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Life-and-death decisions

Agriculture.com Staff 08/07/2007 @ 2:04pm

Janice Halink's legacy endures. Step into the white two-story farm home near Richland Center, Wisconsin, to see her beautiful antiques and glass shoe collection. At family dinners, her delicious recipes still inspire second helpings.

Her proudest legacy lives on in the lives of her four children: Jack, Bill, Dale, and Gail. "She was extra good with the kids," Allen Halink says.

When his wife died seven years ago, he was stunned. "We had updated our wills, but we had no inkling she'd pass on before me," he says.

Today Halink, 72, is taking steps to extend their farm's legacy into the fifth generation with an estate plan that carries out his long-range goals, protects assets, structures the farm transfer, and cuts taxes.

Although none of the children are taking over, they all want to retain that option. "We all have strong ties," says daughter Gail Hoffman. "The house and buildings are on sacred ground. We learned to value the farm growing up and working here."

Halink's situation is not unusual. According to the USDA, 39% of U.S. farmland is owned by persons 65 years and over. A recent FarmTransfers Project study reveals that fewer than 30% of U.S. farmers have identified a successor.

Rising land values and farm size underscore the critical need for planning. "Farmers need to look at estate planning as part of risk management," says Joy Kirkpatrick, outreach specialist, University of Wisconsin-Center for Dairy Profitability. "It's more emotional than crop insurance, but failure to plan is stressful, too."

Halink sought help from Kirkpatrick to explore ways to keep control as long as possible and to mitigate estate and income taxes.

"Most people want to control their assets for as long as possible," Kirkpatrick says. "At the same time, they want to give it all to their kids after they die. But they don't want the estate to pay taxes. Not all their goals fit. They need to set priorities."

Halink is considering a family limited partnership (FLP) or a limited liability company (LLC).

Both would allow him control as a general partner, with his children as limited partners. The value of shares gifted to them would be discounted because of their minority interest.

"An LLC can be used to continue the business, but it also can be an estate planning tool," Kirkpatrick says. "Once the older generation passes, the nonfarm children can use it to continue management of the assets."

Halink's concern about estate tax is shared by many farmers. For 2007 and 2008, it's possible to pass an estate valued at up to $2 million tax-free (see table below). In 2009 the exemption will be $3.5 million. Estate taxes are set for a full repeal in 2010 but would be reinstated in 2011. At that time, the exemption would drop to $1 million. A House bill has been introduced to make the estate tax repeal permanent.

"It's unlikely the repeal will pass, but Congress probably will permanently increase the exemption," says Roger McEowen, Iowa State University ag law specialist. "Because of this uncertainty, people need to make sure their assets are titled properly and to get set up to take full advantage of tax exemptions."

Philip Harris, University of Wisconsin ag law specialist, says he's seeing increased interest in estate planning to achieve a smooth management transition.

"In the past, people let estate taxes drive the whole process," he says. "Taxes brought people in the door, but there are other reasons to plan." Income and capital gain taxes still play a major role in a fundamental decision: whether the farm transfer should occur during the lifetime or at the death of parents.

"The older generation wants to hold assets to get basis adjusted to date of death value and to reduce capital gains," Harris says. "But there are ways to hang on to assets and still assure the younger generation. An option to purchase or a long-term lease with an option to buy at a specified price give the younger generation a contractual right."

Estate plans typically utilize trusts to hold assets such as life insurance or business real estate for the benefit of a surviving spouse or heirs. Financial and health care powers of attorney also are invaluable tools.

"Legal language is difficult," Gail Hoffman admits. So is the challenge of integrating family dynamics into the process. "My brothers and I have different connections to the land, but we share a love for it," she says.

Halink was 18 years old in 1953 when he borrowed money from his dad to start farming. "It's tough making plans to pass it on," he says. "It's hard to think about death."

Val Farmer, Wildwood, Missouri, clinical psychologist and ag consultant, agrees. He lists five psychological barriers to estate planning:

1. Denying mortality
2. Having no retirement plan
3. Needing to stay in control
4. Being fair
5. Avoiding conflict

"I've seen too many cases when a lack of planning comes back to haunt families," Farmer says.

Outside advisers can be invaluable to work through these issues. "Many people don't know Extension offers free resources," Hoffman says.

The Halink family is almost ready to select an attorney. When it comes to estate planning, they know that having all the answers isn't as important as asking the right questions.

"No one should be too proud to ask for help," Hoffman says.

Zones for estate planning

Zones Strategies to consider
Zone 1 If the combined wealth of the husband and wife is expected to be no greater than the value of the estate tax exclusion ($2,000,000 in 2007), the optimal strategy might be to leave the property outright to the survivor at the death of the first to die. For individuals in this category, state death and income tax considerations might be more important than federal estate tax concerns.
Zone 2 If the combined wealth of husband and wife is expected to be no greater than twice the value of the estate tax exclusion at the death of the surviving spouse ($4,000,000 in 2007), the optimal strategy may be to (1) divide the property between the spouses equally during life, and (2) each leave the other a life estate in the property owned with no marital deduction claimed at the first death.
Zone 3 If the combined wealth of husband and wife is expected to be more than twice the value of the estate tax exclusion at the death of the surviving spouse ($4,000,000 in 2007), the optimal strategy might be to (1) divide the property between the spouses equally during life, (2) create a partial marital deduction at the death of the first spouse, and (3) leave the remaining property to the first spouse to die in a life estate for the other spouse.

If you knew when death would occur and the amount of property that you would own at that time, it would be fairly easy to develop the best planning strategy to reduce taxes, explains Roger McEowen, Iowa State University agricultural law specialist. But because that date can't be predicted, McEowen suggests thinking in terms of estate zones useful for planning.

Janice Halink's legacy endures. Step into the white two-story farm home near Richland Center, Wisconsin, to see her beautiful antiques and glass shoe collection. At family dinners, her delicious recipes still inspire second helpings.

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