A well-crafted, comprehensive estate plan includes a will, power of attorney, medical directive and frequently a trust. The estate plan should dovetail with your business documents to ensure the business plan and estate plan fly in formation. An estate plan will save your family not only time and money down the road, but also protect your familial relationships. It will ensure your farm businesses and land pass onto the next generation the way you want.
Once you are ready to work on your estate plan, make sure to avoid these common mistakes.
1. Mistake: The plan doesn’t match asset ownership.
Solution: Review ownership and beneficiaries on all of your assets. Your account ownership or real estate titles may conflict with distributions under your will or trust. For example, if you own a joint account with a child, that account may pass solely to that child, which may not be your intent. Review asset titles, account ownership and beneficiary designations to avoid a mismatched plan and family conflict.
2. Mistake: Poor tax planning.
Solution: Maximize tax savings. As land continues to rise in value, in order to keep the farm in the family, consider advanced income and estate tax planning. While folks in the 1990s frequently created tax plans to minimize federal estate taxes at 55 percent on estates exceeding $600,000, federal laws currently allow you to transfer $5.49 million to someone other than a spouse free of federal estate tax. If the estate exceeds $5.49 million, there is a 40 percent tax. A married couple can create a plan to pass on almost $11 million estate tax free to their families.
In contrast, Oregon taxes estates that exceed $1 million and transfer to someone other than a spouse on a sliding scale of 10-16 percent. However, Oregon also has the Oregon Natural Resource Credit (“ONRC”) that farmers can take advantage of to keep the farm in the family. The ONRC is an estate tax credit on Oregon farms that meet the following requirements:
1. The adjusted gross estate is under $15 million.
2. ONRC Property exceeds 50 percent of the adjusted gross estate.
3. ONRC Property was operated for five of the last eight years before death by the decedent or decedent’s family member.
4. ONRC Property is inherited by the decedent’s family and continues to be used to farm for five of the eight years following death.
5. The ONRC is limited to $7.5 million of ONRC Property.
Aside from estate taxes, capital gains on the sale of farm property have increased. Analyze potential estate and income taxes with your attorney and CPA to determine the best way to reduce taxes for you and the next generation.
3. Mistake: Failing to address family dynamics.
Solution: Work through potential family issues in advance. If one child is inheriting the farm, tell the other children and explain why. Have an honest and open dialogue about the succession and your goals. Perhaps the child worked on the farm his or her whole life and this is fair, albeit not equal. For any potentially sticky situation, take the next step of not just telling the family as a group, but writing a letter to your children explaining your decision.
4. Mistake: Failing to address disability.
Solution: Execute documents and instructions for your family to have in the event of emergency. Who knows all the details of your farm business? Who is legally authorized to run it if you had an emergency? Would the contracts, leases, supplies, payments and employees all run smoothly? If one child leases part of your land, was that done through a handshake or a legally binding document? Ensure that you have documents in place that allow someone to step in to manage your assets and make health care decisions on your behalf in the event of emergency.
5. Mistake: Failing to update estate and business plans.
Solution: Review your plan regularly. The law is complex and our situations in farm and business are unique. Life and the law changes. Have an attorney who regularly works with farm and business succession review your plan regularly to ensure your plan works.
Maria Schmidlkofer is an attorney with Schwabe, Williamson & Wyatt. She focuses her practice on estate planning and works with farmers throughout the Pacific Northwest to create comprehensive succession plans for their families. You can reach her at firstname.lastname@example.org or (503) 540-4265.