Making a Plan for Farming Succession

Among the things an estate plan should include for family farms is guardianship for minor children, beneficiary designations, financial power of attorney for business and power of attorney for health care, an advanced directive for health care, a will and possibly a trust and life insurance.

That’s a lot to tackle, admits Lancaster Farming in the article “Estate Planning Important to Succession.” However, with the right estate planning attorney, it can go more smoothly. Farmers need also to communicate with their families, so the generations can understand each other’s wishes.

How can you structure the business in order to bring in multiple generations, so the farm can continue to support more than one generation? Without an estate plan in place, the state law generally divides assets, which may require the sale of the family farm. The law does not consider whether members of a family farm are contemplating a divorce or who might have estranged children or parents.

Working with an estate planning attorney who has experience with multi-generational farm families can help bring issues to the forefront and resolve them through a carefully created estate plan. If the will needs to be amended or reviewed in the future, that can be done either by creating a new estate plan or drafting a codicil to amend the will.

Note that one cannot simply make notes in the margins and expect them to be considered valid by the court. Any changes must follow the procedures of the state.  That means having the changes made properly, with the help of an attorney.

Assets outside of the will include life insurance policies and payable on death (POD) bank accounts, where a beneficiary has been named. Joint bank accounts and any jointly owned property held with rights of survivorship are also outside of the will.

For some farm families, a trust can be a valuable estate planning tool. With federal estate exemptions now at record highs ($11.4 million for individuals, $22.8 million for couples), trusts are more likely to be used to protect a disabled family member from losing their eligibility for government benefits (A Special Needs Trusts) or for family members who cannot manage their finances on their own.

Wills provide several advantages in succession planning, including control of the property until death, control over who inherits the property, naming a person to be the executor of the estate and naming guardians for minor children.

A living trust eliminates the need for probate and remains private. This makes it more challenging to contest. The trust can also hold assets for minors. However, a living trust has trustee fees and adds a layer of complexity to asset management.

A durable power of attorney appoints a person to act as an agent for all business and financial matters. The authority can have limits; it can be revoked when you want, or it can be written to be active only during a certain time frame, like when you are undergoing surgery.

A health care proxy is the appointment of an agent to make health decisions on your behalf if you become incapacitated and cannot communicate your wishes.

An advance care directive provides specific instructions about what you do and do not wish to happen, when you are facing possible end of life decisions. This may include intubation, artificial respiration, a feeding tube and other means of prolonging life.

These are admittedly not fun conversations but planning in advance for the farm and the farm family will alleviate stress, confusion and costs during emergency situations. An experienced estate planning attorney can provide a great deal of guidance to clarify the family’s values and future plans, as well as help to prepare documents to ensure that the family’s goals are met.

Reference: Lancaster Farming (April 20,2019) “Estate Planning Important to Succession”

Single? Female? Here’s What You Need to Know about Retirement Planning

Retirement is a challenge for single women. Their retirement savings tends to be lower than married, or even widowed, women. Married women may face a steep decline in income, when their spouses die, says Barron’s in the article “The Single Woman’s Guide to Retirement Planning.” However, their single peers don’t have the opportunity to inherit a partner’s assets and spousal benefits from Social Security. Single women also face unique challenges related to higher costs for both retirement living and long-term care.

Most retirement advice is geared toward couples. There needs to be a different plan for singles, because no one is going to save with them. They need to save and plan more.

Retirement security for Gen Xers was the topic of a study from the Employee Benefit Research Institute. This is the generation that was born between 1961-1981. The study found that only in one group of Gen Xers — single women — were 50% at risk of not having enough money to cover retirement basics. The average expected shortfall was as high as $73,000. That’s twice the estimated average shortfall for single men and more than triple that of widows. The gap continues into the highest income levels.

Americans are staying single longer and marriage rates are declining. Those trends, and the relatively new phenomenon of “gray divorce” points to more women facing this scenario in the near and distant future. A little more than half of millennials have never been married. When today’s older retirees were the age of today’s millennials, they were mostly married — only 17% were single.

Because the risk of running out of funds is higher for women, some advisors favor a more conservative approach, with lower expected returns on an investment portfolio. Add to that, the fact that women provide much of the caregiving to others and afterwards end up having to look after themselves. Perhaps that’s why so many occupants of nursing homes are women.

Advisors to women also recommend that they purchase insurance to help with the cost of long-term care. The first phase tends to come from family members. However, if you don’t have children or family living nearby, you have to be more careful about planning for long-term care costs.

About two thirds of people living alone at home over age 85 are women, according to a 2017 study from the Society of Actuaries. Living at home brings its own challenges and costs. Advisors tell single women that they should consider continuing-care retirement housing earlier than married couples. Having access to a full spectrum of care earlier in life, enables residents to create a community of care and a safety net, while they are still healthy.

Estate planning is especially important for single women. It’s crucial to be sure that documents including a will, a HIPAA waiver and powers of attorney are in place, while they are well. For those who have trouble naming a proxy due to a lack of family, an estate planning attorney can help to identify a financial institution that can serve as a proxy and act as a co-trustee.

Finally, single women need to check on the beneficiary designations on their accounts. Some pensions do not allow for non-spousal beneficiaries. Single pension holders may want their pension to go to a child, but if the pension does not permit this, it may be better to roll the pension into an IRA.  They can then select whoever they wish to be their beneficiary.

Reference: Barron’s (March 4, 2019) “The Single Woman’s Guide to Retirement Planning”

Review Life Insurance Trusts in Estate Plans

With the doubling of the estate tax exemption to $11.4 million per person and $22.8 million per married couple, with very few exceptions, the estate tax has become irrelevant until the new tax law sunsets in 2025. In the meantime, however, people who had life insurance trusts created, may want to consider dismantling them, says Think Advisor in the article “Section 1035-Your Way Out of Obsolete Life Insurance Trusts.”

Let’s look at reasons for keeping the life insurance trusts. The chances are good that the exemption levels will change going forward, reverting to somewhere between $5 and $6 million in 2026. Tax laws are never permanent, so keep in mind that all it takes is a change in the political climate and the exemption could decrease, or the estate tax rate could increase.

The federal estate tax isn’t the only estate tax. If you live in a state with estate and inheritance taxes, where transfer tax exemptions are being held to pre-reform levels, then the state estate tax is still the same as before.

If you have risk management concerns, whether they are from a business, malpractice possibility or something else, the asset protection value provided by the life insurance trust makes it worth keeping.

If the life insurance trust itself would permit the trustee to distribute the life insurance to the beneficiary or beneficiaries, then the life insurance trust could be dismantled, by distributing the life insurance owned by the trust to its beneficiary. For example, if your spouse is the beneficiary, then the trustee could give the policy to your spouse. If there are no other assets held in the trust, that would be it—no assets in the trust, no trust.

However, in some cases there may be remainder beneficiaries, and if that is the case, you ‘ll need to obtain their consent. That may not be an issue, if the remainder beneficiaries are your own adult children. If there is concern about future issues, the execution of a non-judicial settlement agreement would be used to provide a formal agreement to dismantle the trust and distribute the policy.

Some people may choose to dismantle their life insurance trusts but recognize that they still need the life insurance protection. One option is executing a 1035 exchange and getting rid of the old policy, in exchange for a policy or financial product better suited for current needs. Consider this as a way to obtain long-term care protection.

The IRC Section 1035 exchange rules allow the owner of a financial product, including life insurance or annuity contracts, to exchange one product for another, without treating the transaction as a sale. No gain is recognized if the first contract is disposed of properly, and there is no tax liability as long as the rules of the exchange are followed. A life insurance policy can be exchanged for another life insurance policy, an annuity, or an endowment contract with long-term care benefits.

The owner of the policy or contract may not change. An exception is only if a policy insuring two lives in a second to die policy, is exchanged for a single life policy after the death of one of the original insureds.

Talk with your estate planning attorney about whether any of the above makes sense for your situation. The transaction must be handled correctly to avoid any tax consequences and protect the continuity of the financial instrument. There are many details, and this should only be handled by an experienced attorney.

Reference: Think Advisor (April 17, 2019) “Section 1035-Your Way Out of Obsolete Life Insurance Trusts”

Celebrating National Elder Law Month: Protecting yourself (and your family) requires more than night cream

We’re taught early on that the Fountain of Youth won’t last long.  We do what we can to protect ourselves from the inevitable: crow’s feet, sallow skin, arthritis, flabby arms.  We get Botox injections, take our vitamins, do yoga, pump iron.  Not all our concerns about aging should be cosmetic, however.  Few think about how the costs of poor health, loss of mobility, in-home nursing care, and nursing home facilities can affect your life savings and your family.

Many people don’t realize that they can plan ahead and be prepared when aging begins to affect more than the strength of their wrinkle cream.  Elder Law is a specialized area of law that involves assisting seniors, people with disabilities, and their families with a variety of legal issues, from estate planning specifically for seniors to long term care issues to asset protection.  Estate planning can be summed up as: What happens when I die?  Elder law planning is for: What happens if I live?

May is National Elder Law Month.  This is the perfect time to explore what that means to you and the people you love the most.  If we are willing to buy the best creams and potions to protect our face from the inevitable, why not protect your assets and your family from the inevitable high costs of long-term care.  Keep in mind that approximately 70% of all people over 65 will need some type of long-term care services.  You can prepare now and learn now.

If you or a loved one are dealing with the costs of aging and the costs of long-term care, you may have already come across the many Medicaid Myths that cause worry and confusion.  Here are the top 3:

  1. I’m going to lose my home;
  2. I’m going to have to spend all my money and have nothing left;
  3. The State is going to get everything.

Legacy Law Firm, P.C. wants to tell people that these are false if proper planning is done.  If you are single and in need of care, if you are married and your spouse is going into a long-term care facility and you worry about losing everything, or if you are making the proactive step to plan ahead long before care is needed – You have options.

Legacy Law Firm, P.C. would be honored to help you learn about your planning options whether you are doing proactive planning or emergency planning.  We have the expertise, experience, and legal solutions for you and your family.  We understand your desire to live a comfortable, secure life, and we want you to have the peace of mind that you have taken steps to protect yourself, your loved ones, and your family.  Make your move today, and call to learn more about Elder Law.  You’re worth it.

If you are interested in learning how we can assist you or your loved one with elder law planning, please contact Legacy Law Firm, P.C. at (605) 275-5665 to schedule a free consultation!

Why Should I Sign a Prenup?

NBC News’ recent article asks “Prenuptial agreements: What is a prenup and should I get one?”

So, should you?

First, a prenup is a legal agreement entered into between two people before they are married, that can cover many issues dealing with property rights and assets. In addition to the traditional role of division and distribution of assets in the event of divorce, pre-nups can also cover death, incapacity, estate planning, student debt, spousal support and other legal issues.

There are other reasons for a prenup. For example, what if one spouse has a child from a prior marriage and must provide support for that child from marital income? Divorce laws also vary state by state, so if you live in a state that has laws of equitable distribution, but you move to a community property state, it is important to protect your assets and instruct how they’ll be distributed.

When financial assets get commingled in marriage, it can get complicated. Buying a house together with just one person’s money, is deemed to be commingling. Starting a business together using one person’s capital is also commingling. Even transferring money more than a few times can constitute commingling. The longer you’ve been married, the more apt you are to commingle your assets and have non-marital assets become marital. As a result, they’re divisible assets.

But aren’t prenups just for rich people? No.

Many folks think of a prenuptial agreement, as only for those with substantial means to protect. This isn’t always true, as many millennial clients hire attorneys to assist them with a prenup to protect them from a future spouse’s student debt.

These couples have discussed their financial situations in detail, before hiring attorneys to draft a prenup. That makes for no unpleasant surprises.

Finally, you can get a prenup online, but you’re likely wasting your time and money. That’s because there are complex legal issues involved, and you need to understand your rights. An online approach is risky and may not be complete.

Reference: NBC News (April 12, 2019) “Prenuptial agreements: What is a prenup and should I get one?”

How to Start the Process of Moving into Senior Living

When you have a close relative or friend who might benefit from moving into a development for aging adults, you might not know how to go about getting from where he is now to settling him into the community of his dreams. Everyone’s situation is different, and you should do what is appropriate, but it can help to have a few pointers on how to start the process of moving into senior living.

Getting the Family Involved

You should not try to handle everything on your own, if there are other family members who can shoulder some of the responsibility. Taking on the project of getting your aging relative moved into assisted living can be exhausting. Doing all this by yourself can also create resentment and suspicion among your siblings and other close relatives. Your family members should all have input into the many decisions this move can generate. It is easier on everyone, if the family can work together amicably.

At the family meeting, you and your family need to agree on who will be the point of contact for the senior living center. Your family might need to designate one person to be the decision-maker, particularly if your aging relative has cognitive decline or a condition like Alzheimer’s disease.

Some families split up the duties, with one person handling medical decisions, another person taking care of insurance issues and another managing the loved one’s finances. Whenever possible, you should have at least two people looking over the bank statements, investments, payment of bills and other financial matters.

Doing Your Homework

Your older loved one will likely have many questions about senior living centers. You should educate yourself on the details of several facilities, so you can answer her questions. After you find at least three developments, pore through their websites and then take a tour of each center.

Having the Conversation

Some people start with this step, but you really should have a grasp of the options available for your loved one before sitting down to talk. You need to collect the information to answer her questions.

Jot down some questions you anticipate your loved one will ask – an informal FAQs list. Ask the questions when you tour each senior development. When you feel you have enough information to respond to the questions you anticipate, then sit down with your aging loved one and “have the talk.”

Develop a Plan

The conversation does not have to end with your loved one going into assisted living immediately. If he is angry or upset about moving into a senior community, give him a little time, as long as he is not in danger while continuing to live in his own home.

You should have a plan, but that plan could be that you will tour three facilities and then sit down and talk again in six months. If things change in the meantime, you could revisit the topic before the six months are over.

If your aging relative wants to go forward, you could set up a plan that covers these topics:

  • Touring at least three developments initially.
  • Talking about what your loved one liked and did not like about each location.
  • Finding several more facilities to tour, tailored to your relative’s preferences.
  • Asking the centers you visit for a list or brochure about the steps a senior needs to complete, like selling the house, packing, and moving, to make the transition from the family home to a senior development center.
  • Go over the list with your loved one and family members to distribute the work equitably among everyone.

Talk with an elder law attorney in your area about any insights or experiences he or she may offer. Before signing a contract with a facility, have the attorney review it for your loved one.

References:

A Place for Mom. “Having the Conversation” (accessed April 14, 2019) https://www.aplaceformom.com/planning-and-advice/articles/having-the-conversation

What is a Transfer on Death (TOD) Account?

Most married couples share a bank account from which either spouse can write checks and add or withdraw funds without approval from the other. When one spouse dies, the other owns the account. The dead spouse’s will can’t change that.

This account is wholly owned by both spouses while they’re both alive. As a result, a creditor of one spouse could make a claim against the entire account, without any approval or say from the other spouse. Either spouse could also withdraw all the money in the account and not tell the other. This basic joint account offers a right of survivorship, but joint account holders can designate who gets the funds, after the second person dies.

Kiplinger’s recent article, “How Transfer-on-Death Accounts Can Fit Into Your Estate Planning,” explains that the answer is transfer on death (TOD) accounts (also known as Totten trusts, in-trust-for accounts, and payable-on-death accounts).

In some states, this type of account can allow a TOD beneficiary to receive an auto, house, or even investment accounts. However, retirement accounts, like IRAs, Roth IRAs, and employer plans, aren’t eligible. They’re controlled by federal laws that have specific rules for designated beneficiaries.

After a decedent’s death, taking control of the account is a simple process. What is typically required, is to provide the death certificate and a picture ID to the account custodian. Because TOD accounts are still part of the decedent’s estate (although not the probate estate that the will establishes), they may be subject to income, estate, and/or inheritance tax. TOD accounts are also not out of reach for the decedent’s creditors or other relatives.

Account custodians (such as financial institutions) are often cautious, because they may face liability if they pay to the wrong person or don’t offer an opportunity for the government, creditors, or the probate court to claim account funds. Some states allow the beneficiary to take over that responsibility, by signing an affidavit. The bank will then release the funds, and the liability shifts to the beneficiary.

If you’re a TOD account owner, you should update your account beneficiaries and make certain that you coordinate your last will and testament and TOD agreements, according to your intentions. If you fail to do so, you could unintentionally add more beneficiaries to your will and not update your TOD account. This would accidentally disinherit those beneficiaries from full shares in the estate, creating probate issues.

TOD joint account owners should also consider that the surviving co-owner has full authority to change the account beneficiaries. This means that individuals whom the decedent owner may have intended to benefit from the TOD account (and who were purposefully left out of the Last Will) could be excluded.

If the decedent’s will doesn’t rely on TOD account planning, and the account lacks a beneficiary, state law will govern the distribution of the estate, including that TOD account. In many states, intestacy laws provide for spouses and distant relatives and exclude any other unrelated parties. This means that the TOD account owner’s desire to give the account funds to specific beneficiaries or their descendants would be thwarted.

Ask an experienced estate planning attorney, if a TOD account is suitable to your needs and make sure that it coordinates with your overall estate plan.

Reference: Kiplinger (March 18, 2019) “How Transfer-on-Death Accounts Can Fit Into Your Estate Planning”

How Do I Financial Plan, When It’s Only Me?

If you’re single, you’ll face your own retirement and financial planning challenges. However, the Twin Cities Pioneer Press’ recently published an article titled “Financial planning for one” that provides a list of ways to help get ahead on a financial plan for one.

Tax-Deferred Savings Options. Tax brackets can be a bit hard on single earners. For example, if you’re the CEO at a company making $180,000 and your friend makes the exact same amount. If she’s married and her husband doesn’t work, you pay tax at the 32% tax bracket, and she pays at the 24% bracket. Leveraging tax-deferred savings vehicles to prepare for retirement can help you keep more of your money. As the CEO, if you save $20,000 a year for retirement and put it in a traditional 401(k), where you can defer the tax until you withdraw the money, you’ll get under the $160,725 threshold for single tax-payers and can pay tax at the 24% bracket.

Emergency Savings Plan. With a married couple, if one spouse is out of work or has a medical emergency, their spouse can usually pick up some of the slack financially. As a single person, that burden rests solely on your shoulders, so it’s important to be prepared for possible emergencies. You should save between six and nine months of living expenses in a liquid account, in case of employment loss, medical emergencies or urgent home repairs.

Estate Plan. Estate planning isn’t just for the ultra-wealthy, or even just regular wealthy individuals. Depending on where you live, you may also be subject to a state estate or state inheritance tax.  Even if that doesn’t apply to you, you still need a will to distribute your assets when you pass away. This is especially crucial for singles, because the inheritance process for your heirs may be more complicated, than if you have a surviving spouse. Keep your beneficiary designations on all of your accounts up to date, so you know that your assets are going to the people you intend.

In addition, if you’re a single parent of younger children, your estate plan should include instructions for who you want to take care of your minor children, if anything were to happen to you. Talk over that responsibility with the designated caregivers, before naming them.

Reference: Twin Cities Pioneer Press (March 23, 2019) “Financial planning for one”

What are Common Mistakes that People Make with Beneficiary Designations?

Many people don’t understand that their will doesn’t control who inherits all of their assets when they pass away. Some of a person’s assets pass by beneficiary designation. That’s accomplished by completing a form with the company that holds the asset and naming who will inherit the asset, upon your death.

Kiplinger’s recent article, “Beneficiary Designations: 5 Critical Mistakes to Avoid,” explains that assets including life insurance, annuities and retirement accounts (think 401(k)s, IRAs, 403bs and similar accounts) all pass by beneficiary designation. Many financial companies also let you name beneficiaries on non-retirement accounts, known as TOD (transfer on death) or POD (pay on death) accounts.

Naming a beneficiary can be a good way to make certain your family will get assets directly. However, these beneficiary designations can also cause a host of problems. Make sure that your beneficiary designations are properly completed and given to the financial company, because mistakes can be costly. The article looks at five critical mistakes to avoid when dealing with your beneficiary designations:

  1. Failing to name a beneficiary. Many people never name a beneficiary for retirement accounts or life insurance. If you don’t name a beneficiary for life insurance or retirement accounts, the financial company has it owns rules about where the assets will go after you die. For life insurance, the proceeds will usually be paid to your estate. For retirement benefits, if you’re married, your spouse will most likely get the assets. If you’re single, the retirement account will likely be paid to your estate, which has negative tax ramifications. When an estate is the beneficiary of a retirement account, the assets must be paid out of the retirement account within five years of death. This means an acceleration of the deferred income tax—which must be paid earlier, than would have otherwise been necessary.
  2. Failing to consider special circumstances. Not every person should receive an asset directly. These are people like minors, those with specials needs, or people who can’t manage assets or who have creditor issues. Minor children aren’t legally competent, so they can’t claim the assets. A court-appointed conservator will claim and manage the money, until the minor turns 18. Those with special needs who get assets directly, will lose government benefits because once they receive the inheritance directly, they’ll own too many assets to qualify. People with financial issues or creditor problems can lose the asset through mismanagement or debts. Ask your attorney about creating a trust to be named as the beneficiary.
  3. Designating the wrong beneficiary. Sometimes a person will complete beneficiary designation forms incorrectly. For example, there can be multiple people in a family with similar names, and the beneficiary designation form may not be specific. People also change their names in marriage or divorce. Assets owners can also assume a person’s legal name that can later be incorrect. These mistakes can result in delays in payouts, and in a worst-case scenario of two people with similar names, can mean litigation.
  4. Failing to update your beneficiaries. Since there are life changes, make sure your beneficiary designations are updated on a regular basis.
  5. Failing to review beneficiary designations with your attorney. Beneficiary designations are part of your overall financial and estate plan. Speak with your estate planning attorney to determine the best approach for your specific situation.

Beneficiary designations are designed to make certain that you have the final say over who will get your assets when you die. Take the time to carefully and correctly choose your beneficiaries and periodically review those choices and make the necessary updates to stay in control of your money.

Reference: Kiplinger (April 5, 2019) “Beneficiary Designations: 5 Critical Mistakes to Avoid”

Passing the Family Business to the Next Generation

Creating a succession plan for a family business needs awareness of more than just spreadsheets, says the article “How to plan for a smooth transition of your family business” from North Bay Business Journal. Family owned vineyards or farms face challenges, when one or two children have chosen to work in the business. Sometimes there is preferential treatment, either with economics or voting and control of the business.

Estate planning attorneys can serve as sounding boards in creating a balance between what will be best for the business and what will work to maintain peace and cohesiveness in the family. With experience in guiding families through this process, they are able to provide an unbiased view and can be helpful, when hard decisions need to be made.

Another part of the plan is having the family and the estate planning attorney meet with other professionals, such as a wealth manager and CPAs. This is especially helpful when the owners are reluctant to talk about what is happening in the business with their children, before clarifying their own thoughts about the business.

Taking time to step back and gain some perspective before holding a family meeting where decisions are made, will give the owners more clarity.

A succession plan often starts a business plan. Once there is a plan for the future of the business, it’s an easier transition to financial and estate planning. Taking these steps, can help the business’ success. Any business will run better when the numbers and projections for future growth are in place. Banks and other lenders look favorably on a company that has its financial reports in place.

This also permits tax planning to be done properly. In some cases, transferring a business or other asset, while the owner is still living, can be beneficial in the long run, even with today’s higher federal estate tax exemptions.

Lifetime gifts can be a way to reduce estate taxes because making a gift today before there has been substantial appreciation, is one way to leverage the gift and estate tax exemption. Let’s say an asset is valued at $1 million, but at the time of your death it may be valued at $8 million. By giving it today, you can use less of your lifetime exemption.

To transfer the business to one or more children and give them an opportunity to succeed on their own, through their own efforts, consider bringing them in as a responsible manager with some ownership.

A gradual approach in transferring control of a business is a wise move, say experts. One family put their real estate holdings into an entity that gave some ownership interests to each of their children, but one of them was appointed as the manager.

Reference: North Bay Business Journal (April 9, 2019) “How to plan for a smooth transition of your family business”