Farm Women's Education Project - Asset Management Insights

Annies Project Education for Farm Women Annie s Project Education for Farm Women a 501(c)(3) organization.

Estate Planning Part Three Transferring Assets Use of Trusts DPA Long Term Care Insurance

Homework Review Did you look at your net worth statement? Did you look at the trend in net worth? How are your assets balanced out between farm and non-farm assets? What are sources of retirement cash flow? Did you find any inconsistencies between your estate planning documents, ownerships, beneficiary arrangements, and contractual arrangements?

Methods to Transfer Contract Life Insurance, Annuity Transfer prior to death Complete severance Retained rights Tenants in Common goes to heirs Joint Tenancy (rights of survivorship) Ownership vests to survivors Probate Will State law

Your Farm Business Machinery Inventory -Crops - Supplies - Market Livestock Good Will? Breeding Livestock Buildings Land Bushes Fruit Trees Perennial Plants

Sell in parent business name? Gift? Rent to Own Machinery Inventory -Crops - Supplies - Market Livestock Breeding Livestock Installment Sale Buildings Land Bushes Cash Rent $00.00 Operating Business Fruit Trees Perennial Plants Parent Business Cash Rent Cash Rent New Business

Basic Estate Planning for Everyone Reduce the number of times assets can be taxed Income and estate taxes Review how property is owned Check and update wills Durable Power of Attorney Durable Power of Attorney for Health Care Patient Advocate Form

Taxable Estate Less Than $11.4 Million Sales and leases of business property Perhaps some bargain sales and gifts Insurance for risk Trust Management needs Disability Elderly years Dependent Children

Taxable Estate $11.4 to $22.8 Million For couples All previously listed Split estate to capture both $11.4 million exemptions or use portability Separate Sole Proprietor ownership Tenancy in Common Trust for splitting the estate and management Bargain sales and gifts

Taxable Estate Over $22.8 Million For couples All of the above Gifts become more important tool Insurance to pay the tax Charitable contributions Get income-producing assets to heirs Bargain sales and gifts Use Special Use Valuation 2032A Look at entities minority discounts

Liquidity Cash Life Insurance 15-year installment payments if qualified Borrowing

Terminology of Trusts Property Corpus: The assets that are held in trust (also called trust res, trust assets, principal, or trust estate) Trustee: Holds title to trust property; manages the trust property

Terminology of Trusts contd Beneficiary: Person or institution for whose benefit trustee owns and manages the trust property Document (Trust Instrument): Document that embodies the terms of the trust Donor (Settlor/Grantor): Person who funds the trust

Advantages of Trusts Can separate assets from beneficiaries; i.e. separate management from benefits Utilize professional management of investments Avoid probate or minimize probate costs Provide for guardianship requirements of transfers to minors or incapacitated persons Increase privacy in property transfers Guard against will contests Save estate tax, in certain cases (split assets)

Types of Trusts Intervivos (Living trust): established during life. Revocable - can be changed. Irrevocable cannot be changed. Testamentary: established at time of death. Pour-over trusts are established by a will. Charitable Remainder Trust Life Insurance Trust

Types of Trusts Generation Skipping Trust Remember: Trust may be joint (one trust for both spouses) or separate. A joint trust may become two trusts at the death of one. All trusts become irrevocable upon the death of the settlor.

Intervivos Revocable Trust Avoids probate of trust assets: Assets not required to go through probate process so transfer may be quicker after death. Generally costs more to create than a will, but avoids probate costs. Commonly used to avoid probate in another state where property is held.

Intervivos Revocable Trust contd Property remains part of taxable estate for calculation of federal estate tax: Does not reduce the value of estate for estate tax planning. Heirs do receive step-up in basis because of retained control. Spouses can use their own individual unified credit.

Intervivos Revocable Trust contd Can be fully funded at creation, at a set later date or subject to pour-over provisions of will. Can be used to transfer management of assets Can involve successor trustees to manage assets before death

Intervivos Irrevocable Trust Can reduce value of taxable estate: Common tool for very high-value estates Transfers subject to Gift Tax: Over $15,000 (2019) per person reduces unified credit (value of $11,400,000) but appreciation occurs outside of estate

Intervivos Irrevocable Trust If grantor/settlor does not retain interest in income or corpus of trust: Trust must benefit others Ex. personal charitable foundation No retention of life estate in income To be a present interest gift, enjoyment by beneficiaries cannot be contingent on death of settlor. Irrevocable transfer of property

Charitable Remainder Uni-Trust CRUT Transfer property into trust irrevocably Trust pays settlor income for life or term of years based on a percentage of the assets May provide for successor income beneficiaries Remainder of trust goes to charities after death of settlor/successor beneficiary or after term of years

CRUT contd May transfer appreciated property into CRUT without capital gain recognition CRUT may sell appreciated property without recognizing capital gain May receive charitable deduction Some or all of the distributions may be used to fund a wealth replacement trust to buy life insurance.

Charitable Remainder Annuity Trust CRAT Transfer property into trust irrevocably Trust pays settlor income for life or term of years: Relatively high rates of return on the full amount Pays a fixed amount annually No recognition of capital gains

CRAT contd Remainder of trust goes to charities after death of settlor/successor beneficiary, or after term of years. May receive charitable deduction. Some or all of the distributions may be used to fund a wealth replacement trust to buy life insurance.

Universal vs. Variable Life vs Variable Life Insurance Premiums $$$$ Interest Accumulation (Investments) Mortality Administrative Costs

Providing for Long-Term Care Adequate cash flow: Significant earnings Sell assets Long-Term Care Insurance Medicaid: Restrictions on resources

Long Term Care Insurance (LTC) Your odds are 33% that you will spend more than 3 months in a nursing home (according to the insurance industry). The very wealthy and very poor probably don t need LTC insurance. Studies suggest those with assets of more than $200,000 but less than $2 million may want to consider LTC in the Midwest. Numbers vary in other regions.

Advance Directives Durable power of attorney: A grant of authority to make financial decisions and conduct business on your behalf if you become incapacitated. Durable power of attorney for health care: A grant of authority to make health-care decisions on your behalf if you are unable to make such decisions.

Durable Power of Attorney DPA Grant of power to another to look after assets and manage affairs Anticipates possibility of incompetence Avoids need for incompetency hearing or approval of guardian

Durable Power of Attorney contd Statute defines powers (plenary complete, unqualified): Should also include express powers for tax returns, life insurance matters, making gifts, transferring property into trust Accessing safe deposit box, dealing with retirement plans and Social Security May be contingent or present: Contingent: effective only upon incompetence Present: effective when executed and continues in spite of incompetence

Durable Power of Attorney for Health Care Allows you to: Choose a person (agent) to make health care decisions for you if you cannot speak for yourself Communicate instructions about your health care

Durable Power of Attorney for Health Care Your responsibilities: Think about your values and wishes Choose someone you trust Choose an alternate agent Talk to family members and the agent concerning your wishes Complete, sign and make copies for the agent and family members

Durable Power of Attorney for Health Care Agent responsibilities: Understand your wishes Evaluate choices about your heath care Make decisions in accordance with your wishes Keep the original document

A Living Will Becomes effective when death is the alternative to treatment and you are unable to make that decision. Allows you to: Direct physician to withhold or withdraw treatment that could prolong the dying process

A Living Will contd Your responsibilities: Clarify wishes with your family and with your physician Complete the proper forms Make copies for your family and physician Doctor s responsibility: Follow your wishes

Questions Who do you want to get into your safety deposit box? Is their name on the card? Does your will/trust provide for designating personal items? Where is your most recent will located? Who needs to know your plan? Why? Have you compiled all critical information in one place? Who knows where it is?

Estate Planning Overview Crucial estate planning steps: Examination of how property is owned or held Review of family insurance program Advisability of lifetime gifting Alternatives for disposing during life or after death Transferring the family business Get started Get it written

Your Up-To-Date Estate Plan Documents Will DPA Property titled correctly TOD/POD Plans for non-titled property Beneficiaries current people tend to name them and forget