

36. Testate (with a Will) Sound mind, of age, not coerced
Disinherit a spouse?
Ante nuptial
Children
The will names the executor/trix and nominates the guardians…
Special bequests list attached
Being coerced is a very high bar to pass over and prove. Spouses have property rights and can “elect to take against the will”. Should have thought of that before you got married with a “Ante nuptial”. Children on the other hand can be dis-inherited. Most states will require that you leave your wealth to a worthwhile cause. Your dog is not one! Your neighbor could be left money to take care of it. The local pet care place could be left money to take care of it. People may argue as much over mother’s wedding ring or the yellow pie plate so wills often contain a clause referring to a list of personal items that should be distributed to certain individuals or entities.

37. Distribution by Will This is state law dependent – refer to your state
Competency required to make a will:
Know the nature and extent of your estate.
Be able to formulate a plan of distribution.
Know the natural objects of your bounty.
Understand the relationship of the above.
Need to check to make sure that your state is the same as Iowa.

38. Distribution by Will cont’d
This is state law dependent – refer to your state
Must be witnessed by two witnesses in the presence of the testator and each other.
Must be revoked with the same formality with which they are made.
Amendments must be made with the same formality as a will.
Handwritten modifications to a will are of no effect.
Need to check to make sure that your state is the same as Iowa.

39. Probate cont’d Personal Representative (PR)
Collects and preserves property of estate
Pays debts, expenses and taxes
If any property is left, PR distributes property as directed in Will or, if no Will, then by rules of intestacy
Personal Representative is sometimes referred to as Executor or Executrix (female). They may charge a fee or serve without. It may be equal to what the attorney would be allowed to charge.

40. Probate cont’d PR cont’d Probate can take time Ties up distributions;
Costs money
Not court fees - its time and legal services
May be more than other alternatives
Personal Representative is sometimes referred to as Executor or Executrix (female). They may charge a fee or serve without. It may be equal to what the attorney would be allowed to charge.

41. Probate cont’d Personal Representative (PR) Prepares inventory
Obtains appraisal, if necessary
Gives notice to creditors to file claims
PR may reject claim, lawsuit on claim may result
If claims not filed, forever barred
One of the advantages of probate is that it puts creditors on notice and if they fail to file a claim within the allotted time period their claims are forever barred.

42. Avoiding Probate How to accomplish and still control:
Joint tenancies - Do you really still have control?
Naming beneficiaries for retirement accounts
Register stock, bonds, brokerage accounts in “transfer on death” and “payable on death” forms
Life estate deed
Living trust
Insurance
Gifting (you lose control with this option)
If all of your property is transferred by title (joint tenants with right of survivorship) or by beneficiary, transfer on death, payable on death or some other method you may not need to go through the probate process.

43. Avoiding Probate Avoiding probate may be an oversold idea
Probate procedures have been streamlined
Probate settles the estate, clears title, resolves debt
Legal services maybe able to be acquired for less than the maximum allowed under state law reducing costs substantially. Make sure to negotiate legal fees with the attorney before he is appointed by the court to serve.

44. Probate Estate vs. Taxable Estate
Assets may be part of one estate and not the other
Anything a person has an interest in at the time of death goes into the taxable estate to the extent of that interest: this includes more than probate property, such as
Property transferred with strings attached
Value of an annuity
Joint tenancy property
Life insurance proceeds
Interests retained from previous “inter vivos” transfers (between lives)
There is a difference between what assets are subject to probate fees and what assets are included in the Taxable Estate used to calculate Federal Estate Tax. If the deceased owned a life insurance policy on their own life it would be included in the estate for estate taxes but might be excluded from probate. State laws vary.

45. Simplified Probate
States may have special rules for probate in certain situations
Informal
Formal
Supervised
Small Estates
Dollar amount varies by state
Check your state rules.

46. Intestate Succession Distribution of Property at Death:
The law of the decedent’s domicile (permanent residence) at death governs the succession of personal property (movables)
The law of the situs (location) of property governs succession of real estate (immovables.)
If you own real estate, such as a winter home, in another state that property may be subject to probate in the state referred to sometimes as “ancillary probate”. This may be avoided by holding that property in trust or having it owned by an entity such as a corporation or Limited Liability Company.

47. Intestate Property Distribution
Varies by State Law – Examples:
Married with full blood children
Spouse - $150, /2 balance; Children - 1/2 balance
Married with ½ blood children (not of spouse)
Spouse - $100, /2 balance; Children 1/2 balance
Married with parents, no children
Spouse - $150, /4 balance; Parents - 1/4 balance
States have laws for those that die without a will. They will not try to minimize taxes.

48. Intestate Property Distribution cont’d
Varies by State Law – Examples:
Married without parents or children
Spouse - all property
Single with children
Children - all property
Single without children
Parents - all property or brothers and sisters or next-of-kin
States have laws for those that die without a will. They will not try to minimize taxes.

49. Probate Administration Fees
Vary by state – generally cost very little
Filing Fee $100, Small Estate $25
Inventory Fee
$1 Million Estate = $1,175
$2 Million Estate = $1,488
$5 Million Estate = $2,425
Certificate Letters of Authority
$11 Each (Stocks)
Petitions to the Court $15 (Supervised)
Most of the costs of probate are legal fees so negotiate with the attorney to reduce those fees ahead of time. Just because an attorney or law firm wrote the will and stored it in their vault, they don’t have any legal authority to probate the will.

50. Small Pie Potential Tax Savings
If the “pie” is small (less than $5.45 million in 2016) look at impact of inflation and legal costs.
Don’t worry about Federal Estate Tax, focus on income tax issues, possible inheritance tax, asset protection.
Often estate planners look at the current “Unified Credit” and the corresponding amount that would be offset by the credit and refer to this as a small pie. In 2012 it is $5.12 million (adjusted for inflation). In 2013 it is supposed to go to $5.25 million and adjusted for inflation there after.

51. Medium Pie Potential Tax Savings
If total “pie” is medium
Husband and wife together is between $5,450,000 and $10,900,000
Consider dividing equally and using a life estate or trust.
Often estate planners look at the current “Unified Credit” and the corresponding amount that would be offset by the credit for a husband and wife if they both used the credit completely and refer to this as a medium pie. In 2012 the credit is $5.12 million (adjusted for inflation) and so, if properly structured, a husband and wife could have $10 million in assets and not pay any tax.

52. Big Pie Potential Tax Savings
If you have a big “pie” you need to seek specialized help.
Look at special tools to reduce valuation, consider a gifting program, charitable donations, Special Use Valuation, minority discounts and other tools estate planners would suggest.
If the husband and wife’s assets were over $10.5 million they would need to look at a variety of tools to reduce the value of their estate. Currently the tax rate is 40 % so for every dollar they can reduce the value of their estate by the may save 40 cents. In 2012 it is $5.12 million (adjusted for inflation).

53. Homework Assignment
Complete your net worth statement if not already done
Look at ratios and values
Look at the trend in net worth over several years?
Look at how your assets balanced out between farm and non-farm assets?
What are sources of retirement cash flow?
They should have already have completed one in the finance section. If not they should find a recent net worth statement. One point is to see how the net worth has changed over time. How are the assets owned. If you have deducted deferred income taxes from your net worth it may be much greater when a person dies due to the step up in basis. How many of the assets are non-farm that could be liquidated for living or for off-farm heirs?

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