Senior Partners - 1

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By Elizabeth Williams
DTN Special Correspondent

INDIANOLA, Iowa (DTN) -- Even the rich and famous make mistakes when it comes to estate planning. Consider the iconic musician Prince, 57, who died without a will in April. The main beneficiaries of his estate will likely be the IRS (which could wind up with $118 million, assuming the value of Prince's estate at $300 million), the state of Minnesota ($48 million in state death taxes on a $300 million estate) and the attorneys hired to sort things out. Most likely, this is not what Prince would have preferred.

In fact, the main problem with dying without a will is the state where you live decides where your assets end up. It's a mistake that could easily be avoided.

If you have a will, you might be in a better position than most Americans. More than 50% of Americans age 55 to 64 do not have a will and 62% of those age 45-54 have yet to draft one, according to a 2014 survey by the website Rocket Lawyer.

However, if it has been more than five years since its last update, your will -- as well as your overall estate plan -- is due for a serious review. State and federal estate tax laws have been revamped since 2011, your family situation may have changed and your financial situation may be different. Not updating your intentions can have serious consequences on what happens to your family after you've gone. (See related DTN article, "Time for an Estate Plan Health Check?" at http://bit.ly/….)

DTN asked agricultural tax experts what common estate planning problems in farm and ranch country could be avoided with proper planning. Here are the top 10 "blunders" they wish farm owners would avoid:

1. Expect the will to cover everything.

People have the mistaken notion that their will overrides other financial documents, said Johnne Syverson, certified financial planner and accredited estate planner with Syverson, Strege and Co. in West Des Moines, Iowa.

"In fact, your will does not have power over the beneficiaries listed on your life insurance or annuities or IRAs. It also does not have anything to do with certain financial accounts such as your bank account or brokerage account where you have a 'payable on death' agreement," Syverson explained. "We had a client who had been divorced for 15 years and had remarried, but he still had his first wife listed as the beneficiary on his life insurance. Other clients have had beneficiaries or had named executors or trustees who were now deceased. Or, they still had their parents listed as beneficiaries and not their wife and children because they hadn't updated their policy in years."

The will is only one component of an estate plan, added Nick Houle, CPA and principal with CliftonAllenLarson in Minneapolis. "Joint tenancy ownership and beneficiaries listed on life insurance policies and 'payable on death' or 'transfer on death' documents all override a will," Houle said. "These need to be updated when your beneficiaries change."

2. Set up a Revocable Living Trust but don't transfer ownership titles to it.

"Some people set these up 20 years ago. These trusts are a great tool to avoid probate and as the trustee, you still retain control over your assets," explained Kevin Bearley, tax attorney with KCoe Isom in Loveland, Colorado. "They may have funded them then, but now some of those trusts no longer have assets in them. Your revocable trust, not you personally, should be the owner of your farm corporation or partnership interests, your personal residence and your checking account," advised Bearley.

Also, real estate you own in another state, such as lake houses, vacation properties or timeshare interests (which are deeded property) should be in your revocable trust, noted Syverson. "Otherwise, that property will have to go through probate in the state where it is located and that can be expensive."

3. Putting everything in one pot.

"We see way too many problems when all the farmland is owned with undivided interest and often the family has to go to court to get something sold," noted Kevin Mills, CPA with KCoe Isom in Lenexa, Kansas.

"It simplifies things if the land is in an entity with a good buy-sell agreement when someone wants out," Mills said.

You may also want to separate assets so the on-farm heir gets the operating assets and the land is split between all the children, added Syverson.

4. Unequal treatment of offspring.

"My opinion may not be popular among farmers, but I often ask, 'What did the girls do to get the short end of the stick?'" said Patrick Costello, attorney with Costello, Carlson and Butzon in Lakefield, Minnesota. "If you want family unity after you're gone, treat your children equally," advised Costello.

It's a problem that's only escalated along with farmland values' rapid ascent since 2000, he and other farm estate planners have observed.

"I've written my last estate plan that leaves the land to the boys and the cash to the girls," Costello added. "Generally in today's economic environment, that's unfair. In one farm family, the girls ended up with $34,000 and the boys inherited $4 million in land. The cash had dwindled because the boys had paid low rent to Mom through the years and Mom was in a nursing home for a long time," explained Costello.

This is a very touchy subject among families. "Fair is not always equal and equal is not always fair," countered Sarah Larson, estate attorney with Davenport, Evans, Hurwitz and Smith in Sioux Falls, South Dakota. "You have to tailor your estate plan to your specific situation." Often that has meant special consideration for on-farm heirs who theoretically helped build the value of the farm business during their working years.

"So, if you want to make deals with the farming child, make them while you are alive," Costello countered. "Don't wait until you are gone and have the off-farm heirs feel cheated."

5. Impractical buy-sell agreement.

Buy-sell agreements are great ... when they are fair. Mills gave this unfair example: "Three brothers owned a lot of land in a corporation and the corporation had a really old buy-sell agreement which stated the shares were to be sold at book value, which turned out to be 20 cents on the dollar. The judge threw that valuation out and the family is still battling in the courts.

"In my opinion, a 40% or 50% discount is not fair to the heirs who want to sell," said Mills.

On the other end of the spectrum, "it's not reasonable to expect the on-farm heir to immediately buy out the heirs who want to sell. A reasonable buy-sell would allow someone to buy out the sellers over 10 to 15 years at somewhat of a discount," Mills continued.

Some farmers and ranchers set up a life insurance policy to fund the buy-sell agreement and then the heirs who sell can be bought out sooner, added Bearley.

In the past, many farmers included a "first right of refusal" clause, to give the on-farm heir a chance to buy out the siblings. "But, it's been my experience that 'first right of refusals' don't work," said Costello. "I've written dozens and dozens of them since 1980 and I've rescinded about half of them. It's simply not realistic for an on-farm heir to come up with the financing to match an outsider's offer to buy land that their sibling wants to sell."

6. Too much gifted away.

In the past, estate planners encouraged those with large estates to gift assets during their life, to help avoid excess tax.

There are two problems with this, said Bearley. "First, you give up control and now it's part of your child's marital estate, which could be split in a divorce. Or, if your child has an untimely death, it could go to your daughter-in-law or son-in-law and eventually out of family hands."

Larson gave this example: "Mom and Dad had gifted all their land and equipment to their son. Unfortunately, their son died before them and their daughter-in-law inherited the farmland and the homestead. This was not what anyone wanted and could have been avoided with a better plan."

The other problem with gifting is your property does not get a step-up in tax basis at death and if your heirs want to sell, they may face a steep capital gains tax.

7. Child gets too much, too soon.

Larson has seen cases where the older generation gets shut out when their middle-aged child dies and the grandchildren, for whatever reason, are not ready for the financial responsibility of their inheritance.

"For example, Mom and Dad had co-signed notes and had also gifted a large portion of their estate to their child. Then, their child died and the grandchildren inherited the farm, but they were not equipped to handle the financial situation. The grandparents were still on the hook for all the co-signed notes," Larson said.

If you have minor children and the husband and wife die without a will, the court will appoint a conservator and the children will receive their entire inheritance when they turn 18 -- which may not be the best thing for them, Larson noted.

8. Life insurance policy expires.

"Many producers bought term insurance 15-20 years ago and either they're going to see a big jump in premiums or their policy will expire," said Bearley. "They need to re-evaluate what their life insurance needs are now."

Also, be sure you don't own your own life insurance policy, as it will be included in your estate, warned Houle. Your beneficiaries can own the policy and you can gift them cash to pay the premium each year.

9. Procrastination.

No one wants to think about their death. But if your will, beneficiary designations, buy-sell agreements, succession plans, et cetera aren't up-to-date, your heirs may get less than you intended. Inaction has consequences.

10. Lack of communication.

"This is often the biggest blunder," said Bearley. "Please tell your kids in general what your plan is. They think they know what they're getting. But over the years Mom and Dad have said different things to different kids and sometimes totally different things at different times. You don't want your children to have a big surprise when the will is read."

Finding out at the funeral is not the time to learn what Mom and Dad's intentions were, said Syverson. "That just leads to family fights and lawsuits and divides families. The only winners are the attorneys."

The time to communicate is now, while you can explain your reasoning and work things out. In some cases that takes a professional counsellor. "We had one client family where we stopped the estate planning process because there was so much conflict and brought in a professional conflict resolution manager," said Syverson. "The mom just called me yesterday and said the planting season was so much better than before. Everyone got along. The dad even took less pain medication because he had less stress. If you let conflict sit under the surface, it will explode at some point."

You can do all the planning; have everything set up just right on paper. "But, what's a more important legacy: to keep your farm together or to keep your family together?" asked Syverson. "Communication is the key."

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EDITOR'S NOTE: DTN's ongoing Senior Partners series examines the financial, legal and emotional hurdles families face as they transition farm ownership from the senior to the junior partners. For more in this series, go to https://www.dtnpf.com/…

(MZT/ES/AG)