Download Estate Planning - Department of Agricultural Economics

Transition Planning Strategies
CENTRA Training – May 14, 2013
Dr. Shannon Ferrell
Dr. Rodney Jones
Oklahoma State University
Department of Agricultural Economics
Assistant Professor, Agricultural Law
OK Cooperative Extension Service
Area Extension Agricultural Economics Specialist
Outline
• Elements
• Tools
• Barriers
• Conclusions
Why should I care?
Founding Generation
Second Generation
Third Generation
30%
12%
3%
Fourth Generation
Iowa Farmland Ownership by Age
Source: Iowa State University Extension (Duffy and Smith, 2008)
100%
90%
28
80%
70%
60%
27
50%
40%
22
30%
20%
15
10%
0%
1982
1992
2002
6
2
2007
•55%
>74 years
65-74
55-64 years
45-54 years
35-44 years
25-34 years
<25 years
Challenges for the
Aging Farm Owner
Perspectives for the closely-held
farm business
Family
Business
Legacy
Assets
Why should I care?
Male:
19.7%
Widowed Persons by Gender (AARP, 2001)
Female:
80.3%
Why should I care?
3x to 4x
Poverty rate of widows compared
to same-age married women
Why should I care?
55%
Percentage of U.S. adults with
no estate plan in place
Elements of Transition
Founder
Successor
Elements of Transition
Founder
On-farm heir
Off-farm heir
Separate Entity
Ownership
Control
Participation
Unrelated
Successor
Liquidation /
Dissolution
Elements of Transition
Founder
On-farm heir
Off-farm heir
Separate Entity
Ownership
Control
Participation
Unrelated
Successor
Liquidation /
Dissolution
Elements of Transition
Founder
On-farm heir
Off-farm heir
Separate Entity
Ownership
Control
Participation
Unrelated
Successor
Liquidation /
Dissolution
Estate Tools
Tool
What it does
Consequences
•Zero up –front cost
Intestate
Default plan; allocates
Succession and transfers property at •Excludes all outside family
•No decedent control
death
Will
Instructions for
disposition of property
at death
•Property held until death
•Probate issues
•Does its job, then quits
Trust
Legal entity that holds
and manages property
•Highly flexible
•Requires trustee
•Irrevocable/rigid at death
Estate Tools - Others
Tool
What it does
Consequences
Financial instrument
•Can add liquidity and/or
paying amount on death enhance estate
•Question of taxability
•Cost : benefit?
•Planning horizon?
Transfer on Conveyance triggered
•Property held til death
Death
by death of grantor
•Avoids probate
deed
•Not universally adopted or
understood
Life
Insurance
Ownership Tools
Tool
What it does
Consequences
Joint
Tenancy w/
Right of
Survivorship
(JTWROS)
Cotenancy that
redistributes ownership
interest of decedent
among survivors
•Avoids probate
•Reduces flexibility during life
•Unintended consequences
Life Estate
Present interest to
holder, remainder
interest to successor at
death
•Avoids probate
•Reduces flexibility during life
•Requires cooperation
Business Entities
Tool
What it does
Consequences
Sole
“Organic” form of
proprietorship business; no separate
/ general
existence from owner
partnership
•Business as entity ceases
upon ANY change to owners
•Unlimited liability that is
personal, joint, and several
Limited
Separate entity
Partnership consisting of general
(L.P.)
partner(s) and limited
partner(s)
•Limited liability for limited
partner (rule evolving)
•Limited management
participation by limited
partner (rule evolving)
•Questions re:
liability/participation of
partners
Business Entities
Tool
What it does
Consequences
Corporation
(Inc.)
Separate legal entity
with limited liability for
all owners
•Did we say limited liability?
•Well-recognized rules
governing control
•Allows flexibility in transfers
•S/C Corp. taxation
•Must follow formalities
Limited
Liability
Company
(L.L.C.)
Separate legal entity
with limited liability for
all owners
•All advantages of
corporations w/ more
flexibility
•Flexibility of tax treatment
•More than enough rope to
hang yourself
Transactional Tools
Tool
What it does
Consequences
Installment
Sale
Purchase of property by
successor with payments
over time
•Allows seller to recognize
income from sale over time
•Remove property from estate
•Seller may retain security
interest
•Buyer may lose step-up in basis
•What if default occurs?
Long-term
lease
Transfer of property
possession and control to
lessee w/ retention of
ownership by lessor
•May be structured in number of
ways to allow more/less
participation by lessor
•Does not remove property from
estate
•Structure of lease dictates tax
treatement
Barriers to Implementation
• Communication
• Equitable considerations
– Farm kid / city kid
– Sweat equity
• Willingness to transfer
Conclusions
• Producers, we can transfer it. We have the
technology.
• Do producers and professionals
understand the tools and their impacts?
• Are producers willing to engage in true
transitions?
THANKS!
Dr. Shannon L. Ferrell
OSU Department of Agricultural Economics
[email protected]