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3 Steps to Succession Planning
At a recent Iowa Power Farming Show seminar, attorney Erin Herbold-Swalwell shared her planning expertise with Midwest farmers in attendance. Prior to entering private practice at Brick Gentry P.C., Herbold-Swalwell was the staff attorney at the Iowa State University Center for Agricultural Law and Taxation. In addition to her professional experiences in research and writing, a background on her own family’s Iowa farm helps her work through the complex planning issues rural families face.
“I really like what I do because I grew up on a farm, too. So I can kind of understand, and try to understand where other people are coming from. Every operation is completely different. It’s very interesting,” she says.
Before diving into the process, Herbold-Swalwell says it’s important to understand that’s what it is – a process. As time passes, relationships evolve and decisions are made, the plan will change too. New legislation, like the 2018 tax bill, may also force plans to shift.
Steps to Estate Planning
For all farm families along the estate planning journey, Herbold-Swalwell recommends these three simple steps:
1. Examine and communicate.
Communicate with your family and set goals. Particularly when there are off-farm heirs involved, it is important to understand everyone’s expectations. Examine land titles and review insurance plans. Physically gather the deeds and other paperwork to double check.
Are your assets titled the way you remembered? Do changes need to be made to allow you to meet your goals? Is everything signed and documented properly to back up your plans?
2. Analyze the tools you have available.
Are there things that can be gifted during your lifetime? Can lease agreements be set up or modified to meet your goals?
What plans are in place already? What professionals should be involved? Does the farm have an accountant, attorney, or loan officer?
“Being prepared to plan is key,” Herbold-Swalwell reminds farm families. It may even help you minimize attorney fees. If you are prepared for the process, professionals can help your family sort through the appropriate setup for off-farm heirs, prenuptial agreements, or power of attorney.
3. What is the law?
As your family sets goals and works with professionals to implement your plans, be aware of how the law can help or present challenges.
Since the 2018 tax bill was passed, it is important to note Congress doubled the exemption of what you can pass on at death and avoid federal estate or gift tax to $11.2 million per person. This new rule has a sunset of 2050. This means if there is no congressional intervention prior to 2025, the limits will fall back to $5.49 million – adjusted for inflation.
Gifts up to $15,000 per year per recipient can be done tax-free. Herbold-Swalwell points out this can be done in the form of grain or other unique ways.
Current uncertainty in the farm economy can make estate planning more challenging. For now, land values are holding strong despite low commodity prices. Producers are still facing high input costs, leaving less cash available to buy out partners interested in transitioning out of farming.
Avoid gifting plans that could lead to capital gains tax down the road if possible. “If you’re going to make gifts during your life, especially farmland, you have to consider basis,” Herbold-Swalwell says. “That’s where tax planning comes in.”
Don’t gift land without consulting your tax preparer or somebody really familiar with those issues, Herbold-Swalwell warns. “A lot of times if you’re gifting during your life, and you’re not retaining a life estate or anything like that and you make a gift to your kids, you’re gifting that land with your basis attached. So, when you acquired the ground, what did you pay for it? There might be a pretty big disparity if the kids then want to sell that farm later on; you could be subject to some capital gains there.
“If you die owning that land, you get a step up in basis. So, if the kids then want to sell that property, their basis is what it was worth the date that you died,” she continues. “Then you wouldn’t have a capital gains issue.”
Wills for Spouses
Often spouses name each other as beneficiaries in their wills leaving all assets to the survivor. This can be a problem if the farming spouse dies first leaving all the machinery to a nonfarming spouse. In this case, farming children don’t have the machinery they need to run the business, and the door is open for hurt feelings or misunderstandings, especially if nonfarming children are also in the picture. For farming couples, failing to make changes after the first spouse dies might not be the best option.
Life Insurance as a Tool
Life insurance can be used as a tool in a family situation where there are both farming and nonfarming children. If this is a strategy your family wants to use, make sure you start planning for it early, says Herbold-Swalwell. Once health issues develop, starting the process can be very difficult. Using life insurance as an estate planning strategy can work in a couple of ways.
First, parents can take out a policy on themselves. By naming off-farm heirs as beneficiaries and leaving the land to farming-heirs, a situation of siblings buying each other out may be avoided. This can also help parents leave more equal value for their children.
Alternatively, a farming child could buy a life insurance policy on their farming parent. This may be helpful in a situation where the plan says farmland will be divided equally among farming and nonfarming children, and the farming child will need to buy out siblings or other partners. Essentially the child is making payments ahead of the parent’s death so they will have the cash available at the right time.
Herbold-Swalwell also presented some of the issues that can arise when there are second marriages. Because women tend to outlive men, this is a common issue for them, she says.
The law is different around the country, but in Iowa, if you are married and your spouse dies, you can file an elective share, even if all your spouse’s assets have been left to their children. Through this process, as the spouse, you can get up to one third of the estate.
On the other hand, as you are planning, don’t assume your children will take care of your second spouse, Herbold-Swalwell says.
Having a prenuptial agreement signed before the marriage is a good way to set clear expectations. “Make sure you talk about that more than three weeks before the wedding,” Herbold-Swalwell advises.
A Trust Vs. A Will
Herbold-Swalwell says often clients come to her asking about the difference between a trust and a will.
“The nice thing about trusts is they’re confidential. With a will you have to file it at the courthouse or online now. So, everybody can see that. Neighbors could go to the courthouse and see what your estate plan provides for,” she says.
Another positive about revocable trusts is they avoid probate and some of the fees associated with that that lawyers and executors can take from an estate if the trust is set up correctly. “Revocable trusts can be pretty seamless to administer on your death as well,” adds Herbold-Swalwell.
Finally, revocable trusts are fairly simple to change. Herbold-Swalwell explains, “If you want to make an amendment to your trust all that has to be is notarized, which is very convenient.”
On the other hand, revocable trusts are a little bit harder to set up because all your assets have to be titled into that trust. That includes bank accounts.
Some people think you have to file two tax returns when you have a revocable trust. Herbold-Swalwell says that’s not true. “You only get a separate tax identification number when you die and then it becomes irrevocable because you can’t change it after your death,” she says.
“A will can also be a perfectly good option and work for you if you don’t have those concerns about going through probate. Just as long as you have provided for exactly what you want to happen to all of your assets, it’s also a good option,” says Herbold-Swalwell.
As you put these three steps into practice and navigate the situations that make your own farm unique, Herbold-Swalwell emphasizes the process mind-set. Succession planning is a work in progress. “Have everyone at the table. Get back together every five years.”