Michigan Durable Power of Attorney Form for Property and Finances by ima13050

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									    Estate Planning
 Small Business/Farm
Succession and Transfer
     Eaton County
              Date: Sept 2, 9, 16, 2004

                            Roger A. Betz
                          District Extension
                       Farm Management Agent
    Mona Ellard                                       Phil Taylor
   Director, Eaton                               Extension Agriculture
County MSU Extension                           & Natural Resources Agent
Why Develop An Estate Plan?

            Mona Ellard
 Michigan State University Extension
          Why an Estate Plan?
   Pass assets & business structure to next generation
   Control transfer
   How to transfer debt
   Retirement income – LOTS!
   Security - health care issues
   Issues at passing of 1st spouse
   Issues - Fairness, equitable, harmonious
   Durable Power of Attorney and Patient Advocate
   Peace of mind
   Minor children - care, finances
   Gifts
   Reduce Taxes
  What Is Your Estate?
 Who Gets Your Property?

  Eaton County Estate Planning &
    Business Transfer Seminar
      September 2, 9, 16, 2004
Targeting Farm and Small Businesses

  Phil Taylor – MSU Extension Agriculture and
                Natural Resources Agent
    Estate Planning
wills, probate, & trusts

A discussion of alternative
property ownership patterns
and estate transfer methods.
 Intangibleand invisible rights,
  powers, privileges and
  responsibilities of the owner
 Real Property
     Land improvements
 Personal Property (everything not real)
             Property Rights
   Property is not just real estate
   Numerous separable Rights for an
    item of property
       Land example: Right of Access,
        Security right (Mortgage against it),
        Leasing right, hunting rights, mineral
        rights, development rights, etc.
       Truck example: Use rights, leasing
        rights, gifting rights, lending rights
          Property Rights
   More than one person can own
    rights in property
   Rights can be referred to as
    “Economic Interests” – there is
    value to the rights
   Economic Interests are part of a
    person‟s estate and can be
    Real Property = Real Estate
   Land or improvements upon the
   Buildings, fences, timber, growing
   Oil, mineral, and development
    rights – houses etc.
   Evidence of ownership: DEED
       Provides description of the property
        Personal Property

Everything other than Real Property

         TANGIBLE – “SEE IT”
  Tangible Personal Property
* Physical Property that includes…
     …Goods, Wares, Merchandise
     Clothing, Furnishings Livestock,
   Harvested Crops Machinery and
Tangible Personal Property         (cont.)

  * Titled property (title proves
     Cars, Trucks, Trailers, etc.
  * Other proof of ownership
      Bill of sale or other document
  showing ownership
  Intangible Personal Property
A claim capable of being enforced on or
    against other individuals or entities.
“Paper Property” – A piece of paper shows
Securities, notes, bank accounts, patent
    rights, land contract, life insurance
    contract etc.
          Ways to Hold Rights
           deed, contract, or other
           evidence of ownership

 Fee simple (sole ownership)
 Co-ownership
     1.Joint Tenancy (with rights of survivorship)
          Tenancy by the Entirety
     2.Tenancy in Common (Default)
    Ways to Hold “Own” Property
       With Rights of Surviorship
           Whoever lives longest – gets the goods

       By the Entirety
           Same as above, only between husband and
           Each spouse has equal ½ ownership
            irregardless of how the property was
Ways to Hold “Own” Property
       No rights of survivorship
       Co-owners have right to transfer their
       At death, % ownership transfers
        subject to will or state law.
    •     Two brothers own land Tenancy In Common. What
          happens to the land if when one brother dies.
    •     His portion of the land is subject to his will or state
    •     Significant effect on multiple owner businesses.
        Methods to Transfer
 Contract
     Life Insurance, Annuity, Trust
 Tenants in Common – goes to heirs
 Joint Tenancy (rights of survivorship)
     Ownership vests to survivors
 Probate
     State law
 Transfer prior to death
     Complete severance
     Retained rights
Methods to Transfer Property

   Question: My will says my life
    insurance goes to my son. Who
    receives the life insurance?
Property: Know what you own.
Ownership: Know how you own it.
Transfer: Know when it gets transferred.
Plan: Know why & how it gets transferred.
Heirs: Know who‟s going to get it.

       PLAN to your HEIRS.
How Do Taxes Affect Your
             Roger Betz
Michigan State University Extension
 District Farm Management Agent
   Property Transfer Taxes
  Government Doesn‟t Care Which Method
    You Use, Just Pay the Appropriate Tax
 Federal Gift Tax
 Federal Income Tax
 Michigan Income Tax
ESTATE (no inheritance)
 Michigan Estate Tax
 Federal Estate Tax
            Federal Gift Tax
   Excise tax on gifts
      Lifetime transfers
      Without full consideration
      Donor pays tax due
   Annual exclusions (indexed for inflation)
      $11,000 per donee and per person
   100% Deductions for GIFT TAX (Income Tax?)
    100% Spouse, College Tuition, Medical Care
      marital, charitable, partial consideration
   Lifetime exemption above the annual exclusions
    $1 Million Starting 2002 and beyond
Federal Estate & Gift Tax Schedule 2004
     Gift Tax Calculation           (example)
 Year 1   $6,000 X 18%            = $1,080

 Year 2 $21,000+$6,000            = $27,000
   3,800 Plus 22% of 7,000 = 5,340–1,080 = 4,260

 Year 3 $51,000+$21,000+$6,000=$78,000
   13,000 Plus 26% of 18,000 = 17,680 – 1,080 –
 Must  add up gifts above the annual exclusion
  for entire lifetime
             Unified Credit
 Used  to calculate effective Federal Estate
  and effective Gift tax exemptions
 Currently the credit is applied to both the
  Federal Gift Tax and the Federal Estate
 Credit used for gifts is not available to pay
  your estate taxes
 Beginning in 2004 different thresholds
  exist for gifts versus estate taxes
 What is the Unified Credit for „04-‟05?
 Gift Tax =$345,800; Estate Tax = $555,800
Unified Credit Reduction             (Example)
Gift Tax Unified Credit (2004 ) $345,800 (1M)
Year 2001 used                     -1,080
Year 2002 used                     -4,260
Year 2003 used                     -12,340
Remaining Gift Tax Credit         $328,120
Died in 2004 with no gifts over limit
‟04-‟05 Estate Tax Unified Credit $555,800
Minus U.C. used by the Gifting        -$17,680
Remaining U.C. for the Estate Tax $538,120
   Gift Tax Effective Exemption
      Gifts are during your Lifetime
 Increases over years
   1997 and before = $600,000
   1998 = $625,000
   1999 = $650,000
   2000 and 2001 = $675,000
   2002 - 2010 = $1.0 million
   2011 = $1.0 million ? probably
   Congress action?
   Same as Estate Tax Exemption up to 2004
    Gift Tax Rate Schedule 2001-2011

Red area is where Unified Credit or Exemption is used up
      Filing Requirements

IRS Form 709A or 709 - Gift Tax Return
      Gifts of more than $11,000
        per donee in any year

Return due April 15 following the year of
                  the gift
     Gifts: Planning Pointers
 $11,000  per person per year
 Spouse can use spouses annual
  exemption so $22,000 per year
 Two married people can give two other
  married people 44,000 per year before
  starting to use Unified Credit
 Children, grandchildren and spouses
  $44,000 each set
Federal 709 Gift Tax Return
Federal 709 Gift Tax Return
       Federal Estate

        An Excise Tax

It is levied upon the transfer of
         property at death.
          Federal Estate Tax
 Tax  applies to total estate transferred, after
  allowing for deductions and credits
 Tax not affected by relationship of beneficiary
  to you: Except marital deduction - Special
  deduction for surviving spouse
 Amount of tax based on:
      Estate Size
      Amount of deductions and Credits
Estate Tax Effective Exemption
 Increases   over years
     1997 and before = $600,000
     1998 = $625,000
     1999 = $650,000
     2000 and 2001 = $675,000
     2002 and 2003 = $1.0 million
     2004 and 2005 = $1.5 million
     2006, 2007, 2008 = $2.0 million
     2009 = $3.5 million
     2010 = No Estate Tax
     2011 = ? back to $1mil without congress action
     Same as Gift Tax Exemption before 2004
  Federal Estate Tax Rate Schedule

Red area is where Unified Credit or Exemption is used up
  “The value of the gross estate
includes the fair market value of all
  property owned by the deceased
 and all property the deceased had
 an economic interest even though
     outright ownership had been
   transferred to someone prior to
           Value of Gross Estate
           Appraised at Fair Market Value
          at date of death or 6 months after
 Personal representative chooses date
 Factors such as:
     local sales
     rental rates
     expert testimony
 Exceptions:
       “Special Use Valuation” of certain real property
       “Family Owned Farms and Businesses” exclusion
        (Stops beginning 2004)
       “Qualifying Conservation Easements” - 40%
Property Value in Gross Estate
Kind of Property                Value in Estate
Sole Ownership                  Entire Value
Tenancy in Common               % Owned
Joint Tenancy                   % Contributed
  With Rights of Survivorship

Tenancy by Entirety             One-half of Value
Life Insurance                  Policy Value
Retained Life Estate            Economic Interest
Annuity                         % Contributed
       Joint Tenancy
with Rights of Survivorship

If you add your daughter‟s name to the title
of a $100,000 piece of your real estate, how
much reduction in the size of your estate?
        Joint Tenancy
 with Rights of Survivorship
Reduction in gross size of your Estate??
Final Answer:
Depends, but probably none.
1. Who contributed to buying it?
2. Does she bare the burdens and benefits of
ownership? Rent income, pay taxes etc.
3. Is there debt against it?
Who will own it when you die?
Examples of Economic Interest
         in Property
 Retained  rights to income
 The right to change who inherits
 The right to change the future use
 The right to change enjoyment
      Adjusted Gross Estate
Gross Estate               $2,300,000
Funeral                    -    9,000
Administration             -   15,000
Losses (casualty, theft)   -    5,000
Debt claims against estate -   12,000
State Estate Taxes (2005- 2009)
Mortgages and Liens        - 125,000
Adjusted Gross Estate      $ 2,134,000
        2004 Taxable Estate
Adjusted Gross Estate               $2,134,000
Charity, Education, Religion            35,000
Adjusted Taxable Estate             $2,099,000

Federal Estate Tax (on 2,000,000)    $780,800
plus 48% of $99,000                    47,520
Total Potential Tax                  $828,320
Unified Credit (2004)                -555,800
Total Estate Taxes                   $272,520
       Estate Tax Examples
Taxable Estate       Tax Paid
                 1997            2004
$600,000         None            None
$675,000         $18,500         None
$800,000         $75,000         None
$1,000,000       $153,000        None
$1,350,000       $298,500        None
$2,000,000       $588,000       $225,000
                       Saves $363,000
    Filing Requirements
Estate Tax Return must be filed when
 the Gross Estate value exceeds the
 exemption equivalent.

File within 9 months after death. Tax is

Federal Estate Tax Return 706
Federal 706 Estate Tax Return
Delayed Payments of Estate Taxes
1    year extension with interest
     Reasonable cause
 Ten   1 year extensions with interest
     Each year with reasonable cause
 Installment       Payments
   35% or greater of Adjusted Gross Estate in
    closely held business
   Decedent active role in business
        Share   rent versus cash rent
             Estate Tax
       Installment Payments
 Closely  Held Business portion of the Tax
 35% of Adjusted Gross Estate is Family
 Interest only first 4 years then 10 year
  installment payments (total of 14 years)
 2% Interest rate on first $1.12 million
 Interest rate on value above $1.12 million
  is 45% of applicable rate for under
  payment of tax
    2004 Michigan Estate Tax
Adjusted Taxable Estate          $2,099,000
Michigan Credit                     - 60,000
      Taxable Estate             $2,039,000

Tax on 1,540,000                  $ 70,800
Tax on 499,000 (7.2%)              + 35,928
                                  $ 106,728
2004 75% Reduction                - 80,046
MDT “Granholm‟s Check”             $ 26,682
Federal Estate Tax Calculation    $ 272,520
State of Michigan Credit           - 26,682
IRS“Bush Check”                   $245,838
Federal “State Death Tax Credit”
 2002 – Reduced by 25%
 2003 – Reduced by 50%
 2004 – Reduced by 75%
 2005 – State Credit is Repealed
 But in 2005 to 2009 have a new deduction
  from the Gross Estate for State Estate
  Taxes paid
     Paid within 4 years after Fed Estate tax
 Michigan    will lose revenue. Changes?
Special Use Valuation (2032A)
  of Certain Real Property
Farm and other real property valued at fair
  market value - determined on the highest
  or best use.

If this becomes a financial burden then
   property can be valued as a farm or other
   closely held business.
Cannot reduce value more than $850,000 in
   2004 (inflation indexed)
           To Qualify for
        Special Use Valuation
 50%  of Adjusted Gross Estate from Farm
  Property (real and personal)
 25% of Adjusted Gross Estate from Farm
  Real Property
 Material Participation
 Pass to qualifying heir
 Descendent or family has used real
  property 5 of last 8 years in “qualified use”
            “Material Participation”
                    Special Use Valuation
   Rules similar to Self Employment Tax
       “At Risk” income from trade or business
       Crop share
       Cash rent to family member qualifies
       Cash rent to non-family member disqualifies
   Eligible “Qualified Heirs”
       Meet active management test
       Makes business decisions
       Decedent‟s spouse
       Heir not reaching age 21 who is full time student or who is
       Lineal Descendants may lease property to another
        descendant on a cash basis
 Special Use Valuation Formula
 Cash Rent            $80.00
 Property Taxes       -17.00
 Net Rental   =       $63.00

 Net   Rental        $63.00
                     .0693 = $909/Acre
The 5 yr average effective interest rate for all
  FLB loans 2004 = 6.93%
       Tax Basis of Property
 Basis on inherited property is the Special
  Use Value amount as it is passed through
  the estate.
 Get as high of basis as possible without
  paying an estate tax!!!
  If Within 10 Years Property
is Sold or Ceases to be a Farm
Tax benefits are recaptured

If qualified heir dies without having
   disposed of the property or converting it
   to a nonqualified use, or 10 year period
   lapses, the potential liability for recapture
Recapture of Tax Savings from
    Special Use Valuation
                (Section 2032A)
 If sold or family fails to meet Material
 100 % first 6 years
 80% 7th year
 60% 8th year
 40% 9th year
 20% 10th year
 0% after 10th year
   2004 Estate Tax Maximums
 Married Couple  50% Farm Land
 Split Assets between them
 Use both Federal Exemptions $1.5M
 Use 2 Special Use Valuation $850,000
 Careful planning and can get both to
 $4.7 M Transferred with no Estate Tax
 Tax Basis equal to value used for
  Estate Tax calculation
    Generation Skipping Tax
 2001 Excess of $1,060,000 taxed at 55%
 2002 starts to match annual exclusion for
  Estate Taxes
 2002 and 2003 = $1.0 Million
 2004 and 2005 = 1.5 Million
 2006 – 2008 = 2.0 Million
 2009 = 3.5 Million
 2010 = none
 2011 = ?
    Example of Generation
      Skipping Transfer
            Property owned by

              1/2             1/2

C   Income Trust                   Trust    Income     D

                                           Trust property
                                            not taxed at
                                           death of C & D
  Annual Inflation Adjustments
           After 1998
 Gifts Annual Exclusion $10,000 (lowest
  multiple of $1,000) $11,000 in 2004
 Special Use Valuation ceiling on of real
  estate $750,000 ($10,000) $850,000 in 2004
 Generation Skipping Tax exemption
  $1 million ($10,000) $1,120,000 in 2004
 Installment Payment ceiling $1 million
  ($10,000) $1,120,000 in 2004
       Income Tax Basis
     40 Acre parcel of Land
 Paid $500 per Acre or $20,000 in 1974
 Tax Value Today = 2x S.E.V. = $80,000
 Land‟s been selling for $2,500 per
 Widowed Mother Gives land to
  Daughter and Daughter Sells. Taxes?
 Daughter Inherits land after Death of
  Mother and then Sells. Taxes?
       Stepped-Up Basis Issues
   In past full “stepped up basis” of inherited
    property resulted in no taxable gain to heirs for
    appreciation that occurred during deceased
   Basis for heirs was the value that passed through
    the estate and subject to Federal Estate taxes
   Full Basis Step Up until 2010
   Step-Up is limited to $1.3 million starting in 2010
   Additional $3.0 Million for Spouse
   Total of $4.3 M Increase in Basis to Surviving
    Spouse in 2010
   Records for tracking basis is very important
        Basis Step-Up Planning
   What year will you die? Size of Estate? Amount of
    appreciation on assets?
   Trade offs between Estate Tax and step-up in
    basis until 2010, 2011?
   Goal want to capture as much of the step-up as
    possible without hitting Estate taxes “free
    money” Who benefits? Heirs
Why Limits on Stepped up Basis
      What‟s the logic?
 Tax  Revenue for Federal Government
 Gift Tax effects
 Capital Gains Tax effects
 What‟s the interplay? Before and
  after 2001 tax law changes?
 Remember - Not until 2010???
 2004 Estate Planning Strategies
 Because of Basis & Tax Issues
 Gift high basis assets now or wait?
 Capital Gains Tax Rate is lower than
  Gift tax rate
 What year will you die?
 Future changes in tax code?
 Probably a little less advantage to
  gifting strategies if estate tax continues
  to be repealed starting in 2010
   Future of Federal Estate Tax?
 All 2001 tax code changes are scheduled
  to sunset Dec 31, 2010
     Avoids arcane budget rule (Byrd rule)
     One Senator could block
     Would take 60% to overturn
     As written only majority vote to continue
     Leaves some uncertainty for planning
     Not an excuse not to plan – still critical
     Tax Issues are only part of Estate Planning
 Small down side risk of planning based on
  the 1 Million per person – Depends?
                INCOME TAXES
                  Michigan & Federal
   Capital gain or loss
   Difference between:
        Sale price and adjusted cost basis
   Adjusted cost basis in property
        Gifted, Purchased, Inherited
   Example
        Sale price                     = $40,000
        Remaining Cost Basis           = $13,000
        Difference (taxable)           = $27,000
   Exceptions
        Property trades
        Residence ($500,000 Married – Joint every 2yrs )
  Allocation of Purchased or
Transferred Business Property

        Non Depreciable
   Non – Depreciable
   Property or Assets
         Bare Land
Timber (Depletion Allowance)
      Growing Crops
 Property or Assets
Farm Buildings & Structures
  Machinery & Equipment
       Grain Storage
   Field Tile and Drains
      Tenant House
         Good Will
Taxation on Transfer of Property
Methods to Transfer?
   1. Sell it
   2. Give it away
   3. Retain owner ship till death

              Roger Betz
 Michigan State University Extension
  District Farm Management Agent
    1999 Taxation of Example Farm
1965 - Bought 100 ac HOME Farm             $ 25,000
        Land                     $20,000
        Buildings                 $5,000
1972 - Bought SMITH       200 ac           $100,000
1975 - Built SWINE Facilities              $ 50,000
1981 - Bought JONES       200 ac           $200,000

500 ac @ 1200/ac                           $600,000
Buildings                                    30,000
Machinery and Equipment                     100,000
200 Raised Sows                              50,000
Market Hogs 1,600 Hd                         80,000
Feed                                        100,000
TOTAL                                      $960,000
No Debt against Estate
                    Income Taxes
Capital Gain - Max 20% FED rate
         - 10% on Income in the 15% bracket
         - 20% for Income above the 15% rate

Ordinary Income (Married Joint 1999)
   Depreciation Recapture and Sched. F Income
Federal Inc. Tax = 15% to 43,050
                      28% to 104,050
                      31% to 158,550
                      36% to 283,150
                      39.6% above
(Rate after Standard Deduction and Exemptions)
          7,200 plus 2,750 per exemption or Itemize

Social Security and Medicare Taxes
        Sched. F Income (earned income)
        12.4% to 72,600 Soc Sec (.9235)
        Plus 2.9% Medicare (.9235) [no limit]
Option #1- Sell Whole Business Cash Sale
Home Farm
  100 ac x 1,200 = 120,000 - 20,000 basis =$100,000 (Capital Gain)
   30,000 - 5,000 basis           = $25,000 (Depreciation Recapture)
  200 ac x 1,200 = 240,000 - 100,000 basis = $140,000 (Capital Gain)
  200 ac x 1,200 = 240,000 - 200,000 basis =$40,000 (Capital Gain)
Machinery and Equipment
  100,000 - 25,000 basis          = $75,000 (Deprec. Recapture)
200 Raised Sows
  50,000 - ZERO basis             = $50,000(Capital Gain)
Market Hogs
  80,000 - ZERO basis             = $80,000 (Sched. F Income)
 100,000 - ZERO basis             = $100,000 (Sched. F Income)
        Income Tax Calculations - Option #1
                 (sell whole farm)
100,000 +140,000 + 40,000 + 50,000   $330,000 Cap. Gains (Max 20%)
                25,000 + 75,000      $100,000. Dep. Recapture (Max 39.6%)
                100,000 + 80,000     $180,000 Sched F income (Max 39.6%)
        Total Taxable Income         $610,000

Long Term Capital Gains Tax      $66,000
Fed Income Tax                   $79,583
Social Security                  $8,291
Medicare                         $4,821
Michigan Income Tax              $26,594
Total ALL Income Taxes           $185,289

Buyer has new Basis in all property purchased and can depreciate the
  depreciable property.
   Option #1 - Sell Whole Farm
 We  have paid income Taxes of $185,289
 So now Net Worth is 960,000 - 185,289
 Equals 774,711
 What‟s the Estate Tax on this?
 750,000 taxable = 248,300 tax
 24,711 taxable X 39% = 9,637 tax
 248,300 + 9,637= 257,937 total tax
 257,937-211,300 (99) = $46,637 net tax
  Option #1 - Sell Whole Farm
 Income  Taxes = $185,289
 Estate Taxes = $46,637
 Total Taxes = $231,926
 If you sell your assets, does this reduce
  the size of your estate?
 What does it do?
    “Freeze it”? Depends on how
     Option # 2 - Give it All Away
   Home Farm 100 ac X 1,200 = 120,000 GIFT
        20,000 basis to donee
   Buildings 30,000 GIFT, 5,000 basis to depreciate
   Smith Farm 200 ac X 1,200 = 240,000 GIFT
        100,000 basis to donee
   Jones Farm 200 ac X 1,200 = 240,000 GIFT
               200,000 basis to donee
   Machinery and Equipment 100,000 GIFT
        25,000 basis to donee to depreciate
   200 Raised Sows 50,000 GIFT,
              ZERO basis to donee to depreciate
   Market Hogs 80,000 GIFT, ZERO basis to donee
   Feed 100,000 GIFT, ZERO basis to donee
Tax Calculations Option #2
     (give it all away)
   Capital Gains
       NONE to Donor
   Depreciation Recapture
       NONE to Donor
   Ordinary Income Sched. F
       NONE to Donor
                           Capital Gains = ZERO
                         Fed Income Tax = ZERO
                          Social Security = ZERO
                                Medicare = ZERO
                                Mich Tax = ZERO
Option #2 Give it All Away
Total All INCOME Taxes = ZERO (donor)
   What about the donee (receiver)? What tax
   Donee has OLD Basis in property and can
    depreciate only what was left on the depreciation
    schedule. If sold in one year with same tax
    attributes, then would have the same $185,289 of
    income taxes.
   GIFT TAX - 1 person to 1 person in 1 year
   960,000 - 10,000 = 950,000 subject to Gift Tax
   326,300 - 211,300 unified credit = $115,000
   Donor has used up his/her unified credit
   Total Taxes paid for the family = $300,289
Option #3 Retain Ownership Until Death
     Income Tax = Zero
     Estate Taxes
      Same Estate Tax implications as the Gift
      option but the heirs receive a step up in
      basis to the fair market value but would lose
      the $10,000 annual exemption. (10,000X 39%)
      Total Estate Taxes paid = $118,900
      Step Up in Basis is Very Useful Tool to
      Retain Financial Value for Family.
      Michigan Estate Tax = $30,960
      Federal Estate Tax  = $87,940
Opt. #4 Combinations
 This is what most people do.
 Option #1 Sell Whole Farm = $231,926
 Option #2 Give it all Away = $300,289
 Option #3 Retain Till Death = $118,900
 Option #4 Proper Combinations
     All Tax = $”ZERO”
               What If?        (1999 example)
   1. The Estate was split between Husband and Wife
      Two 650,000 Exemptions - Tax would be Zero and
        FULL STEP UP in Basis for heirs, no restrictions from
        other tools below
   2. Utilize the Special Use Valuation Method 2032A
      500 acres Land valued at 700 versus 1,200 per Acre
      960,000 less 250,000 = 710,000 Taxable Value
      Estate Taxes would be $22,200 (37% of $60,000)
      Limitations Placed on Business
   3. Utilize the Family Owned Farm and Business
    exclusion 2033A
      If estate qualifies, then can have up to 1.3 million
        Estate tax would = Zero
      Limitations placed on Business
Gifts: A Flexible Tool for
     Estate Planning

            Roger Betz
Michigan State University Extension
  GIFTS: Flexible Tools For
     Property Transfers

   The greatest gains from sound estate
  planning come when the transfer starts
before death, while the owners still have the
  ability to guide and affect the outcome .
  Possible Benefits of Gifts
 Opportunity for Children to Participate
  in the Management of Family Business
 Reduce size of estate for Estate Taxes
 Reduce Administration Expense
 Income Tax Savings for Family
            Completed Gifts
 Requirements for Present Interest
A  competent donor and donee
 A clear intent to divest title & control over
 Transfer of legal title
 Delivery of title
 Acceptance of gift by donee
          Valuation of Gift
          Fair Market Value
           Date of Transfer
 Organized market activity
 Professional Appraisal
 Income potential
 Tax assessment
          Direct Gift Examples
 Cash  or Property (real, personal-tangible
  or intangible)
 Forgiveness of a Debt (like cash)
 Interest Free Loans
     (act like payments made then given back)
 Creation of a Joint Tenancy in real estate
 Transfer of Equity in a Business
     Percentage ownership, stock shares
 Irrevocable Trust
 Life Insurance Policy (3 year)
   Selecting Property to Give
    General Considerations
 Low  gift/high estate tax value
 Appreciated property
 Assets not likely to be sold
 High income-producing property
 Property unsuitable for testamentary
 Income tax bracket of children
  Dividing Gifts to Save Taxes
 Gift Splitting (Husband and Wife)
 Bargain sale
 Installment sale & cancel notes
 Mortgage property before giving
 Gift of limited interest
 Create undivided fractional share
 Subdivision of real estate
 Gift of a future interest
 Property Unsuitable for Gifts
              (for tax savings)
 Shrinking  assets
 Assets producing income losses
 Business property if using “Special Use
 Principal residence - $250,000 per person
 Property donor intends to use
     (provide own support)
 Depreciable property
 Property that can gain “Step-Up-in-Basis”
  Practical Considerations in
        Lifetime Giving
Plus Factors
  Escape property management
  Eliminate estate transfer costs
  Fulfill a business obligation
  Assist donee‟s financial progress
  Practical Considerations in
        Lifetime Giving
Possible Negatives
 Loss of property control
 Donor may need funds
 Donee‟s income tax on appreciated
 Donee‟s use of property
  No “Step Up in Basis”
   Guidelines to Making Gifts

 Donor‟s  financial security
 Complement a transfer plan
 Donee‟s financial judgment
 Benefit the donee
 Life motives for making gifts
 Lastly - Tax reduction
     Probate, Wills,
Durable Power of Attorney,
    Patient Advocate
     Dave Smith, Attorney
        Charlotte, MI
 Estate Protection & Individual
      Code - After April 1, 2000
 Changed       Rules for Opening Probate
  Informal
  Formal
  Supervised
  Small Estates
      (less   than $15,000 that is probated)
        Property Distribution EPIC
        no will/state law after 2000
   Married with full blood children
        Spouse - $150,000 + 1/2 balance; Children - 1/2 balance
   Married with ½ blood children (not of spouse)
        Spouse - $100,000 + ½ balance; Children ½ balance
   Married with parents, no children
        Spouse - $150,000 + 3/4 balance; Parents - 1/4 balance
   Married without parents or children
        Spouse - all property
   Single with children
        Children - all property
   Single without children
        Parents - all property or brothers & sisters or next-of-kin
Informal Probate Administration
  If No Problems Anticipated
  Quicker, Easier, Cheaper
  Don‟t Meet with Judge
  Application with Probate Court Register
  Most Popular 75%
Formal Probate Administration

 File a Petition for Proceeding before a
  Judge with notice to all interested
  persons - 25% of Probated Estates
 Hearing
 If in Informal can move to Formal and
  back to Informal
     perhaps need   help on a single issue
       Supervised Probate
 Involves Court Supervision of all Estate
 Not many done like this, Only when
  problems within family
 Less Than 1% of Probated Estates
Probate Administration Cost
 Filing Fee $100
 Small Estate Filing Fee $25
 Inventory Fee for Probated Assets
      $1 Million Probated Estate = $1,175
      $2 Million Probated Estate = $1,488
      $5 Million Probated Estate = $2,425

   Certificate Letters of Authority
      $11   Each (Stocks)
   Petitions to the Court $15 (Supervised)
Tool in Estate Planning

   Steven Peters, Attorney
Trust Dept National City Bank
 Trust Uses in Estate Planning

One of the most flexible tools

Because of the -
wide variety of ways it can be designed
It can help you reach your estate planning
          What is a Trust?
 Fiduciary relationship in which one person
 (trustee) holds title to property (trust
 estate) for the benefit of another

 Termsof trust are detailed in a trust
 Who   holds trust title?
      Individual - private trust
      Institution - commercial trust
 Private trust
      Family member or friend
 Commercial trust
      Corporate employee
      Family member or friend
            Types of Trust

 Living  trust - separate agreement
     - Revocable
     - Irrevocable

 Testamentary   trust
     - Part of will
 Two Types of Lifetime Trusts
Living - inter vivos - “between lives”
  created during life
  property doesn‟t pass through probate
  management of securities
  recipient of insurance

Irrevocable Trust
   property given away for good
   gift tax considerations
   cannot be altered, amended, revoked
          Testamentary Trust
It does not exist during the life of the grantor
       created by will
       trust is beneficiary of the estate
A grantor creates the trust
   keeps direct control during life
   upon death the trust comes into being
   property managed in accordance to agreement
Property passes through probate
   costs and taxes paid
   few tax savings possible
   provides management of property
   trust department acts is supervisory manner
          Creation of a Trust
                              Step 2
     Step 1
  Owner Grantor
                        Property to Trustee

      Step 6                  Step 3
      Goals              Trust Agreement
     Reached              Directs Trustee

       Step 5                Step 4
Beneficiary Receives   Manages & Controls
 Income & Benefits       Has Legal Title
 Example of Trust Used by
     Married Couple
             Property owned by
              1/2              1/2                at A’s

                     Income                      Transfer
Spouse   B                           Trust
                                                  at B’s
                    Children                 Trust property
                                             not taxed at B’s
  When would a Trust be a good
tool for Husband and Wife to use?

  1. Large estate when want to utilize
   both exemptions (until 2010?)
  2. Manage affairs when/if disabled
  3. Reduce future administration cost
  4. Privacy issues versus Probate
      Advantages of a Trust

 Minimize Estate Taxes
 Reduce Estate Administration Cost
 Provide Professional Management
            Trust Limitations

 Trustee will not operate business
 Heirs cannot control property
 Annual trust fee
 Can not solve all goals
 Title must be transferred
         Checks and Balances
Trustees are required by law to operate under the
  prudent man rule.
Regular inspections of trust depart. by state and
  federal bank examiners.
Reputation of the bank or individual.
Size of staff.
Built into the trust itself. Agreement allows the
  beneficiary to change trustee if not satisfied with
  income or officers.
                 Careful Planning Pays
        Costs and Fees

The more complex the duties of the
  trustee, the higher the fees will be.
  Life Insurance
Tool in Estate and
Business Planning
  Steve Shook, Agent
 Russell and Schrader
       Sample Term Policies
Level Death Benefit
• Face Value of Policy
•Death Benefit

Premiums are fixed for a period of time, but gradually
begin increasing.

Decreasing Term Insurance

       •Death Benefit

Premiums are level for the term of time selected .
        Term Life Insurance
 Low cost at early ages makes insurance
  available when cash flow is low

 Gets very expensive in later years
 Has no provision to be paid-up
 Less than 1% is paid as claims
 Builds up no cash value

                        Level-Fixed Premiums

                    Face Value
Participating       of Policy
Whole                                                                       Cash Values
                     Start                                                    Age 100

                             Level - Fixed Premiums Are
                             Lower than Participating Policy

Non-Participating   Face Value
                    of Policy

                                                                         Cash Values

                    Start                                      Age 100
              Whole Life
 Cash values help policy solvency in later
 Dividends can by paid-up additions which
  will increase the death benefit
    Can pay premiums in later years
 Policy operates at the guaranteed level
 Can have term riders
 Cost more going in
 Not quite as flexible as Universal Life
        One Policy - Two Approaches
               Universal Life
    Flexible Premiums
    Interest Sensitive Cash Values

                     Face Value

Increasing Death     of Policy

                    Start            Age 100

 Flexible Premiums
 Interest Sensitive Cash Values
Level                Face Value
                     of Policy



                    Start            Age 100
            Universal Life
         (A Whole Life Policy)
 Great Flexibility
 Insurance Amount
 Premium
 Has cash value with competitive interest rate
 Cash values can be withdrawn or policy loan
 Policy can be paid-up (current amount or
 Death benefit can be increasing or level
           Universal Life-
        (A Whole Life Policy)
 Disadvantages
 Withdrawal  Privilege sometimes lets the
  policy be under funded in later years
 Does not have dividents - no paid-up
 Probably cost more than other Whole Life
  Policy over a life time
                            Jones Family

                          A           B           C            D

Son “A” wants to buy the family business, sons “B, C, and D”
deserve the inheritance.

Son “A” enters into a purchase agreement with Dad. He also
purchases Life Insurance on Dad. Thereby guaranteeing other
siblings their inheritance.
            Partnerships or LLC
     $200,00            Partnership               $200,00
     on “B”              $400,000                 on “A”

      Partner                                     Partner
                          Partners agree to
       “A”                purchase each others     “B”
                          share if death occurs
Partners want control of their business should they lose their
They buy insurance on each other, have an agreement that they
   must purchase deceased partners share of the business.
      To Summarize
1. The need for liquidity in estates
2. Sources of liquidity
3. Life Insurance being the best source
4. Kinds of Life Insurance:
       Term, UL, Whole Life,
       Combination, Second to Die
5. Life Insurance, the tool used in:
       Debt,      Purchase Agreements
       Buy-Sell, Key Person
       With Irrevocable Trust
6. Questions
 Transferring The Family

             Roger Betz
Michigan State University Extension
 District Farm Management Agent
      What Mom and Dad Want!
 Slow  Down, more time off
 Getting Tired
 Minimize Risk
 Protect assets
 Pay off debts
 Get Son/Daughter to work harder
 Take less responsibility – more to S/D
 Don‟t want to give up control
 Son/Daughter should start where they did
  35 years ago
        What Son/Daughter Want!
 Get  started
 Start where mom and dad left off
 Take risk
 Enthusiasm, Try new things!
 Expand operation, invest
 Buy Machinery
 Buy Land
 Utilize Mom and Dad‟s Financial Position
 Have more money and more time off
   Any Potential
Conflicts between the
    Critical Success Factors

 Parents ready  for “business partner”
 Younger party committed
 Common values, visions and goals
 Financial size, stability and profit of
  business, expansion potential
 Personal Relationships
         Stage One – Testing
          Early Assessment
 Look at present situation, Size, Financial,
  Goals, Objectives
 Compatible?
 Should we try to farm?
 Should it be together?
 May decide not to farm – OK
 “Go” “No-Go” “Wait” Decision
           Parents Goals
 Slow Down
 Turn over business
 Maintain some involvement
 Protect breakup of business
 Treat all children equitably
 Adequate retirement income
 Security, business assets
 Minimize income & estate taxes
   Farming Child‟s Goals
 Adequate  income
 Buy into business
 Participate in management
 Gain control over time
 Increase business size
 Use new technology
 Build personal equity
      Non-Farm Childs Goals

 Inheritan equitable share of estate
 Receive equitable return on
 Participate in management if still
  involved in business
 Sell equity in business
   All Family Member‟s Goals
 Maintain &   improve viability of family
 Enjoy pleasant family and home life
 Enjoy good times with friends
 Do new and exciting things
 Engage in community activities
 Pursue favorite hobby or sport
       Stage one - Testing
 Wage/Bonus
 Wage/Incentive
 Wage/Share
 Should  we try to Farm?
 Together or Separate?
 Holding Pattern?
 2 or 3 years max
 “Go” “No-Go” Decision
      Stage two - Commitment
 Enterprise   Agreement
     Farrowing Phase, Contract Heifers
 Operating    Agreement
     Property, Labor, Management
 Sharing of   Labor and Machinery
     Swap Resources
 JointVentures
 Parents Co-signs Notes
 Transfer of Specific Assets Overtime
         Stage Three
Established as Separate Units
    Continue and Expand
 Operating  Agreements
 Joint Venture
 Sole Proprietor
 Rental arrangements
 Exchange Labor Machinery
 May phase out the agreements
             Stage Three
         Established Together
   Limited Liability Company
   Partnership
   Corporation
   Expansion?
   Shift personal property/management
   Buy/Sell Agreements
       Leave Early, Retirement, Death, Disability
   Provide for untimely death
       Insurance
       Provisions in will
   Plans for Real Estate Transfer
Sole                                                          Limited
Proprietorship                          Partnerships          Liability Co.    Corporation   Combinations

                                    GENERAL        LIMITED
            MODIFIED                                                            TAX

                          Lease Arrangement
                        Joint Venture
                                                        LLC             LLP

      Wage             Enterprise
      Share            Agreement

  Least                                                                                              Most

                                              Degree of Complexity

    Alternate business arrangement ranked according to degree of legal complexity.
    Stage Four – Withdrawal of
 Secure  Farm Heir‟s Position in Farming
 Firm up Transfer Plans
 Complete Personal Property/Management
 Shift Control/Ownership of Real Estate
 LLC is Desolved - Buy/Sell Agreement
 Heir Buys or Rents Parents Share in
 Additional Provisions in Will
      Transferring Business Asset
 What Kinds of Assets are there?
 Personal Property
   Machinery
   Feed and Market Livestock
   Breeding Livestock
 Real   Estate
   Buildings
   Land
      Methods for Transferring
 Sale  – income to seller and expense to
 Gift – no income to seller but also no
  expense to buyer (old basis)
 Lease - Ordinary Income, 1040 F Expense
 Inherit? Step-Up in Basis
     How long? How old?
 Depends on    Asset, situation, goals
   Sale of Business Property
 Allows   junior partners to own property
 Separates business and estate transfer
 Reduces inflation of senior partner‟s
 Senior partners give-up some control over
 Ordinary or Capital Gains taxes
Ways to Transfer Business Property to
        Delay/Minimize Taxes
     A. Sale
        -Depreciation Recapture
        -Depends on Selling Price in Relation
        to Tax Basis
     B. Lease
        -Use Principle & Interest as Guideline
        -Gifts to Equalize “Principle”
        -Trade Ins
        -Depreciation Schedule
     Ways to Transfer Business Property to
        Delay/Minimize Taxes (cont‟d)

II. Breeding Livestock
   A. Sale
      -Capital Gains - Raised to Seller
      -Installment Sale
      -Interest and Depreciation to Buyer

  B. Lease with New Borns Owned by New
  Generation - Decreasing with Time
     Ways to Transfer Business Property to
         Delay/Minimize Taxes (cont‟d)
III. Inventory
    A. Feed
       -Use Unpaid Bill and Pay Later
       - Gift
    B. Market Livestock
       -Use Unpaid Bill or/and Sell In Parents
       -Sale = Income
    C. Supplies and other inventory
  Ways to Transfer Business Property to
      Delay/Minimize Taxes (cont‟d)
IV. Land
  A. Cash Rent to Start Out
      Long Term Rental Agreement

 B. Sale or Gift

 C. Options to Buy
    Buy From Estate – Step-Up in Basis

 D. Inherit with Step-Up in Basis
  Ways to Transfer Business Property to
     Delay/Minimize Taxes (cont‟d)
V. Buildings
  A. Cash Rent to Start Out
     Long Term Rental Agreement
  B. May need to move ownership to younger
  C. Sale or Gift
  D. Options to Buy
     Buy From Estate – Step-Up in Basis
  E. Inherit with Step-Up in Basis
      Order of Importance
and Time Line for Asset Transfer
1. Working Assets
      - Livestock, Crops and Inventory
2. Machinery
3. Buildings
4. Land
   -Center of Operations
   -Non Critical Land
      Transferring Management

 Conflicts      between parents and
 How are Decisions Made?
     General Manager
       Final authority

     Equal Voice
       Vote,   weighted?, arbitration
      Transferring Management
 Division   of Management Responsibility
   Enterprise Division
   Functional Division
 Management Styles
   Differences are good
   Need to compliment each other
   Are we doing things right?
   Are we doing the right things?
          Dividing Income

 Percent Contribution
   Capital
   Labor - guaranteed payments

 50/50
Example LLC Business Structure
 Dad  and Junior want to farm together
 50/50 Business starts out “naked”;
  doesn‟t own anything
 Business Buys Cows and Calves from Dad
  - Installment Sale Contract
 Feed and Inventory- carry as unpaid bill
 Machinery - Business has 10yr Lease with
     Trade ins, Sale in 10yrs
 Business Cash Rents Buildings from Dad
 Business Cash Rents Land from Dad
Inter Generational Business Transfer
       Critical Success Factors
1. Must have open, honest, continual,
   communications-spouses too (See Making it Work)
2. Get young generation financially involved
3. Have younger generation own large
   significant portion of operating business
  (50% cows vs. 10% cows, machinery and land)
4. Business must make sufficient profit to
   provide for comfortable family living and
   allow business growth
  What Do I Do Now?
 Putting it all Together

             Roger Betz
Michigan State University Extension
 District Farm Management Agent
1.    Reduce Times Assets can be
      Taxed - Income and Estate Taxes
2.    Review How Property is Owned
3.    Check and Update Wills
4.    Durable Power of Attorney
5.    Durable Power of Attorney for
      Health Care - Patient Advocate
      LESS THAN $1.5 Million
         (2.0 M in 2006, 1.0 M 2011)

1. Sales and Leases of Business Property
2. Perhaps Some Bargain Sales and Gifts
3. Insurance for Risk
4. Trust for Management Needs-Disability,
   Elderly years
   -Dependant Children
    $1.5 Million TO $3 Million
 (2.0 M to 4.0 M in 2006, 1.0 M to 2.0M 2011)
1. All of the above
2. Split Estate to Capture Both $1 Million
      -Separate Sole Proprietor Ownership
      -Tenancy in Common
      -Trust for Splitting the Estate and
3. Bargain Sales and Gifts
            (4.0 M in 2006, 2.0 M 2011)
1. All of the Above
2. Gifts become more Important Tool
3. Insurance to Pay the Tax
4. Charitable Contributions
5. Get Income Producing Assets to Heirs
      -Bargain Sales and Gifts
6. Use Special Use Valuation
7. Don‟t worry about it
             Now What?
 Continue  with your learning and plans
 Talk to your Family
 Develop your Ideas
 Meet with Professionals to further develop
  and finalize
 Act on the Plan – Critical
 Will not be perfect
 Review in future as situations change
 Evaluation, Sign up list

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