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    How to plan for smooth succession planning

    The hardest part about owning a farm is how to keep the land in the family, said Paul Morf during a presentation at The Chicago Farmers’ May 8, 2017, meeting. Morf, chair of the estate planning group for Simmons Perrine Moyer Bergman, a law firm principally located in Cedar Rapids, Iowa, allowed that “taxes are hard, too.”

    Morf related that setting up an LLC is the most efficient structure for succession planning. The LLC provides:

    • Centralized management.
    • Privacy regarding the ownership of real estate.
    • Separation of ownership from control through recapitalizing the LLC into voting and non-voting ownership interests.
    • Facilitates estate planning transfers of real estate to descendants and trusts for descendants.
    • Treatment like a partnership for income tax purposes so that all income and deduction items of the LLC flow through directly to the members.
    • Distribution of funds from the LLC to the members without taxation.
    • Liability protection for all owners.
    • Restrictions on transfers and insulation of LLC assets from creditors of owners.
    • Facilitating availability of significant valuation discounts for transfer tax purposes.
    • Avoidance of partition.
    • Avoidance of ancillary probate and possibly state death taxes in Iowa or Illinois for a non-resident landowner from Florida, Texas, Arizona or other state without a death tax.
    • Smooth business succession planning.

    Morf noted there is an emotional and economic attachment to a farm and there are times when fair is not always equal. He said this situation generally occurs when a child returns to the farm to work on it and maintain it, while other siblings have chosen other paths. Decisions have to be made:

    • Should there be identical treatment for siblings?
    • Give farming son the right/option to purchase farms from the estate or other siblings?
    • Should the land be held in trust, require rental to son at fair market retail rates and distribute rent equally to siblings?
    • Sell farms to the son (or grantor trust for sons) on an installment contract during life?

    In families where the business owners or famers have few assets outside of the business/farm and there are one or more children involved, other decisions have to be made when creating estate plans:

    • Treat children equally or fair but not equal?
    • Will the equipment pass predominately to the on farm heirs? What about the land?
    • Should children be put in business together or is each given a different parcel?
    • If you give children different assets, do you equalize with life insurance or liquid assets? He noted that life insurance is subject to the death tax.
    • Should children involved in the business be given purchase options?
    • Are those children not involved in the business given put options?
    • How do you value farmland or business assets for purposes of division?
    • Are buy-outs among family members for cash, or on an installment basis:

    Morf pointed out that there are a lot of tools for shared inheritances. He encouraged people to talk with their advisers and family during these considerations. Morf suggested that premarital agreements be in place for second marriages to protect the children. He added that placing an inheritance for children in a trust is a protection against a divorce.

    Morf reviewed revocable trusts and related that the trustor, who is the initial trustee and initial beneficiary, can amend or revoke the trust at any time. The trust is not a separate taxpayer and gifts to the trust have no tax implication. Additionally:

    • With the death of the trustor, the trust continues with new beneficiaries, according to the terms of the trust, which at that point becomes a will substitute.
    • It is important that every revocable trust be backed up with a valid will. A “pour over will” provides that any property owned by the trustor (and not by the trustor’s revocable trust) at death pours into the revocable trust.