Managing for Today and Tomorrow
Succession, Business, Estate, and Retirement Planning for Farm and Ranch Women
Managing for Today and Tomorrow
Estate Planning
Part Two
Methods of Asset Transfer
Managing for Today and Tomorrow
Succession, Business, Estate, and Retirement Planning for Farm and Ranch Women
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?
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Methods of Asset Transfer
“Four” Methods
1. Buy
2. Gift
3. Inherit from Estate (after death)
4. Steal it!
Combination of two or three
There are differences in tax implications
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Property Transfer Taxes
• SALE
– Federal Income Tax (potentially at capital gains rate)
– State Income Tax(potentially at capital gains rate)
• GIFT
– Federal Gift Tax
• ESTATE
– State Estate Tax
– Federal Estate Tax
• STATE INHERITANCE
– Varies by state
• Also State “Transfer Taxes” on Real Estate
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Basis & 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”
• 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
39.6% income bracket) Federal plus State C.G. Tax
(no 15.3% Social Security tax)
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Income Tax Basis Example
40 Acre parcel of Land
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Paid $500 per Acre or $20,000 in 1974
Tax Value Today = 2x S.E.V. = $140,000
Land’s 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?
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Basis Example
Current Land Value $4,500 / acre
Die
Gift
Sell
Purchase Price
$1,000
$4,500
$4,500
$4,500
$1,000
$4,500
$1,000
$4,500
$6,000
$4,500
$4,500*
$6,000*
* gifting or selling to family, 2 year rule
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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
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Unified Credit - Gift Tax
• How much can each person transfer
during life without incurring a gift tax?
– $5.25 million per person for 2013
– Credits used for gift tax reduces amount
available to use against estate tax
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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:
– $5.25 million per person for 2013
– Adjusted for inflation in the future
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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
2002 - 2010 = $1.0 million
2011 and 2012 = $5.0 & 5.12 million
2013 = $5.25 million
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Gift Tax Filing Requirements
• IRS Form 709A or 709 - Gift Tax Return
– 709A =<$28,000
• Gifts of more than $14,000 (2013) per donee in
any year
• Return due April 15 following the year of the
gift
• Filing starts “statue of limitations”
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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 (2013) per year to any
one recipient will affect the gift tax credit.
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Federal Gift Tax
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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
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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
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Federal Estate Tax
• Your taxable estate is your gross estate less
allowable deductions:
a). Debts
b). Attorney fees
c). Executor fees
d). Court costs
e). Burial expenses
f). Marital deductions
g). Charitable deductions
h). Inheritance tax
i). Part of Federal tax paid in previous 10 years
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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 $1,040,000 reduction for 2012. Pre/post death test.
– Discounts for “minority shareholders”
– “Qualifying Conservation Easements” - 40%
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Type of Ownership Value in Estate
Sole Ownership
Tenancy in Common
Joint Tenants - spouse
Joint Tenants – non spouse
Tenants by Entirety
Life Insurance - owned
Retained Life Estate
Annuity
Entire Value
Percent Ownership
One-half of value
Percent Contributed
One-half of value
Policy value
Economic Interest
Percent Contributed
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Examples of Economic Interest in
Property
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Retained rights to income
The right to change who inherits
The right to change the future use
The right to change enjoyment
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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?
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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?
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Gross Estate
• 3 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
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Adjusted Gross Estate
Example:
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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
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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
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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
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Unified Credit - Portability
• 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)
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Unified Credit - Portability
• 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
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Probate Procedures and Wills
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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
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WILL
• Will is revocable – can be changed
– Revocable is to be preferred: circumstances
and wishes change
• A Will typically requires probate
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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
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Testate (With a Will)
a).
b).
c).
d).
e).
f).
Sound mind, of age, not coerced.
Disinherit a spouse?
Ante nuptial.
Children.
Pets.
The will names the executor/trix and
nominates the guardians…
g). Special bequests list attached.
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Distribution by Will – refer to state law
• Competency required to make a will:
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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.
• 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.
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Probate (Cont.)
• PR - Personal Representative
– Collects and preserves property of estate
– Pays debts, expenses and taxes
– If any property left, PR distributes property as
directed in Will or, if no Will, then by rules of
intestacy
– Probate can take time; ties up distributions;
– Costs money (Not court fees - its time and legal
services) – maybe more than other alternatives
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Probate (Cont.)
• 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
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Avoiding Probate
• How to accomplish & still control:
– Joint tenancies - Do you really still have control?
– Naming beneficiaries for retirement accounts
– Register stock, bonds, brokerage accounts in
“transfer on death” & “payable on death” forms
– Life estate deed
– Living trust
– Insurance
– Gifting (you lose control with this option)
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Avoiding Probate
• Avoiding probate may be oversold
idea
–Probate procedures have been
streamlined
–Probate settles the estate, clears title,
resolves debt
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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
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Property transferred with strings attached
Value of an annuity
Joint tenancy property
Life insurance proceeds
Interests retained from previous “inter vivos” transfers (between
lives)
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Simplified Probate
• States may have special rules for probate in
certain situations
– Informal
– Formal
– Supervised
– Small Estates
• (dollar amount varies by state)
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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.)
39
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Intestate Property Distribution Varies by State Law – an example:
• Married with full blood children
– Spouse - $150,000 + 1/2 balance; Children - 1/2 balance
• Married with ½ blood children (not of spouse)
– Spouse - $100,000 + ½ balance; Children ½ balance
• Married with parents, no children
– Spouse - $150,000 + 3/4 balance; Parents - 1/4 balance
• Married without parents or children
– Spouse - all property
• Single with children
– Children - all property
• Single without children
– Parents - all property or brothers & sisters or next-of-kin
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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)
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Small Pie Potential Tax Savings
• If the “pie” is small (less than $5.25 million
in 2013) 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.
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Medium Pie Potential Tax Savings
• If total “pie” is medium (husband and wife
together is between $5.250,000 and
$10,500,000)…
Consider dividing equally and using a life
estate or trust.
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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.
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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?