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The Typical Iowa Farm Family Estate Saga
(Here We Go Again)
This article was updated last on: 01/06/2012
By M.D. Anderson, AZCLDP, Realtor® Chandler, Arizona
Estate Planning Consultant of Financial Strategies, Inc.
Release Date: November 9th, 2010
Content: A timely message to farm & business owners or heirs concerned about potential estate tax hitting an estate in just a few weeks unless Congress amends the current death tax (inheritance) law.
Disclaimer: The following commentary is general legal information and commentary only. Nothing is meant to be or should be construed as specific legal advice. If you need legal advice, only a qualified lawyer in your state can perform the estate planning techniques noted in this article.
It's time to finish harvest and then wake up to what is going on in Washington. There are lots of trust documents and Wills that birth a trust at death that have the wrong formula’s and wording in them because clients who seek professional help have a tendency to think that what was done in 2001, for example, is still good today. Interesting enough, as we watch “gridlock” for the next two years in Washington with our elected officials, we have to plan on what the law is now and will be in less than two months if a last minute change is not made in what we call the “sunset clause” law in the current federal estate tax statutes.
Right now, you can die with 10 billion dollars and do so estate tax free! Next January, only a million is tax free. The sunset just means what was law in 2001 will again become law in 2011. After a 10 year hiatus, we get to “flashback” a decade as if it never happened. Therefore, many if not most estate plans done are in need of review. It’s time to do the math on the provisions common with many Iowa estate planners. Many will say in the legal community, “you don’t need a trust” to save the estate tax. This is 100% true. But, they fail to tell you, as Paul Harvey would say…. The rest of the story! Even the Iowa State Bar website seems biased against using a revocable living trust to help save hundreds of thousands of dollars with funded trusts that help provide full exemption credits for both spouses and without the cost or delay common in probate.
Sure, a Will with a testamentary trust provision will also get the job done, which creates the “bypass” trust that is the tax saving feature identical to a funded living trust. The bypass trust works similar to a life estate used a generation or two ago to guarantee the kids get the money while a surviving spouse gets lifetime income. But, now, we use them to reduce or eliminate federal estate tax under the law. Sadly, too many country lawyers around the country feel they have a "right" to send your farm or business assets into probate when you die. Too many times, the main motivation is the mandatory fees they will collect. But, just because that is the way it's always been in your town, nothing gives anyone a right to collect on your estate when you die, accept for your heirs YOU choose to receive it.
Some lawyers do "some" estate planning beyond just writing a simple Will. They fund a trust at the death of the first spouse. (known as a Testamentary Trust) The problem with the idea of creating a bypass trust after the first death dictated from your Last Will & Testament is that you have to walk through the probate waters first. In Iowa, the Testator by law has already hired two people to serve in the capacity as a death advisor when they die. The first person you hire the day you sign that Will as your main estate plan, is your estate lawyer. Not hiring a lawyer to take your estate through the probate waters is like putting on diving masks and tanks and jumping out of a boat with no training. (Probate is a very dark, deep lake at times) Your survivors most likely won't come out very good trying to probate your estate without a lawyer. Because of the statutory law confuses some, the fact that you can negotiate actual fees instead of pay the statutory legal fees is often missed. But don’t wait until you are dead to strike a deal with your lawyer. Dead men don’t negotiate very well…
So, the standard Iowa lawyer fee is 2% of the total valuation of the estate. (Some states are higher) It can be more if any “extraordinary” services are rendered. Do you think when you are dead, that some creative lawyers will find a way to be “extraordinary” in their charges? Well, you’re probably right! But, just take the 2% rate. You die with a simple “I love you Honey!” Last Will that dumps your separate share of estate assets into the lap of your spouse. And, that spouse could just be entering a nursing home or be just a few short years away from having her own adventure -- a one way trip to a nursing home! (surviving spouses are more likely to enter a nursing home because the other spouse is no longer available to assist them in their home)
The lawyer at statutory rates would get 2% on your separate assets when you die. A $1,000,000 (million dollar estate) which is your separate estate share in your marital assets, would pay out $20,000 for legal fees. Then, whatever is left of your joint estate after the nursing home bills* stop and the surviving spouse dies, let’s say ˝ of the surviving spouses estate or $ 640,000 (each had a million to start with here), plus your $ 980,000 left of your estate you dropped on her, means a net estate of $1,620,000 gets hit again just a few years later.
This time the lawyer takes his 2% again and gets a paycheck for $ 32,400, not including any of those potential “extraordinary” services that may take additional mula away from the estate. So what is the take for the law firm in what normally is a five year or less (average stay in a nursing home before death is less than five years) time period to help settle two farm estates? Well it comes out to $ 52,400! Enough for that lawyers kid to get a multi year tuition deal at an Iowa University. Or take a nice trip around the world. Or pay off his mortgage.
* The nursing home in our example got $ 6,000 a month x’s 60 months or $ 360,000
But wouldn’t you rather see someone in your family benefit instead with this money?
Taking Against The Estate
(Let us count the ways your money will disappear)
Now, paying the local lawyer may not seem so bad, but we must not forget that what the lawyer gets, the Personal Representative can take too. He or she is given equal treatment in Iowa statutory law. Sure, you can have a kid appointed who is nice and agrees not to take their fair, statutory share. But even those deals can turn sour when the 3 page simple Will (One with terms, one page for mostly signing, and the last page an affidavit) ends up being a little quiet on details. Fighting breaks out amongst the sibling heirs. And, before long, the Personal Representative announces her “extraordinary” work being done is not being paid for, so she is going to have to take her fair Iowa share along with the lawyer. So, it could happen, and thus, another $32,400 chunk is removed from the estate at the second death when all hell breaks lose. (Kids are extremely quiet on the first death and extremely vocal on the second death usually when bad documents exist… or no documents exist!)
That heir is your Uncle Sam. He has been leaving smaller Iowa farm families alone for about a decade. But, he is going to become a fat cat again very soon if the estate laws aren’t corrected or amended.
Finding Some Relief
Yes, we had it made the last 10 years. In fact, they even suspended all of those “special valuation” seminars a few years ago when the estate limits exceeded the 1.3 million cap on valuating your farm/s for estate tax purposes based on what the land can actually produce, not the highest and best use. (like planting 20 French wind generators on it, towering over the corn and beans in every field)
Well dust off those old estate help books from Iowa State University professor Neil Harl you bought in the 70’s and 80’s -- because you may need them again!
First, in separate property states like Iowa, trying to split the land between the spouses in a deed analysis can be a good start to cover up and not get burned from coming adverse estate tax laws. And, call your CPA if you have any joint tenancy with right of survivorship property deeds. One question: "Please tell me all the reasons why top estate planners use JTWROS deeds to manage large estates?" If you don't hear a long pause... fire your CPA. (There really aren't any reasons)
And try to find someone in your family who will sit down and pledge that come hell or high water, they will promise to farm your lands for 15 years after your joint deaths, or you will lose a huge chunk of cash to the government tax coffers if a default should take place down the road after claiming "special use" valuations upon the last owners' death. (plus penalty and interest are added in on a default for good measure)
Hint: A good start would be electing a son or son in law who already has farmed 15 years and still has that many years left in them to make it to the IRS finish line.
If that doesn't work out, consider a little tool we call a FML (family limited partnership) which might be of interest if no family member is willing to make a long term commitment to actively farm (or run your family business) which the government requires. You can own your land in your FML and then your trust owns the shares. FML’s allow fractional shares for gifting and estate distribution purposes. It is the only way you can divide and give without having to sell or survey new little sub-sections. It’s a lot like owning mutual fund shares. FML’s can be funded with your main land assets and fractional shares worth $13,000 (2010 rate) can be gifted out of the estate per year per recipient under current IRS rules with no tax to the recipient and no reporting necessary to the IRS as long as you don’t go over that amount each year. You can give in December and January next year and get rid of substantial value if you have estate values that will be hit with the estate tax if you allow the excess assets to remain in your name.)
The potential to lower estate taxable values is the end result for IRS valuation purposes upon your death, when an FML and lifetime gifting program is put in force. This is because only family members can buy (or be gifted) shares of the FML. The limited marketability reduces value and thus, reduces taxable estate tax due to the IRS and is substantially accepted now in case law results. If you have too much “net worth” but most of it is in land, then the FML is also the tool of choice to be able to gift fractional shares of the farm or enterprise to kids and grandkids without having to liquidate to cash which may be in short supply. (Just keep enough ownership percentage remain as General Partner so your kids don’t legally gain the right to tell you how to run your business)
And if you’re worried about someone suing you, you can also have a limited liability Company to hold each farm separately and your trust can own the shares of each LLC for asset protection purposes. Some lawyers will put the farm operation in one LLC and the actual owned land parcels (one by one) in separate LLC’s. If you are a low risk person or not in a very high risk occupation (for example you aren’t a crop duster that drinks and then flies), you can skip the LLC asset protection route and just call your local insurance agent. Have them jack up your liability coverage's (and rates but it's partially deductible) on each separate casualty policy you have to the maximum they sell, then buy an “umbrella” liability policy on top of that for the full value of your net worth to be covered, if they will sell it to you. (In serious litigation cases, Lawyers tend to sue for what they think they can get out of you – for what they think your net worth is.)
If either the husband or wife of a large estate is still insurable for life insurance protection, there is another very common way to offset high estate tax bills, if you are over the 2 million mark for asset count (net worth after liabilities). This is to have your lawyer (we have a free module he or she can use) create an irrevocable life insurance trust (known as an "ILIT" in the financial industry) which will be the owner and beneficiary of any new coverage you apply for. Don't worry if one of you is not insurable any more. As long as one spouse is insurable, a special "2nd to die" life policy makes sure the needed money to settle with the government (yep you will have to hand the money over to Timothy Geitner in 9 months) will be quickly available soon after the last estate owner passes away. And best of all, the money is income tax free! (or at least it still is today) Be sure you contact me, for setting a plan like this up. As a 35+ years insurance agent/broker, I can help you find the best rates with the best companies (that will not go broke before you die). And, I can assist any lawyer to make sure the irrevocable trust is set up properly so the death benefit proceeds won't get dragged into the estate and estate taxed. (a common problem with "light weight" agents that don't understand estate planning correctly, or tax law)
You can also let your new ILIT become the owner and recipient of your current permanent life insurance policies (term works too, but it often runs out just about the time you need it....) you bought in the past. New coverage when issued correctly in an ILIT will keep "incident's of ownership" out of your estate (the life insurance trust does that for you). But you can't avoid inclusion under some funky "3 year rules" the IRS applies to transfers of ownership of life insurance policies already in force and owned by you, into an ILIT. One has to be careful if the policyholder is ill as to whether any transfer of ownership will make it past the 3 years before a death could occur. If a policy for an ill spouse is already in force with a cross owned approach (each spouse owns the policy on the other), you need a little chat with your CPA, because diverting death proceeds to any person other than the owner of the policy (other than the insured as owner) triggers a little cross wise tax problem. If we get desperate with no change in the federal death tax law next year, probably getting current policies into an ILIT is a good approach and then being very careful in your moves for 3 years after that! (drive slow on those country roads where deer like to jump out suddenly at night)
So, there are many “proven” estate planning tools available to make life better for you for the time you have left, as well as for your heirs when you eventually do turn the keys over to them. No, they aren’t all simple, but neither is planting a row of corn in a perfectly straight line (without a GPS control unit of course) as a new farmer. Once you find the right estate advisors to help, estate planning takes on a whole new meaning. And it provides for substantial financial savings as well. Whatever you pay them, you (or your family) will get it back in spades! DOING THE MATH
Now, it’s time to
do the math on just how much this “simple Will” scenario costs
before the kids get their
We had two millions dollars ($2,000,000) to start with. The value remains static for illustration purposes:
$ 52,400 The double estate settlement fees to the lawyer took: 32,400 The “Personal Rep” took her fee on the second death: 360,000 The nursing home took out of the estate (5 year stay): 266,000 Uncle Sam took of 43% of net taxable estate*: ________ $ 710,800 The Total “Take” for this estate plan
What’s left for the kids: $ 1,289,200
Percent of shrinkage after joint demise of land owners: 35.5%
* net estate valued at death of last farm owner and not optional 6 month later provision since land increased in value after the last death. Average estate rate on this size estate ($1,620,000) for the surviving spouse and assuming that land did not go up in the five year period (a poor assumption but we need to keep this as simple as possible) Net taxable estate is $620,000 after applying the exemption credits that equal a million dollar deduction. Income tax and other estate expenses are not included in this example and are additional costs.
Note: No family member would agree to farm for 15 years, so the estate assets (land) were appraised and reported to Uncle Sam on Form 706, 9 months later at full appraised value!
Some Would Call This Scenario a Nightmare.
But, it isn’t a nightmare. It is the reality coming in less than 60 days unless something changes in the law. You voted in November. Maybe you should holler in December…
Or, think differently about who you want your money to go to. If you would like more to go to your kids (or grandkids) instead, you are going to need a new estate plan. And most likely, you’ll need a new estate advisor. For starters, a revocable living trust can address the probate fees and eliminate them if you put all your assets into the trust. And, you can write a clause that restricts the Successor Trustee (new name for that Personal Representative in your old Will) from any fees unless administration takes more than one year.
Hint: Remind all your kids how much more money they are going to get in your “new” estate plan. It should help one or more you choose to serve as Trustee, to do a few duties (a lot less work than in your Wills forcing one or two probates!), in a complimentary way.
On the nursing home bill, well each kid is going to get a whole lot more if one will step up and agree to take care of “Mom” or “Dad” as long as possible away from a nursing home. Or, you can find live in health workers (carefully) if home assistance is workable too. And, if you are able to still qualify, consider “insuring” this risk with home care or nursing care insurance. (The premiums for one year are less than one month’s nursing home billing in most cases.) That is like a 12 to 1 advantage if a claim came up soon after buying the policy.
So, we are down to Uncle Sam. At this size estate, why don’t you just fire him like Donald Trump? You saw the tax bill. Wouldn’t it be nice to “fire” a tax bill like this that is over a quarter million dollars? You can if you fund a trust while you both are still alive and well enough to know what you are signing and doing under Iowa law. Those testamentary trust Wills some lawyers still push will do it too, but you will get hit with the first estate Personal Representative bill, probate lawyer bill, probate expenses, probate delays, etc. These lawyers aren’t thinking about your best interests. They are in-between the old fashioned (and usually older) lawyers in Iowa who still stick you with those simple Wills and the true professionals who serve the best interests of the client first.
A true professional legal estate planning advisor will let you do the math. These modern lawyers (revocable trust writers) know if Patrick Henry can write a living trust that still exists today, maybe the concept will work for you right now, not waiting until the first death to put your assets into one. They won't tell you to avoid them completely all because they are “too complicated". A modern trust estate plan with the right tax advisor who understands the estate and inherited IRA tax law too, (who also will give you some strong tax reasons to keep your land until death and preserve your large IRA for another generation), can put money in your surviving spouse’s pocket, and your kids too. And the grandkids!
In our example, even the lower exemptions of a million per spouse (you have to deduct any “funny stuff” transfers to kids you may have done to avoid the farm bank 20 years ago trying to foreclose on you) can allow you to say “YOU’RE FIRED!” to Uncle Sam on a two million dollar estate. (If you are worth more than that, a little concept called a “Q-Tip” option can still keep Uncle Sam at bay until after the second death.)
So, what’s the
final tally in estate expenses with our suggested “funded” and
“active” living trust (known as inter-vivos in Latin) as your
main estate planning tool? Well, breathing
life into your own funded living trust is going to cost a heck of a
lot less if you redo the math. Most likely the only bill would be
the nursing care bill and a few thousand to pay a modern estate
planning trust lawyer to draft the proper terms and assist in the
proper titling of your land assets into trust. And that nursing
care bill could be greatly
If you find you need some heavy weight planning tools and techniques, such as an FLP or a lifetime gifting plan, or an LLC -- they are all available to you and at reasonable fees to get them set up and operating properly. Whether it’s the governments hand in your estate pocket trying to take 41%-55% under the new estate tax schedule coming back January 1st, 2011, or a professional con artist trying to run into your combine and claim lifetime disability afterwards – at the very least insure your net worth fully with liability protection.
The Wrap UP
Keeping your simple “Will” estate plan (some now call it a horse and buggy time period plan) as your main controlling legal document could be associated as being as wise as cashing out as much as 35% -45% of your valued estate and placing the cash on your car roof. Then just driving away from the bank!
What would people say or think of you if you did that?
Yet, if you die with a simple “I Love You” Will… or no Will or Trust at all -- isn’t that exactly what you will be doing?
To plan your estate well, all you need is the right tools!
Warning: If you have millions, don't take any trips to remote locations with strangers or perhaps, even a family member between now and December 31st, 2010. If you don't know why this warning is real, then fire your lawyer too!
BTW: Most of this scenario applies to non farm families and not just to Iowan’s either.
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inheritance shares.
