Dean and Director
The University of Georgia College of Agricultural and Environmental Sciences

Director
Northeast District

Dr. Kent Wolfe
Director, The University of Georgia College of Agricultural and
Environmental Sciences Center for Agribusiness & Economic
Development
Dr. Nathan Smith
Extension Economist, Department of Agricultural & Applied Economics
The University of Georgia College of Agricultural & Environmental
Sciences

Associate
James, Bates, Brannan, Groover LLP

“By failing to plan, you are planning to fail.”
-Winston Churchill
Willard D. Thompson, J.D., LL.M.

• Tax Law Update
• Critical Questions
• Techniques

“The hardest thing in the world to understand is the income tax.”
-Albert Einstein

• Ordinary Income – highest marginal rate
39.6%
• Capital Gains and Dividends – 20%
• Estate Taxes – 40%
• Medicare Investment Surtax – 3.8%
• Additional Medicare Payroll Tax – 0.9%

“Permanent” Lifetime Exemption
• $5.34 million in 2014 per individual
• Indexed for inflation in future years
• Excess over exemption is taxed at 40%
• Estate and Gift Tax are unified – they share the same exemption
• Portability
Annual Exclusion
• $14,000 per year to any beneficiary tax free
• Expected to increase at a slower rate than the lifetime exemption

• Unfortunately, no matter the laws in place, farmers and landowners often bear more than their fair share of the Transfer Tax burden
• According to the US Department of Agriculture, a farmer is more than twice as likely to owe
Federal Estate Tax at death as an average person
• After they have paid a lifetime of Income Tax, their assets may be subject to Estate Taxes at their death

“Plans are nothing; planning is everything.”
-Dwight D. Eisenhower

• Succession is a whole-family process that affects everyone in the family deeply and differently
• It will change the family system forever
• More often than not, the new business leader also becomes the next leader of the family

• It is not a one-size-fits-all process
• Owners of family farms and agribusinesses, in particular, struggle with unique characteristics that extend beyond the business to personal relationships
• It is the ties among parents, children, siblings, spouses and in-laws that make a succession plan a necessary part of not only managing personal wealth but more importantly the business itself
• It is important to talk with your family about establishing a business succession plan to begin the process of developing a transition for your family business
• With open communication, between generations, it is more likely that your business goals with be met while maintaining harmony in the family

Nine Reasons Family Businesses Fail to do Succession Planning
• It is not urgent
• The focus on tax avoidance and “drop dead plans” creates a false sense of security
• Family member and/or employee push back
• It is always safer not to change
• Family businesses do not know how to undertake succession planning
• Lack of courage among the next generation family business leaders
• Senior generation family business leaders do not know how to be fair to their non-employee children relative to their employee children with respect to inheritance
• Family businesses see succession planning as an event – not a process
• It costs too much

What to do with the Family Business?
Basically, you have three options:
• Pass it on to the family members
• Plan to sell it while you are alive
• Let your estate sell it

“When planning for a year, plant corn. When planning for a decade, plant trees. When planning for a life, train and educate people.”
-A Chinese Proverb

• How do we select the next leader of the company?
• When do we decide who will be the next leader of the company?
• When and how should leadership transition take place?
• How do we evaluate our new leader’s job performance?
• How do we provide meaningful careers for other family members who are not chosen to lead?

Find Your Successor and
TRAIN HIM/HER NOW!
• 70-80% of family businesses pass to the owners’ children
• Not surprisingly, 70-80% of these businesses then
FAIL, because the next generation has no idea how to manage the assets
• So…
• If the farm or agribusiness will stay in the family, who will run it?
• Is that person currently working in the business?
• Are they being trained to run the business?
• Are they currently being brought in on the decision making process?
• Is there someone who can assist a family member in running the business after you are gone?

What are the Problems we see with
These Potential Heirs?
• Not financially responsible
• Do not understand the family business
• No clue as to the amount of work it took to accumulate your wealth or the value of money
• Constantly spending beyond their needs
• Potentially ruin the initiative of younger generations

You need to start planning!
“A good plan today is better than a perfect plan tomorrow.”
- George S. Patton

• Doing nothing (approximately 80% of
Americans)
• Joint Ownership with spouse
• Giving away assets during lifetime
• Beneficiary Transfers
• Wills
• Irrevocable Trusts
• LLCs (Limited Liability Companies)
• FLPs (Family Limited Partnerships)
• Buy-Sell Agreements

• Means dying “intestate” (legal jargon for
“without a Will”)
• Each state has laws that dictate how an intestate person’s property will be distributed
• You have absolutely NO CONTROL
• Property may go to people you don’t want and in ways of which you do not approve
• This technique is roughly described as “letting the chips fall where they may”

• Planning may be necessary after the death of the first spouse when still in a period of mourning
• No time for planning if both spouses die simultaneously
• Assets are subjected to creditors and predators of both spouses
• There is NO remarriage protection:
• Your assets may end up with people you never knew

• You lose control
• May cause huge problems if Medicaid assistance is needed within 5 years after the gift is made
• You may lose significant tax benefits
(although, if properly done, you may gain some significant tax benefits)

• A formal document that allows you to direct the transfer of property you own at your death

A Properly Drafted Will Allows You To:
• Set aside to provide for your surviving spouse for her lifetime
• Choose who receives those assets after the surviving spouse’s death
• Select which children ultimately receive which assets and in what amounts (i.e., farm vs. insurance)
• Avoids or minimizes family confusion and disagreements
• Minimizes or eliminates estate taxes

• A Trust is a legal relationship – a special kind of contact designed to control property management and distribution
• A Trust has three separate roles:
• Grantor (also referred to as Trustor, Settlor, or
Creator) who created and funds the Trust
• Trustee who holds the property and administers the
Trust
• Beneficiary who receives benefit from the Trust

• A Trust is a contract between two parties for the benefit of a third party
Grantor Trustee
Beneficiary

Wills and Trusts Enable Sophisticated
Estate Planning
• Creditor/Predator Protection
• Remarriage Protection
• Estate Tax Minimization
• Additional care for children (or spouses) with special needs that are disqualified for government benefits

• LLCs are highly flexible and customizable tools that hold many benefits for small business owners (including farmers and ranchers)
• LLCs can be thought of as a hybrid between a partnership and a corporation
• LLC Operating Agreements can restrict ownership in the company only to lineal descendants or trusts where the ultimate beneficiaries are lineal descendants

• FLPs are also highly flexible and customizable tools that hold benefits for small business owners like farmers and ranchers (similar to LLCs)

• Allows control to be maintained by the organizers, as opposed to gifting undivided interests
• Limits personal liability

• Non-controlling and marketability adjustments can reduce the fair market value of ownership interests
• Gifting of ownership interests
• The annual exclusion is currently $14,000 for an individual (or $28,000 for a married couple)
• Annual gifting of LLC interests in these amounts can greatly reduce the size of your estate

• One way to equalize the inheritance received by children who are active in the operation of the farm or ranch with those who are not is to create two classes of ownership
• Another way to equalize inheritance is to prepare a Buy-Sell Agreement requiring active children to “buy out” the passive children
• FLPs and LLCs can also utilize Buy-Sell
Agreements and other provisions that restrict the transfer of interests in these entities (e.g., only your descendants)

Other Vehicles for Succession and
Estate Planning
• Grantor Retained Annuity Trusts (GRATs)
• Self-Cancelling Installment Note (SCINs)
• Annual Gifting using Annual Exclusion
• Use of lifetime exemption to move appreciated property to the next generation
• Dynasty Trust or Generation-Skipping Trust
• Irrevocable Life Insurance Trust

• There is no better time than the present

The United States Department of Agriculture has several restrictions and limitations when using LLCs and FLPs to hold farm property, so be sure to check with your agriculture attorney to see how using an LLC or FLP will affect your farm plan before using either for estate planning purposes

Director
Center for Agribusiness & Economic Development
The University of Georgia College of Agricultural and Environmental Sciences

College of Agricultural and Environmental
Sciences Student Ambassador

Commissioner
Georgia Department of Agriculture

2 nd District Field Representative
Georgia Farm Bureau

Director
Center for Agribusiness & Economic Development
The University of Georgia College of Agricultural and Environmental Sciences