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Saving Your Farm With Generation Skipping Planning

Our mission statement is “Effective Planning Made Easy”.  The most effective planning minimizes estate tax, protects loved ones and keeps more of your property with your family for generations to come.

One of the most effective strategies available to farm families for reaching their planning goals is Generation Skipping Planning.  This effective tool has been ignored for two major reasons: a.). it was misunderstood and b). it was considered as a tool for only the super rich.

 Misconceptions of Generation Skipping Planning

First and foremost, this planning technique will take nothing away from your spouse.  This planning allows you to provide for and protect your spouse at your death.  The planning implications are for your children/grandchildren.

The name of the planning tool is the problem. “Generation Skipping Planning” leads you to believe you are disinheriting your children and giving property to grandchildren.  Many folks dismiss the concept for this reason alone.  They wrongly believe that the property skips a generation.  The correct view is that the estate tax skips a generation, not the property.  It is a strategy which gives your children all or part of their inheritance in a way that makes it exempt from estate tax at their death.  When correctly designed, your children inherit property up to the limit of your Generation Skipping Tax Exemption in a trust share specially designed to give them access to money and property to meet their needs, yet the property remaining in the trust share at their death is not subject to estate tax in their estate. In addition to allowing your children to have access to the money/property, these trust shares can provide greater protection from predatory creditors and can also add greater protection in the event that your child is divorced.  These exempt trust shares do great things for your children and are one of the best gifts that you can give them.

People Who Need Generation Skipping Planning

It’s not just the super rich that love their children.  Nebraskans take a long view in planning.  We all want to thoughtfully provide for and protect our families.  All of us would want reduce taxes for them.  Depending on the size of your operation and the tax law in effect at their death, it can save your children hundreds of thousands or even millions of dollars in unnecessary estate taxes.  For the family farmer estate taxes can be one of the largest avoidable expenses.  It is a powerful tool for the family farmer who wants to keep the farm in the family for generations to come. It is one of the many effective planning strategies that are available. 

If your plan has been gathering dust on the shelf, you’re not alone.  On average, plans are reviewed once every 19.6 years.  That’s not often enough.  You owe it to yourself and your family to have your plan reviewed regularly.

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Disability Planning, the Often Overlooked Aspect of Planning

Clients often contact our office after they realize the benefits of developing an effective estate plan. They recognize the potential for tax savings, proper distribution of wealth, increased creditor protection, and divorce protection. However, sometimes people neglect to consider the consequences of becoming disabled. As a result, clients do not realize the importance of disability planning.  Many people have not considered who will be in charge of their affairs during periods of disability. There are several tools that can be employed which will protect your well-being and your property.  These tools are most effective when included in a well designed revocable living trust.

Revocable Living Trust

A properly drafted revocable living trust should include a customized definition of “disability”. For example, the trust could state that you are deemed disabled if two licensed physicians find that you are disabled. Once the definition is satisfied, then the Disability Trustee assumes control over the trust assets.  This control is defined by the instructions set forth in the trust. These instructions should define how your assets should be managed.  For example, the Trustee can be instructed to utilize trust assets to provide for your spouse and your children during your disability.  The Trustee is also given specific instructions regarding your care during your disability. For example, your trust could specifically state that you wish to remain at home and not be placed in a nursing home for as long as possible. Your instructions could require that you be provided with books, movies, or other media for your entertainment. The detail of your instructions to the Disability Trustee is infinite.   

Revocable Living Trust Alternatives

A properly drafted revocable living trust which includes disability provisions is a superior tool to manage your property during your disability. In the absence of a revocable living trust, disability planning can be achieved through a durable power of attorney. This power of attorney appoints an agent to manage your property and accounts on your behalf. However, a power of attorney can present many problems. If the power of attorney is effective upon its execution, then your agent has the ability to access your accounts even if you are not disabled. Also, financial institutions are not required to accept your power of attorney.  If the document is too old, or if the institution simply is unsatisfied with the language in the power of attorney, then your agent will be denied access.

Given the reasons above, disability instructions to a Disability Trustee within the context of a revocable living trust is a much more secure and reliable method of managing your assets if you become disabled. In addition, revocable living trusts also provide increased tax savings, creditor protection, protection from a divorcing spouse, and management of your property to benefit your family after death. Contact an estate planning specialist to ensure your wealth survives long after you are gone.

Death and Taxes

 In Nebraska, your estate is typically subject to two separate death taxes, the Nebraska Inheritance Tax, and the Federal Estate Tax.  With proper planning, you can take advantage of many tools that are available which can reduce the burdensome Federal Estate Tax liability. 

Nebraska Inheritance Tax 

This is a state tax that is paid by your beneficiaries to the county where your property is located when you pass away.  A surviving spouse has an unlimited marital deduction for inheritance tax purposes.  Therefore, you can give all of your property at your death to your spouse and no inheritance tax will be due.  On the other hand, if property is passed to immediate relatives, such as parents, grandparents, siblings, children, or grandchildren, these recipients will pay a tax of 1% of the value of property in excess of $40,000.  If an immediate relative receives less than $40,000 worth of property, that beneficiary will pay no inheritance tax.  If property is passed to remote relatives or unrelated people, the tax increases to 13% or 18%, with a much lower exemption, depending on the beneficiary. 

Typically, the Nebraska Inheritance Tax is a modest tax since most people give property to their spouse or immediate family members.  If, however, bequests are made to remote relatives or to unrelated people, the tax becomes more significant.  Even greater taxes can arise from the Federal Estate Tax. 

Federal Estate Tax

Federal Estate Tax is paid by your estate to the IRS.  If the value of all property in your taxable estate exceeds the exemption or “Applicable Exclusion Amount”, then your estate is subject to Federal Estate Tax.  Under current law, if you pass away in 2009, your estate has an Applicable Exclusion Amount of $3,500,000.  In 2010 there is no federal estate tax. (Most believe that Congress will address this issue before the end of the year and establish an Estate Tax for 2010.)  The Applicable Exclusion Amount for 2011 and thereafter is currently $1,000,000.  Therefore, if you pass away in 2011 or later, and your taxable estate is valued over $1,000,000, then your estate will be subject to estate taxes in the range of 41% to 55%.  A surviving spouse has an unlimited exemption amount, similar to the Nebraska Inheritance Tax.  However, passing all of your property outright to your spouse is a short-sighted solution which will actually result unnecessary taxes paid by your spouse’s estate. 

Without proper planning, many families could be subject to hundreds of thousands, if not millions, of dollars in Federal Estate Tax. Estate Tax can be minimized, or in some cases even avoided, by contacting a qualified estate planning attorney.  In addition to providing tax benefits, a well drafted estate plan ensures proper distribution of your wealth, increased protection from creditors, and management strategies that protect your wealth long after you are gone and the taxes have been paid.

Intestacy: The Government-Imposed Estate Plan

If you pass away without an estate plan in place, it is said that you have died “intestate” which requires you to commence intestate proceedings in probate court. State law then directs the distribution of your property.  This article briefly describes how the intestate statutes apply to common family situations.

Example 1.  If you pass away leaving a surviving spouse and three minor children, the first $100,000 of your property, plus one-half of the rest of the estate passes to your spouse.  The remaining half would be equally distributed to your three minor children.

Problem.  The minor children do not have the maturity to properly manage those assets.  A Conservatorship action would have to be filed by an attorney requesting the court to appoint a conservator to manage the assets on behalf of the minor children.  When a child reaches the age of majority, the conservatorship will terminate and the child will have full access to the property.  Typically, those who plan their estate do not feel comfortable with granting a recent high-school graduate unfettered access to a large amount of assets. Most 19 year-olds are simply not mature enough to handle that responsibility.

Example 2.  Same facts as above, except one of the children was born of a prior marriage, is 35 years old, and has a prosperous farming operation.  According to the intestacy statutes, the spouse receives half of the estate ($100,000 less than Example 1), and the farmer and minor children equally share the other half.

Problem.  The farmer is financially independent.  Most would rather provide for college tuition or living expenses of the household.  The spouse may suffer a financial hardship as she is receiving $100,000 less than Example 1, and a significant share of the estate is distributed to the farmer whom she may barely know.

Example 3.  A tragic accident occurs and you have no surviving spouse or children.  Your parents and grandparents passed away years ago.  Intestacy statutes direct that your property be divided among your brothers, sisters, nieces, and nephews; or if there are none, to your aunts, uncles, and cousins.

Problem.  In medium or large size families, each share of the estate may be so small that the probate attorney fees make such a distribution financially ridiculous.  Secondly, an estranged or unknown relative may receive a share of your estate.  Most would rather give the assets to a family friend or a charity. Also, one relative may receive a vastly different share than another relative, creating a breeding ground for intra-family fighting.

Solution.  The above problems describe a small sample of the possible intestate distributions.  Such problems can be avoided by contacting a qualified estate planning attorney.  In addition to ensuring the proper distribution of your wealth, a well drafted estate plan provides tax benefits, increased protection from creditors, and management strategies that protect your wealth for generations to come.  The government-imposed estate plan addresses none of these important issues.

Joint Tenancy Ownership: Short-Sighted Tool for a Long Term Tax Problem

Effective estate planning involves a comprehensive evaluation of your goals and the creation of planning tools to enable you to pass your knowledge, values and property to your loved ones.  Such planning requires meaningful thought and consideration to develop a plan that fits your individual needs.  However, many people have been told that the bulk of estate planning can be simplified or even avoided by titling property in joint tenancy with their spouse.  While it is true that property owned as “joint tenants with the right of survivorship” passes to the surviving spouse, such planning can have grave estate tax implications upon the subsequent death of the surviving spouse.

Federal Estate Tax

Federal Estate Tax is a tax levied on the value of property we own at our death.  Each of us has an exemption amount that allows us to pass a certain amount of property without paying estate tax.  Today, that amount is $3,500,000, but after 2010 the limit is $1,000,000.  If your estate is below the exemption amount, no estate tax will be paid.  But if your estate exceeds the limit, a heavy tax will be incurred.

The Joint Tenancy Trap

You can give an unlimited amount of property to your spouse at death and it will all be free of federal estate tax because of the unlimited marital deduction.  In fact, Bill Gates could pass away, give all his property to his wife, and owe zero estate tax.  But, I can assure you, Bill Gates will not make this planning mistake.  Passing all of your property to your spouse by joint tenancy may avoid estate tax in the short term, but it fails to take advantage of the exemption amount available to the decedent, thereby unnecessarily exposing your family to estate tax upon the subsequent death of the surviving spouse.  In some cases, without proper planning, the taxes can only be paid by selling assets, such as a home or farm ground.  Luckily, there are solutions to these issues.  If the elite can use comprehensive planning techniques to protect their wealth, so can you and your family.  Your assets are just as important.

 Comprehensive Trust Planning Provides Solutions

 Given the increases in land values, many farm and ranch families likely face significant estate tax burdens at the death of a loved one.  Owning property in trust may be the answer to many estate tax problems.  Trusts can be specifically tailored to provide for all of the financial needs of your spouse, and transfer property to your loved ones in a way that protects your wealth.  Most importantly, a comprehensive plan allows you to pass on your knowledge and experience to your family to ensure that the fruits of your labor can be enjoyed for generations to come.  You should consult with your estate planning attorney to identify which planning techniques will provide your family with the tools to reach your goals.

The Foundation of all Planning: Titling Assets

This month I want to review the foundation of all planning, which is how assets are titled.  Your planning results will depend on how you title your property.  Many options are available.  Just as different highways take you to different destinations, different titling methods take your property in different directions at the time of your death and can lead to many different results, including unnecessary taxes, expenses and even loss of the property.  Since you are betting all that you have on your plan working, it is important for you to review your ownerships to make sure the titling is wise and thoughtful.

Let’s review the basic forms of ownership and how they pass at death.

1.  SOLE OWNERSHIP.  Property left only in your name at the time of death will have to pass through the probate process in order to be transferred.  If you have a Will it will direct how and to whom the property passes.  Depending on how the Will is written and last updated, it may bring a good result or a bad result.  If you didn’t write a Will, the Nebraska State Statutes direct how your property will pass.  These statutes, in a sense, write a Will for you, but it is not likely a Will that you would want. 

 2. JOINT TENANCY OWNERSHIP.  This is sometimes referred to as “joint tenancy with rights of survivorship” which refers to the very nature of joint tenancy ownership. It passes to the survivor upon the death of one of the joint tenants.  This feature causes many married couples to put all their property in joint tenancy.  While this may at first glance seem a good result, it can be a major tax mistake for couples that have a taxable estate which under current law is an estate over $1,000,000 in value starting in 2011.  With high land prices, this includes many Ag Families.  While Joint Tenancy may avoid probate on the first death, the second death will bring the probate.

 3. OWNING PROPERTY IN A REVOCABLE TRUST.  Owning property in trust offers many advantages over the other forms of ownership.  At death, your Successor Trustee, usually a family member, takes over and follows your instructions in the trust.  Property in your trust will avoid probate.  Your trust can be designed to take advantage of the deductions that are available for Federal Estate Tax purposes and can also include greater protection for your property and your family for years to come.  Trusts should be tailored to your specifications just like a fine suit is tailored to fit.

You should consult with your planning attorney to review the ownership of your property to make sure the titling leads to a path that carries out your wishes, protects your loved ones and saves all the taxes and expenses that are possible to save.  This is the type of planning that all of us deserve.

 Happy planning to all of you.

WILLS vs. TRUSTS: Which is best for you?

Last month, we discussed our Three Step Strategy for implementing and maintaining estate plans.  We talked about the importance of developing your plan with a counseling oriented attorney, committing yourself to continued review and maintenance and the importance of transferring your life’s lessons along with material assets to those you love.  This month we tackle a question we get quite often:  Do you need a will or revocable living trust?   

The answer to this question usually depends on a number of factors including your estate planning goals, individual family circumstances, currently owned assets, current and future income, and potential future inheritances to name a few.  Based on your initial consultation, these individual issues are brought to the forefront and we advise you based on the answers you provide. 

 A will-based plan is generally prepared for individuals or couples with young children or minimal estates.  The vast majority of wills are essentially the same.  They name a Personal Representative to gather assets, pay taxes, probate fees and last bills and distribute the remaining assets to beneficiaries.  If you have minor children, we also name a Guardian and Trustee to raise and provide for your children until they reach an age of your choosing.  Most will-based plans include a financial power of attorney, health care power of attorney and a living will.

Will-based plans are simple to draft and inexpensive.  However, wills guarantee the cost and time of court-supervised probate, expose your assets to public view, provide little disability protection and offer no creditor, remarriage or divorce protections for your beneficiaries.

A revocable living trust-based plan is the foundation for comprehensive estate planning.  If you have any of the following circumstances in your life, you are probably a good candidate for a revocable living trust.  If you have a gross estate value of more than $400,000, own real estate outside the state you reside, are looking to avoid paying federal estate tax or seek creditor, remarriage and divorce protections for your surviving spouse and children, a revocable living trust is strategy you should consider. 

 Additionally, a properly funded revocable living trust allows your beneficiaries to skip the time and cost of court-supervised probate, retains the confidentiality of your assets and can properly provide for your needs should you become disabled.

 Revocable living trusts traditionally include pour-over wills, powers of attorney and living wills and usually cost more than basic will-based plans. However, when you factor in the costs of probate, the tax advantages and the protections trusts offer over wills, in most circumstances, revocable living trust-based plans cost less over the life of the plan and offer more of the options you desire.

 If you have put off planning your estate or if it has been awhile since you last had your plan reviewed, please consider contacting a qualified, estate planning attorney.  Properly planning your estate will certainly give you peace of mind and is one way to ensure a lasting legacy for the ones you love.