Volume 10, Issue 5
The Wealth Counselor
Three Estate Planning Mistakes Farmers and Ranchers Make and How to Avoid Them
Farming or ranching is more than a means of livelihood – it is about preserving a legacy and unique way of life. Unfortunately, many farmers and ranchers don’t fully protect their legacy with an up to date estate plan. An out of date or inadequate estate plan could result in a farm or ranch that has been passed down for generations ending up being sold and converted into non-agricultural use. Sadly, a lack of planning can cut a legacy short and end a family’s unique lifestyle choice.
The subdivision of the family farm or ranch into residential lots or plowing under the soil to build the next mall or office building can be avoided. In this issue you will learn about three common estate planning mistakes farmers and ranchers make and how you can help to avoid them.
Mistake #1 – Failing to Plan or Failing to Update an Out of Date Plan
Farmers and ranchers have complex estate planning needs. They may have children who want to continue the farming or ranching business and children who do not. As a result, they will be forced to decide who inherits the land, the equipment, the livestock, and other assets, while trying to keep things fair and equal. This makes it difficult for many farmers and ranchers to decide what to do, which may result in no estate plan being created at all. On the other hand, some farmers and ranchers may have an estate plan but have failed to maintain and tweak the plan as their lives change.
Planning Tip #1: Clients who own a farm or a ranch and do not have an estate plan need to be advised of their planning options and assured that their goals can be achieved. You are in the ideal position to understand the current family dynamics and wealth, and then assemble a team of experts (including attorneys, accountants, bankers, and insurance specialists) who can help the client create a plan that will work for their current situation.
Clients who own a farm or a ranch and already have an estate plan need to understand the importance of keeping the plan up to date as life events happen (births, deaths, marriages, divorces, illnesses, bankruptcies, lawsuits, jackpots) and laws are modified or repealed. As the expert who understands the changing dynamics and wealth of the family, you are in an ideal position to assemble a team of experts (including attorneys, accountants, bankers, and insurance specialists,) who can help the client update their plan so that it will work for their new situation.
Mistake #2 – Relying on Joint Accounts and Beneficiary Designations
Farmers and ranchers may believe that the easiest way to plan their estates and avoid probate is to own property in joint names with family members, establish payable on death (POD) or transfer on death (TOD) accounts, and name family members as beneficiaries of their life insurance policies and retirement accounts. Relying on joint accounts and beneficiary designations is a huge mistake on many fronts.
For example, enrolling jointly owned farmland or ranch property in programs administered by the U.S. Department of Agriculture may result in subsidies being left on the table. In addition, farmers and ranchers are giving up control of their real estate by owning it directly with others. Business entities (corporations, partnerships, and limited liability companies) or trusts are the better options for maximizing subsidies, minimizing liability, and retaining control.
Some farmers and ranchers have taken the time to make an estate plan, but the use of joint property with rights of survivorship, POD or TOD accounts, and individual beneficiary designations on life insurance policies and retirement accounts can frustrate the intent of the estate plan. This is because these assets pass outside of the will or trust. In addition, outright distributions will not be protected from creditors, predators, and lawsuits.
While joint and beneficiary assets will avoid probate, these assets will still be included in the taxable estate. This may create an estate tax liability at the state and/or federal level without a well-planned means for payment since the assets will go directly into the hands of the beneficiaries. In turn, other property that passes through intestacy or a will or trust will be used to pay the estate tax bill, potentially creating unfair and unequal inheritances.
Planning Tip #2: How property is titled often dictates who inherits it. Farmers and ranchers need to coordinate assets held in business entities and trusts with assets that are jointly owned or pass under a beneficiary designation. Otherwise intended heirs may end up with nothing and estate tax bills may cause unintended consequences.
Mistake #3 – Overlooking Liquidity Needs
Incapacity and death are expensive. Aside from day-to-day family expenses and medical bills, attorneys, accountants, trustees, and other administration expenses need to be paid. To make matters even more challenging, federal estate taxes are due within nine months of death, and state death taxes are also typically due within this same time frame.
Where will the farming or ranching family get the cash to pay these expenses? Farmland is illiquid as is farming equipment. Without properly planning for immediate and long-term cash needs, families may be forced to quickly sell land and equipment at a reduced rate.
Planning Tip #3: You are in the unique position to help farming and ranching clients assess their liquidity needs and create a plan for managing debt and expenses upon incapacity or death. You can assist with securing lines of credit and the proper amount of disability insurance, long-term care insurance, and life insurance. You can also collaborate with attorneys to add life insurance trusts, entity planning, and part gift/part sale arrangements in exchange for a note or private annuity.
Takeaways for Farmers and Ranchers
Farmers and ranchers have unique circumstances that require specialized estate planning solutions. You, as the advisor to farming and ranching clients, are in the perfect position to help them create and maintain a plan that will preserve their legacy and way of life. We are experienced with helping farmers and ranchers achieve their estate planning goals. Please call us if you have any questions about this type of planning and to arrange for consultations for your farming and ranching clients.