The importance of strategic estate planning

Mar 5, 2010

Estate planning for those involved in family ranching is one of the most difficult topics to openly discuss among family members, yet it can have the most long reaching effects within a family and business of any other decision. Often when the term estate planning is heard, people envision death and dying or families who possess huge multimillion dollar estates. While estate planning does encompass all these ideas, it should ideally be a lifetime oriented planning process and is important for most people, even those with smaller estates.

The definition of an estate is a residence and everything a person owns and can comprise: residence and real estate, cash, stocks, bonds and investments, livestock, businesses, IRAs, life insurance policies, personal property, and family heirlooms. An estate plan should be an accurate reflection of what a person truly values. It is a means of preserving and controlling the wealth a person has accumulated. Additionally, it should reflect their hopes, dreams, concerns, values and aspirations.

“It is very important for people to consider what they truly value and what they really want to see happen when their estates are passed on. It is also crucial to gather the input and perspectives of the stakeholders in an operation and then to take the jump from thinking and talking about it to actually meeting with your family’s advisors and establishing an estate plan,” said Cole Ehmke, University of Wyoming Extension specialist.

Estate planning deals with: property ownership, retirement planning, finances, disability concerns, tax strategies, and preservation and protection of assets. It is important for the young and old to be involved in the process. When it comes to the transfer of ownership of a ranching business or lands, it is critical to discover innermost feelings, needs, and fears associated with each specific situation. Transfer of ownership without losing the ranch to estate taxes, creditors, or unintended allocation of property by the state as a result of the probate process is the primary function of making an estate plan.

Creating a secure financial future for loved ones is another top goal of good estate planning. The estate can be set up to cover the costs of medical care, funeral costs, and any costs associated with settling the estate so that those costs are not on the shoulders of the heirs. Other issues that can be provided for through the estate are living costs and educational costs for the beneficiaries.

Being knowledgeable about all of the associated business and legal relationships involved within the estate is very important. Examples of this are the various forms of business ownership that can drastically affect how an estate needs to be handled. Sole proprietorships, partnerships, limited partnerships, corporations, and limited liability corporations are all subject to legal and tax differences which a qualified estate planning attorney should explain to each individual family. Another important idea to consider is how property is titled. Titling everything in joint tenancy can sometimes create unintended problems within estates, especially in the case of divorce or other unforeseen situations.

Good estate planning will help ranching families transfer both the land and business operation from generation to generation. However, there are some harmful misconceptions which can lead people to make undesirable choices concerning their estates. One common misgiving for those who avoid estate planning is the belief that just because the family knows how they want to divide their assets means that an estate plan is simply not needed. This is a risky way to approach estate planning, because if there is no will or estate plan in place at the time of death, the state has the authority to allocate assets according to state law, regardless of the decedent’s wishes or the wishes of the heirs.

Another approach that can cause major harm to people within a family who are trying to stay in agriculture is to assume that a ranch or estate can stay in one piece by simply dividing everything equally among the children. This approach sounds so logical and fair, however, this kind of planning often leads to ranches being split up and sold because the on-ranch child or children are financially unable to buy out the off-ranch children’s interests in the estate. This certainly does not suggest that children who are not running the ranch or have left agriculture deserve nothing. There are many ways to create an equitable solution that everyone can work with. It does, however, require more planning and greater efforts to put the plan into place. Life insurance is one option that can help families to create a fair situation for all their children while achieving the goal of the ranch staying within a family. Basically what happens is that the off-ranch children receive the cash from the life insurance proceeds while the children who are running the ranch receive the land and ranch related assets.

Another important consideration for estate planning is the tax ramifications of your decisions. The current year of 2010 is going to be an especially interesting year for people who own ranches as this is the year of the total repeal of the current estate tax. This is a controversial

issue and even people within agriculture have competing points of view as to which side of the issue people in the beef industry should be on. Most groups within agriculture, such as National Cattlemen’s Beef Association and the American Farm Bureau Federation (AFBF), support a total repeal of this tax. Many ranchers and other people in agriculture have termed this tax the “death” tax. AFBF supports a permanent repeal of all federal estate taxes. However, until this is achieved, the group calls for an exemption of $10 per person, indexed for inflation.

There is a minority of people within agriculture who believe that instead of trying to achieve a total estate tax repeal, we should be pushing for inflation indexing. Indexing involves setting a base year for the exemption value and allowing that figure to grow with inflation. The federal estate tax exemption was $600,000 in 1972. If that figure was indexed for an inflation rate of only 3 percent, the figure would be $1.7 million today. Currently in 2010, we are experiencing a one-year repeal of the estate taxes.

However, in 2011, the estate tax exemption is set to drop back down to $1 million, with a 55 percent tax rate on estate value beyond that amount. Most governmentrun programs like government wages and contracts are indexed for inflation. The estate tax exemption level is among the few that are static. Even those who do not support a total repeal of the estate tax do agree that reform is needed.

The issue of estate tax reform was brought up in 2009 on Capitol Hill. Before the Christmas recess, the House passed a permanent extension of the estate tax at 2009 rates, which includes a $3.5 million exemption for individuals and $7 million for couples, and then taxing the rest of the value of the estate at 45 percent. However the Senate, overwhelmed by the health care reform bill, failed to take any action on estate tax legislation as 2009 came to a close.

Passing It On: An Estate Planning Resource Guide for Wyoming Farmers and Ranchers is accessible at passingiton.asp. A Lasting Legacy is an online self - study course that can be accessed at www.RightRisk. org. A hard copy of these materials can also be obtained by contacting Cole Ehmke at 307/766-3782. — Heidi Suttee, WLJ Correspondent