Title: Estate Planning and Small Business/Farm Succession and Transfer Eaton County Date: Sept 2, 9, 16, 2004
1 Estate PlanningandSmall Business/Farm
Succession and TransferEaton County Date Sept
2, 9, 16, 2004
Roger A. Betz District Extension Farm Management
Agent
Mona Ellard Director, Eaton County MSU Extension
Phil Taylor Extension Agriculture Natural
Resources Agent
2Why Develop An Estate Plan?
- Mona Ellard
- Michigan State University Extension
3Why 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
4What 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
5Estate Planningwills, probate, trustsE2120
- A discussion of alternative property ownership
patterns and estate transfer methods.
6Property
- Intangible and invisible rights, powers,
privileges and responsibilities of the owner - Real Property Land Land improvements
- Personal Property (everything not
real) Tangible Intangible
7Property 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
8Property 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 persons estate
and can be transferred
9Real Property Real Estate
- Land or improvements upon the land
- Buildings, fences, timber, growing crops
- Oil, mineral, and development rights houses
etc. - Evidence of ownership DEED
- Provides description of the property
10Personal Property
- Everything other than Real Property
- TANGIBLE SEE IT
- AND
- INTANGIBLE PAPER
11Tangible Personal Property
- Physical Property that includes
- Goods, Wares, Merchandise
- Clothing, Furnishings Livestock, Harvested
Crops Machinery and Equipment -
12Tangible Personal Property (cont.)
- Titled property (title proves ownership)
- Cars, Trucks, Trailers, etc.
- Other proof of ownership
- Bill of sale or other document showing
ownership -
13Intangible Personal Property
- A claim capable of being enforced on or against
other individuals or entities. - Paper Property A piece of paper shows
ownership. - Securities, notes, bank accounts, patent rights,
land contract, life insurance contract etc. -
14Ways to Hold Rightsdeed, contract, or
otherevidence of ownership
- Fee simple (sole ownership)
- Co-ownership 1.Joint Tenancy (with rights of
survivorship) Tenancy by the
Entirety 2.Tenancy in Common (Default)
15Ways to Hold Own Property
- JOINT TENANCY
- With Rights of Surviorship
- Whoever lives longest gets the goods
- By the Entirety
- Same as above, only between husband and wife.
- Each spouse has equal ½ ownership irregardless of
how the property was obtained
16Ways to Hold Own Property
- TENANCY IN COMMON
- No rights of survivorship
- Co-owners have right to transfer their interest
- 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 law. - Significant effect on multiple owner businesses.
17Methods to Transfer
- Contract Life Insurance, Annuity, Trust
- Tenants in Common goes to heirs
- Joint Tenancy (rights of survivorship) Ownership
vests to survivors - Probate Will State law
- Transfer prior to death Complete
severance Retained rights
18Methods to Transfer Property
- Question My will says my life insurance goes to
my son. Who receives the life insurance?
19Resources
20(No Transcript)
21SUMMARY
- 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 whos going to get it.
- PROPERTY OWNERSHIP TRANSFER PLAN to your HEIRS.
22How Do Taxes Affect Your Estate?
- Roger Betz
- Michigan State University Extension
- District Farm Management Agent
23Property Transfer Taxes
- Government Doesnt Care Which Method You Use,
Just Pay the Appropriate Tax - GIFT
- Federal Gift Tax
- SALE
- Federal Income Tax
- Michigan Income Tax
- ESTATE (no inheritance)
- Michigan Estate Tax
- Federal Estate Tax
24Federal 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
25Federal Estate Gift Tax Schedule 2004
26(No Transcript)
27Gift Tax Calculation (example)
- Year 1 6,000 X 18 1,080
- Year 2 21,0006,000 27,000
- 3,800 Plus 22 of 7,000 5,3401,080 4,260
- Year 3 51,00021,0006,00078,000
- 13,000 Plus 26 of 18,000 17,680 1,080
4,26012,340 - Must add up gifts above the annual exclusion for
entire lifetime
28Unified 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 Tax - 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
29Unified 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
30Gift Tax Effective ExemptionGifts 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
31Gift Tax Rate Schedule 2001-2011
Red area is where Unified Credit or Exemption is
used up
32Filing Requirements
- IRS Form 709A or 709 - Gift Tax Return
- 709Alt20,000
- Gifts of more than 11,000
- per donee in any year
- Return due April 15 following the year of the gift
33Gifts 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
34Federal 709 Gift Tax Return
35Federal 709 Gift Tax Return
36Federal EstateTaxes
- An Excise Tax
- It is levied upon the transfer of property at
death.
37Federal 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
38Estate 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
39Federal Estate Tax Rate Schedule
Red area is where Unified Credit or Exemption is
used up
40GROSS ESTATE
- 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 death.
41Value 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
42Property 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
43Joint Tenancy with Rights of Survivorship
- Question
- If you add your daughters name to the title of a
100,000 piece of your real estate, how much
reduction in the size of your estate?
44Joint 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?
45Examples 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
46Adjusted Gross Estate Example
- 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
472004 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
48Estate 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
49Filing Requirements
- Estate Tax Return must be filed when the Gross
Estate value exceeds the exemption equivalent. - File within 9 months after death. Tax is DUE!
- Federal Estate Tax Return 706
50Federal 706 Estate Tax Return
51Delayed 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
52Estate Tax Installment Payments
- Closely Held Business portion of the Tax
- 35 of Adjusted Gross Estate is Family Business
- Interest only first 4 years then 10 year
installment payments (total of 14 years) - 2 Interest rate on first 1.12 million taxable
- Interest rate on value above 1.12 million is 45
of applicable rate for under payment of tax
532004 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 Granholms Check 26,682
- Federal Estate Tax Calculation 272,520
- State of Michigan Credit - 26,682
- IRSBush Check 245,838
54(No Transcript)
55Federal 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?
56Special 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)
57To 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
58Material 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
- Decedents spouse
- Heir not reaching age 21 who is full time student
or who is disabled - Lineal Descendants may lease property to another
descendant on a cash basis
59Special 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
60Tax 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!!!
61If Within 10 Years Propertyis 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 ceases.
62Recapture of Tax Savings from Special Use
Valuation (Section 2032A)
- If sold or family fails to meet Material
Participation - 100 first 6 years
- 80 7th year
- 60 8th year
- 40 9th year
- 20 10th year
- 0 after 10th year
632004 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 qualify?
- 4.7 M Transferred with no Estate Tax
- Tax Basis equal to value used for Estate Tax
calculation
64Generation 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 ?
65Example of Generation Skipping Transfer
Property owned by A
1/2 1/2
Income
Income
Trust
Trust
D
C
Trust property not taxed at death of C D
Grandchildren
66Annual Inflation AdjustmentsAfter 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
67Other Provisions of The Taxpayers Relief Bill of
1997
- Exclude 40 the value of land in a qualified
conservation easement
68Income Tax Basis40 Acre parcel of Land
- Paid 500 per Acre or 20,000 in 1974
- Tax Value Today 2x S.E.V. 80,000
- Lands been selling for 2,500 per Acre
- Widowed Mother Gives land to Daughter and
Daughter Sells. Taxes? - Daughter Inherits land after Death of Mother and
then Sells. Taxes?
69Stepped-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
lifetime. - 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
70Basis 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
71Why Limits on Stepped up BasisWhats the logic?
- Tax Revenue for Federal Government
- Gift Tax effects
- Capital Gains Tax effects
- Whats the interplay? Before and after 2001 tax
law changes? - Remember - Not until 2010???
722004 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
73Future 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?
74INCOME TAXESMichigan 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 )
75Allocation of Purchased or Transferred Business
Property
Depreciable Non Depreciable
76Non Depreciable Property or Assets
- Bare Land
- Residence
- Timber (Depletion Allowance)
- Growing Crops
77Depreciable Property or Assets
- Farm Buildings Structures
- Machinery Equipment
- Grain Storage
- Fences
- Field Tile and Drains
- Wells
- Orchards
- Tenant House
- Good Will
78IRS EXPECTSAREASONABLE ALLOCATIONOF BASIS
79Taxation on Transfer of PropertyMethods 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
802004 Farm Taxation Example
- Land (Basis 400,000) 1,500,000
- Buildings (Basis 50,000) 200,000
- Machinery (Basis 100,000) 250,000
- Stored Crops (Basis Zero) 100,000
- Non Farm Assets 250,000
- Total Assets 2,300,000
81Adjusted Gross Estate Example
- 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
822004 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
831999 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
- 1999 FAIR MARKET VALUE
- 500 ac _at_ 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
84 Income Taxes
Capital Gain - Max 20 FED rate - 10 on
Income in the 15 bracket - 20 for Income
above the 15 rateOrdinary Income (Married
Joint 1999) Depreciation Recapture and
Sched. F IncomeFederal 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
ItemizeSocial Security and Medicare
Taxes Sched. F Income (earned income) 12.4 to
72,600 Soc Sec (.9235) Plus 2.9 Medicare
(.9235) no limit
85Option 1- Sell Whole Business Cash Sale
- Home Farm
- 100 ac x 1,200 120,000 - 20,000
basis 100,000 (Capital Gain) - Buildings
- 30,000 - 5,000 basis 25,000
(Depreciation Recapture) - SMITH Farm
- 200 ac x 1,200 240,000 - 100,000 basis
140,000 (Capital Gain) - JONES Farm
- 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) - Feed
- 100,000 - ZERO basis 100,000 (Sched. F
Income)
86Income 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.
87Option 1 - Sell Whole Farm
- We have paid income Taxes of 185,289
- So now Net Worth is 960,000 - 185,289
- Equals 774,711
- Whats 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
88Option 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 reinvested.
89Option 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
90Tax 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
91Option 2 Give it All AwayTotal All INCOME Taxes
ZERO (donor)
- What about the donee (receiver)? What tax
bracket? - 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
92Option 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
93Opt. 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
94What 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
95Gifts A Flexible Tool for Estate Planning
- Roger Betz
- Michigan State University Extension
96GIFTS 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.
97Possible 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
98Completed GiftsRequirements for Present Interest
- A competent donor and donee
- A clear intent to divest title control over
property - Transfer of legal title
- Delivery of title
- Acceptance of gift by donee
99Valuation of Gift Fair Market ValueDate of
Transfer
- Organized market activity
- Professional Appraisal
- Income potential
- Tax assessment
100Direct 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)
101Selecting Property to GiveGeneral Considerations
- Low gift/high estate tax value
- Appreciated property
- Assets not likely to be sold
- High income-producing property
- Property unsuitable for testamentary distribution
- Income tax bracket of children
102Dividing 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
103Property Unsuitable for Gifts(for tax savings)
- Shrinking assets
- Assets producing income losses
- Business property if using Special Use
Valuation - Principal residence - 250,000 per person
- Property donor intends to use
- (provide own support)
- Depreciable property
- Property that can gain Step-Up-in-Basis
104Practical Considerations in Lifetime Giving
- Plus Factors
- Escape property management
- Eliminate estate transfer costs
- Fulfill a business obligation
- Assist donees financial progress
105Practical Considerations in Lifetime Giving
- Possible Negatives
- Loss of property control
- Donor may need funds
- Donees income tax on appreciated property
- Donees use of property
- No Step Up in Basis
106Guidelines to Making Gifts
- Donors financial security
- Complement a transfer plan
- Donees financial judgment
- Benefit the donee
- Life motives for making gifts
- Lastly - Tax reduction
107Probate, Wills, Durable Power of Attorney,
Patient Advocate
- Dave Smith, Attorney
- Charlotte, MI
108E.P.I.C. 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)
109Property Distribution EPICno 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
110E.P.I.C. Informal Probate Administration
- If No Problems Anticipated
- Quicker, Easier, Cheaper
- Dont Meet with Judge
- Application with Probate Court Register
- Most Popular 75
111E.P.I.C. 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
112E.P.I.C. Supervised Probate Administration
- Involves Court Supervision of all Estate
Proceeding - Not many done like this, Only when problems
within family - Less Than 1 of Probated Estates
113Probate 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)
114Trust Tool in Estate Planning
- Steven Peters, Attorney
- Trust Dept National City Bank
115Trust 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 goals
116What is a Trust?
- Fiduciary relationship in which one person
(trustee) holds title to property (trust estate)
for the benefit of another (beneficiary) - Terms of trust are detailed in a trust agreement
117Trustee
- Who holds trust title?
- Individual - private trust
- Institution - commercial trust
- Private trust
- Family member or friend
- Grantor
- Commercial trust
- Corporate employee
- Family member or friend
- Grantor
- Co-trustee
118Types of Trust
- Living trust - separate agreement
- - Revocable
- - Irrevocable
- Testamentary trust
- - Part of will
119Two Types of Lifetime Trusts
- Living - inter vivos - between lives
- created during life
- property doesnt pass through probate
- privacy
- management of securities
- recipient of insurance
- Irrevocable Trust
- property given away for good
- gift tax considerations
- cannot be altered, amended, revoked
120Testamentary 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
121Creation of a Trust
Step 1 Owner Grantor
Step 2 Transfers Property to Trustee
Step 6 Goals Reached
Step 3 Trust Agreement Directs Trustee
Step 4 Manages Controls Has Legal Title
Step 5 Beneficiary Receives Income Benefits
122Example of Trust Used by Married Couple
Property owned by A
Transfer at As death
1/2 1/2
Transfer at Bs death
Income
B
Trust
Spouse
Trust property not taxed at Bs death
Children
123When 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
124Advantages of a Trust
- Minimize Estate Taxes
- Reduce Estate Administration Cost
- Provide Professional Management Services
125Trust Limitations
- Trustee will not operate business
- Heirs cannot control property
- Annual trust fee
- Can not solve all goals
- Title must be transferred
126Checks 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
127Costs and Fees
- The more complex the duties of the trustee, the
higher the fees will be.
128Life InsuranceTool in Estate and Business
Planning
- Steve Shook, Agent
- Russell and Schrader