Edit your estate plan

Feb 3, 2012
by WLJ

Minnesotan Mark Habedank, 51, has but one life to live. It’s his estate and succession plan that has already experienced multiple editions and revisions from youth to middle-age.

Your estate plan should deal with the consequences if you died today, but update when tax law, family situations or assets change.

You never know when you’ll die, what federal estate taxes will be, or whether your elementary school age children may follow in your footsteps 20 years down the road. That’s not an excuse to procrastinate.

“The best you can do is address your priorities at the time, then update your plan as circumstances change,” Habedank said. “For me, that’s meant revising my will and other documents about every 10 years.”

Rapid appreciation in farmland the past five years means many Corn Belt farm families also are overdue for an estate plan revision, said CPA Lynn Lambert of Monticello, IN.

The windfall in land wealth “has made multimillionaires out of people who have no cash,” said Lambert. That could mean parents must step up gifting programs to move land out of their estates or launch installment sales of land now while interest rates are low. Otherwise, on-farm heirs will need significantly more insurance or assets to buy the land at the owner’s death, she said.

Keep plans fluid

Habedank operates 7,000 acres of corn, soybeans, sugar beets and wheat as a fifth-generation farmer near Twin Valley, MN. He and his wife, Rhoda, are sole owners of the business, which includes about 1,500 acres of owned farmland and shares in a sugar beet processing cooperative.

Minnesota extracts about a 10 percent tax on estates over $1 million unless heirs continue to farm the land, plus IRS collects a 35 percent federal rate on assets over $5 million. Even though married couples can double those exemptions, the Habedanks would face a significant tax burden if they weren’t proactive.

Mark believes that estate plans should not only address potential taxes, but also life goals. “When you run a family business, your family and business situations are intertwined,” Habedank said.

As a bachelor, Mark and his farming brother bought joint life insurance on their father so they’d have the cash to pay other heirs in a buy-sell agreement. Having the funds to keep that farmland in the family “was the best thing we ever did,” he said.

“Dad was diabetic and in terrible health, so insurance was expensive at the time, but we knew we’d need the liquidity from insurance to buy land on short notice,” he said.

When Habedank married in his mid-30s, his priorities shifted again. He needed to protect his wife’s security as well as that of his two sons, now 15 and 12. Mark has a reciprocal agreement that his brother will farm his 7,000 acres in the event of his death or disability.

While Rhoda is his partner in life, she has little interest or experience running a large farm operation solo. Their sons are also too young to get involved now. “It’s important to me to keep the land in the hands of those people who produce the crops, not just make my wife a landlord,” Habedank said. “But we don’t want to lose land outside the family.”

When to review

A formal estate plan will incorporate those wishes. “Anyone who is married and has minor children needs an estate plan to control where their assets will go,” said Nick Houle, a CPA and estate planner with CliftonLarsonAllen LLP in Minneapolis. “If they don’t, the state is going to decide for you.”

What’s more, he thinks it’s easier to make better decisions if you start young and have time to implement a plan, such as gifting property.

Houle cited three situations that should trigger amendments to your estate plan:

• Family changes such as the death of an heir or a spouse, the birth of a child or addition of heirs, divorces, even the bankruptcy or drug problem of a key family member. Check the beneficiaries you have listed on retirement plans, life insurance and wills. People frequently forget. An Illinois farmer suffered a fatal heart attack during 2009’s stressful harvest. The tragedy was that he had never updated his will after he remarried, so his ex-wife inherited his property instead of his widow.

• Material changes in net worth. For example, last year’s 20 percent to 40 percent surge in farmland values may make past strategies ineffective. “Two years ago, Farmer A and his wife might have owned a $7 million estate split evenly between them and not worried about the federal estate tax,” Houle said. “Now their estate is worth $12 million because of farmland gains, and even with a $5 million per person estate exemption, they’re exposed to a $700,000 federal tax.”

• Changes in state or federal tax law. Congress temporarily raised the federal estate tax exemption to $5 million per person in 2011 and adjusted it for inflation to $5.12 million in 2012. However, that law sunsets in 2013 and it’s not clear what Congress will do then. Meanwhile, states have implemented changes as well. Last year, Minnesota passed a law to exempt $4 million worth of farmland per estate if a family continues to operate the land. That could amount to an $800,000 savings for each married farm couple, if their estate were structured properly, Houle said.

“There’s never really a ‘right’ time to do it,” said Houle. “Often, young parents need the most insurance and coming up with the money at that stage in life is very difficult. But the place to start is to look at where you’re at today and what would happen if you died tomorrow. Then ask yourself, is that what you want? Almost everyone says, ‘not really.’ So we work on fixing that.” — Marcia Zarley Taylor, DTN