Estate Planning

Federal Legislation Introduced to Address Farm Estate Taxes

Source: Robert Moore

On July 26, 2023, Representatives Jimmy Panetta of California and Mike Kelly of Pennsylvania introduced legislation related to farm estate taxes.  The proposed bill seeks to increase the limit on the deduction that can be taken by farmers under Section 2032A of the Internal Revenue Code (IRC).  The 2032A provision in the IRC allows farmers to value their land at agricultural value, rather than fair market value.  However, the current law limits the deduction to $1.16 million.  This relatively small deduction can limit the usefulness of 2032A for some farm estates.

Consider the following example:

Farmer’s estate includes 500 acres with a fair market value of $5,000,000.  The agricultural value, allowed by 2032A, is $4,500/acre or $2,250,000.  The difference between the fair market value and the agricultural value is $2,725,000.  So, by using 2032A valuation, the land value can be reduced by $2,725,000.  However, 2032A limits the deduction to $1,160,000.  Therefore, Farmer’s estate can actually use less than ½ the reduction in land value.

The newly introduced legislation would increase the 2032A deduction limit to the federal estate tax exemption, currently $12,900,000.  Applying the proposed legislation to the above scenario, Farmer’s estate would be able to deduct the entire $2,725,000.

The farm value of farmland is determined by a formula included in the IRC.  The value is the net cash rent of comparable land less real estate taxes divided by the Farm Credit System Bank interest rate, which is 4.57% for a 2022 Ohio estate.  Let’s assume the fair market cash rent for a farm is $220/acre less $50/acre for taxes.  Dividing by the interest rate, we get a value of $3,720/acre.  The 2032A rate (farm value) is usually 1/3 to ½ of the fair market value. Continue reading Federal Legislation Introduced to Address Farm Estate Taxes →

Is a Handwritten Will Valid?

By: Robert Moore

 

You may have seen the news story about Aretha Franklin’s will.  Aretha, the famous singer, died in 2018.  A will executed in 2010 was originally thought to be her last will and the document that controlled the distribution of her assets to her heirs.  The 2010 will appears to have been a formal will, prepared by an attorney, and properly executed by Franklin.  However, a 2014 handwritten will was later found in a notebook in Franklin’s couch.  Some of the heirs of Franklin’s estate disputed the validity of the 2014 will.  The 2010 left Franklin’s home to three sons while the 2014 will left her home to only two sons.  The issue was recently resolved by a Michigan jury.  The primary issue was: can a handwritten will be a valid will?

The answer in most states, including Ohio and Michigan, is yes.  Known as a holographic will, a person can write their own will and the will can be valid provided it is signed and witnessed by two adults.  Generally, the holographic will must be in the person’s handwriting to confirm that they did, in fact, write the will themselves.  So, even a will written by hand on notebook paper found in someone’s couch, like Aretha’s will, can be valid.  Presumably, two witnesses were present when Franklin signed the handwritten deed.  A few lessons can be learned from Aretha Franklin’s situation:

  • Revoke the prior will.  When executing or updating estate planning documents, the new or updated documents should clearly revoke the prior relevant documents.  If Aretha’s 2014 will would have expressly revoked her 2010 will, the matter may not have gone to court because her intent to use her 2014 will would have been much clearer.
  • Every requirement of a will matters.  If Aretha’s will would not have been signed, it would not have been valid.  The law vigorously enforces the technical requirements of estate planning documents.  An unsigned will is typically not enforceable even if it is clear the person intended to use the will but did not sign it in error.  Aretha’s will met all the requirements of a holographic will in Michigan and was deemed valid.
  • Secure your estate planning documents in a safe location and make sure someone knows where they are.  Whether a desk drawer, safe or filing cabinet, your estate planning documents should be held in a protected location and the executor and/or heirs should be aware of the location of the document for easy access.  Also, the law firm drafting the documents usually retains a copy in their files.
  • Put a “No Contest” clause in your will.  A No Contest clause disinherits any heirs who challenge the validity of a will.  If Aretha’s 2014 will had included a No Contest clause, the son disputing the will may have not initiated the lawsuit in fear of losing his inheritance in her valuable song royalty rights.
  • Every change in an estate planning document should be a formal change.  Scratching out a line on a will or adding a provision by hand will likely not be effective.  If a change needs to be made to a document, a formal amendment should be drafted and executed or the document should be changed and re-executed.
  • Casual execution of documents can cause conflict among heirs.  Because Aretha took a more casual approach to her 2014 will, heir heirs ended up in a lawsuit and family relations are likely strained.  Have an attorney assist with your documents so that formalities are followed and conflicts among heirs are minimized.
  • Take the time to visit with an attorney for your documents.  No one likes spending money on legal fees but a modicum of legal fees preparing estate planning documents can save heirs many thousands of dollars in litigation fees.

Not All Trusts Protect Assets

By: Robert Moore

How Do Retirees Define A 'Comfortable Retirement' And Should That Matter To You?

A common misperception is that all trusts protect assets from creditors, lawsuits, and nursing homes.  While some trusts do protect assets, many trusts do not.  In fact, most trusts are not designed to protect assets but instead to only transfer assets at death.  Knowing the difference between the different types of trusts is important to ensure that your trust meets your expectations for asset protection.

There are generally two different types of trusts – revocable and irrevocable.  A revocable trust is the typical estate planning trust most people use.  Because the revocable trust can be changed and assets transferred into and out of the trust, it provides no asset protection.  Essentially, if the owner/grantor can access the assets of the trust, then so can creditors.  If you can make changes to your trust and transfer assets in and out of the trust, you probably have a revocable trust.

An irrevocable trust can protect assets.  The concept of an irrevocable trust is to establish a trust that cannot be changed (with a few exceptions), transfer assets to the trust and then relinquish the right to withdraw the assets back out of the trust.  Additionally, someone else serves as the trustee to manage the trust assets.  Since the original owner of the assets no longer has access, control, or ownership of the assets, then creditors cannot access them.

It is important to keep in mind the five-year lookback rule for Medicaid.  This rule causes ineligibility for Medicaid for gifts that were made within five years of Medicaid application.  Due to this rule, establishing an irrevocable trust to protect assets from nursing home costs must be done well before the assets become at risk.

While an irrevocable trust is useful to protect assets, the irrevocable nature of the trust is a significant negative feature.  Once the irrevocable trust is established and the assets transferred, it cannot usually be undone.  Even if circumstances or goals change over time, the irrevocable trust stays in place and the assets stay in the trust.  A revocable trust, on the other hand, is flexible and can be changed as circumstances and goals change.

Sometimes a trust will include “revocable” or “irrevocable” in its name, making it obvious the type of trust.  However, many trusts do not indicate in the name if it is revocable or irrevocable.  In that case, the trust document must be reviewed to determine the type of trust.  Typically, within the first few paragraphs of the trust document, the trust will be clearly identified as either revocable or irrevocable.

Some estate plans include both a revocable and irrevocable trust.  Assets to be protected are transferred to an irrevocable trust and assets the owner wishes to retain control over are transferred to a revocable trust.  Having two trusts increase the costs of both setup and administration but it is an option for many people.

Anyone with a trust should verify the type of trust they have.  It is common that someone believes their assets are protected by their trust only to find out too late that they actually have a revocable trust and their assets are subject to nursing home costs.  A revocable trust can be converted to an irrevocable trust at any time prior to death.  If there is any doubt as the type of trust, review the trust with your attorney to be sure it meets your estate planning and asset protection goals.

Your Trust and Retirement Accounts

By: Robert Moore

How Do Retirees Define A 'Comfortable Retirement' And Should That Matter To You?

Revocable trusts are an important estate planning tool that is utilized in many estate plans.  Most assets can be held in a revocable trust but there are exceptions.  One such exception is retirement accounts like an IRA, 401k or 403b.  These types of accounts should not be owned by a trust and a trust should only be the beneficiary in limited circumstances.

A qualified retirement account can only be owned by an individual.  There are many rules and restrictions related to changing the ownership of a retirement account.  If you transfer a retirement account to your trust, there will likely be penalties assessed and income tax due.  Do not transfer ownership of your retirement account without consulting your tax advisor and financial advisor.  Generally, transferring a retirement account to a trust is not advised.

A trust can be made the beneficiary of a retirement account but, again, caution should be used.  Trusts usually pay higher income tax rates than individuals.  Also, it is often easier for an individual to manage an inherited retirement account than it is for a trustee to manage a retirement account on behalf of a trust.  So, it is usually best to have retirement accounts inherited directly by the beneficiaries rather than be held in trust for beneficiaries.

There are times when naming your trust as the beneficiary of a retirement account is appropriate.  The potential for higher taxes and more cumbersome administration can be offset if the retirement accounts should be managed by the trustee due to concerns with the beneficiaries.  Some situations that might justify using a trust as a retirement account beneficiary include minors as beneficiaries, concerns with marriage of beneficiary, the beneficiary’s inability to manage assets and providing creditor protection.  Particularly when a retirement account may involve large amounts of money and concerns about the beneficiary, naming the trust as the beneficiary may be warranted.

In all situations, the retirement account should have at least one beneficiary named.  If no beneficiaries are named, the account will go through probate and the administration burden on the executor and trustee will be significant.  Be sure to double-check all retirement accounts to be sure a beneficiary is named.

The integration of retirement accounts in estate planning is an important component of most people’s attempt to transfer assets to the next generation.  Be sure to discuss your retirement accounts with your attorney, tax advisor and financial advisor.  Making changes to the beneficiary designations of retirement accounts is a relatively easy process but knowing whom to name as the beneficiary should include careful analysis and consultation with your advisor team.

What Assets are Subject to Divorce?

by: Robert Moore, Attorney and Research Specialist, OSU Agricultural & Resource Law Program

A well-known statistic is that one-half of all marriages end in divorce.  While there is some debate as to the accuracy of this statistic, there is no doubt that many marriages do end in divorce.  According to Ohio law, all marital assets are to be divided equitably in the event of a divorce.  Equitable does not necessarily mean equal although an equal division of assets between the spouses is often the result.  It is important to note that only martial assets are subject to the equitable division between the spouses.  Non-marital assets, or separate assets, are retained by the spouse who owns the asset.

Separate assets include the following:

  • An inheritance received by a spouse during marriage
  • A gift received by a spouse during marriage
  • Property acquired by one spouse prior to the date of marriage
  • Passive income and appreciation from separate property by one spouse during marriage

The above list would seem to make it an easy exercise to determine what are marital assets and what are separate assets in a divorce.  However, like many legal issues, this is often not the case. Determining whether an asset is a marital assets or a separate asset can be complicated.  For example, Ohio law also provides that the following is a marital asset:

“… all income and appreciation on separate property, due to the labor, monetary, or in-kind contribution of either or both of the spouses that occurred during the marriage.”

So, it is possible for an asset to be partially a marital asset and partially a separate asset.

Consider the following example: Continue reading What Assets are Subject to Divorce? →

“Planning for the Future of Your Farm” Workshops offered by OSU Extension

By: by: David Marrison, OSU Extension-Coshocton County, marrison.2@osu.edu
To kick off 2022, OSU Extension will be offering “Planning for the Future of Your Farm” workshops to help farm families actively plan for the future of their farm business. The workshops are designed to help farm families learn strategies and tools to successfully create a succession and estate plan which can be used as the guide to transfer the farm’s ownership, management, and assets to the next generation. Learn how to have the crucial conversations about the future of your farm.

Topics discussed during this series include: Developing Goals for Estate and Succession; Planning for the Transition of Control; Planning for the Unexpected; Communication and Conflict Management during Farm Transfer; Legal Tools & Strategies; Developing Your Team; Getting Your Affairs in Order; and Selecting an Attorney.  This workshop will be taught by members of the OSU Farm Office Team.

Families can choose to attend the workshop virtually or in-person at regional workshops which will be held across the state. These sessions being offered include:

Virtual “Planning for the Future of Your Farm” Workshop

A virtual version of this workshop will be held on January 31 and February 7, 21 & 28, 2022 from 6:30 to 8:00 p.m. via Zoom. Because of its virtual nature, you can invite your parents, children, and/or grandchildren (regardless of where they live in Ohio or across the United States) to join you as you develop a plan for the future of your family farm.

Pre-registration is required so that a packet of program materials can be mailed in advance to participating families. Electronic copies of the course materials will also be available to all participants. The registration fee is $75 per farm family.  The registration deadline is January 25, 2022. More information and on-line registration can be obtained at go.osu.edu/farmsuccession

In-Person “Planning for the Future of Your Farm” Workshop

In addition to the webinar series, 3 regional in-person workshops will be held in February and March of 2022. Each of these programs will be held from 9:00 to 4:00 p.m.  The base registration cost for each of these meetings is $85 for 2 attendees, lunch and 1 notebook.  Additional participants can attend for a $20 fee and extra sets of the course material can be purchased for $15. Registration is due 1 week prior to each event.

The locations for each for the meetings are:

February 10, 2022 in Greene County

Location: Greene County Extension Office

100 Fairground Road, Xenia, Ohio

On-line registration can be made at go.osu.edu/greenefarmfuture

More details can be obtained at corboy.3@osu.edu or 937-372-9971

 February 25, 2022 in Wayne County

Location: Fisher Auditorium

1680 Madison Avenue, Wooster, Ohio

More details can be obtained at zynda.7@osu.edu or 330-264-8722

 March 4, 2022 in Wood County

Location: Wood County Fairgrounds- Junior Fair Building

13800 W Poe Road, Bowling Green, Ohio

More details can be obtained at eckel.21@osu.edu or 419-354-9050

Specific details about each of the workshops can be found at: go.osu.edu/farmsuccession

 

Save the Dates – Central Ohio Agronomy School

Due to COVID uncertainties the 2022 Central Ohio Agronomy School has been pushed to March. 

Monday March 7 – 6:30 – 9:00p.m.

Monday March 14 – 6:30 – 9:00p.m.

Monday March 21 – 6:30 – 9:00p.m.

Monday March 28 – 6:30 – 9:00p.m.

The School will be at the new Ramser 4-H Activity Center (on the fairgrounds)

700 Perimeter Dr.  Mount Vernon, OH  43050

More details to come

Tips for Speaking with Your Lender

by: Chris Zoller, Extension Educator, ANR

2019 is upon us and you may be meeting soon with your lender to discuss financial needs for the year. We all know agriculture is suffering from poor economic conditions – and the outlook for many sectors of the industry doesn’t look real promising. A variety of factors are forcing lenders to be more critical of loan applications. Let’s review a few things you can do to assist your lender as they review your loan application.

Financial Forms:

A year-end Balance Sheet is very helpful and provides a snapshot of the assets, liabilities, and net worth of your farm. Get in the habit of completing one each year for your lender to keep on file and for your own reference so you can monitor changes over time. You can get a blank balance sheet from your lender or access one here: https://farmoffice.osu.edu/farm-management-tools/farm-management-resources.

Cost of Production:

Know your cost of production. What does it cost you to produce 100 pounds of milk? What is your per acre or per ton cost to grow and harvest crops? If you need assistance with determining these, please see: https://farmoffice.osu.edu/ for copies of Ohio State University Extension production budgets and https://farmprofitability.osu.edu/business-summariesfor copies of the Ohio Farm Business Summaries.

Goals:

Why are you requesting money from your lender? What is your goal(s)? What are you hoping to accomplish with the money you are requesting? Will you use the money as an operating loan to plant your crops? Are you planning an expansion? Are you wanting to consolidate existing debt? Regardless of the reason, your lender is going to need to know how you plan to repay the loan. A budget and cash flow projections will help everyone understand how the money will be used and how it will be repaid. Research has proven that you are more likely to accomplish your goals if they are written. Be sure your goals are Specific, Measurable, Attainable, Rewarding, and Timed (SMART). See this Ohio State University Extension fact sheet for information about writing SMART goals: https://ohioline.osu.edu/factsheet/node/767.

Tax Returns:

Your lender may request copies of your tax returns. Make sure you categorize income and expenses the same way each year. This allows the lender to compare apples-to-apples when evaluating your historic income and expenses. Also, if you pre-pay expenses or defer income, make sure your lender is aware of this so they can make accrual adjustments.

Communication:

Communication with your lender is critical. Your lender is interested in understanding your farm, knowing how you are progressing, and what your plans are for the short and long-term. Invite your lender to visit the farm for a tour, a ride in the tractor, or to assist with milking!

Business Plan:

Every lender would love to see each client have a written business plan. A business plan is made up of five parts: Executive Summary, Description, Operations, Marketing Plan, and Financial Plan. The University of Minnesota Extension has a template available at the following site: https://agplan.umn.edu/.

Summary: The items discussed in this article are ones you can control. Focus on these areas and make adjustments accordingly to make improvements. Contact the Knox County Extension Office for assistance.