Is Estate Planning Worthwhile?

You bet it is — as long as you do it and you do it right!

By Ken Lassen, Vice President, Agribusiness Financial Services

Your time is valuable, and so is the money you work hard to earn. That's why you probably want to get the maximum benefit out of your hard-earned assets while you are alive, while still providing for the future of your family beyond your lifetime. Chances are, you've heard about "estate planning," but you probably wonder if it's worth your time, effort and cost. And where do you start? To answer these questions, let's take a look at a typical farm family situation …

Meet Mom and Dad

Mom and Dad owned and operated a dairy farm on a quarter section of good farmland near a growing community. They were in their mid-70s and had three grown children, all married and involved in the operation. Back in the mid-90s, Mom and Dad made vague plans to retire "soon." At the time, their entire estate planning consisted of a couple of wills prepared in 1965! That was all.

Mom and Dad's options

Mom and Dad had two options concerning retirement and beyond:

• Option one: They could have stayed the course with no additional estate planning beyond their 1965 wills.
• Option two: They could have talked to an estate planning expert about options to improve their family's financial future. Let's examine both options …

Option one: Do nothing

Mom and Dad knew that when they passed away, their assets would go to their beneficiaries — their children, who could decide among themselves what they wanted to do with their parents' assets.

Dad passed away in 1999, and his will left everything to Mom. Mom had no estate tax due, because of the "marital deduction," which allows Dad to transfer all of his property to her without paying gift or estate tax. Mom also became the sole owner of the farm.

Two years later, Mom passed away. That's when the IRS stepped in. They valued the farm at $3.2 million (see Chart 1), computed the estate tax and notified the family that estate taxes of more than $1 million were due within nine months.

Sadly, the surviving family members concluded that they would have to sell land to pay the estate tax. A real estate broker told them that the best possible use of the land was residential, not agricultural (because of the encroaching development around the farm). The broker also said that, if they were able to find a buyer, they should expect the buyer to select the most desirable piece with the highest potential value. In addition, the family would pay about 10 percent of the sales price for commissions, sales and closing costs.

The family sold 66 acres along the highway and kept 94 acres behind it. They had no other options. They would have liked to have held out for a more reasonable deal, but they didn't have time to market the parcel more effectively.

The family paid selling costs of $132,000 and estate tax of $1,180,250. This left them with 94 acres of land (59 percent of the original farm) and $7,750 in cash. (See chart 2.)

Today, the family knows that the future value of the remaining land depends on the developer's plans for the land that they were forced to sell. They continued to hope for the best, exactly as their parents did.

Option Two: Take advantage of estate planning tools

Now let's switch scenarios. Let's assume that Mom and Dad talked to an estate planning specialist back in the mid-1990s, a professional who discussed planning tools with them:

• Bypass trust. The estate planning specialist explained to thecouple that their wills could be revised to include "bypass trusts." This provision would prevent the entire estate from passing from one spouse to another at the time of the first death. Married couples have two "unified credits" between them. In 2002, for example, that credit is $1 million for each spouse or $2 million for both.
  
  A bypass trust allows both unified credits (one for Mom and one for Dad) to be used in later tax computations. When the first spouse dies, a portion of his or her estate equivalent to the unified credit amount is put into a trust where it can be preserved until the surviving spouse dies. The remaining portion of the first-to-die's estate is transferred to the surviving spouse with no estate tax due because of the unlimited marital deduction.
  
  Without a bypass trust, all property is generally left to a surviving spouse, which can cause the loss of the predeceasing spouse's "unified credit."

• Gifting program. Mom and Dad also transferred ownership of the farm into a family limited partnership and began "gifting" shares of the farm to their children. Together they could gift to each offspring and their spouse $40,000 (in shares) each year without paying gift tax.
  
  They gifted regularly to each offspring couple until 1999 when Dad passed away. In 1999, Dad's share of the estate was valued, his applicable exclusion amount went into a bypass trust and the remainder went to Mom with no estate tax due. Mom continued to gift for the remaining two years of her life until she passed away in 2001.

Let's see how the numbers add up

Option two produced a significantly lower estate tax bill through the two basic tools described above.

Is estate planning worthwhile?

Of course it is! In what is a typical family situation, estate planning saved Mom and Dad close to $1 million in estate tax. (Option one cost them $1,180,250 in estate taxes; option two cost them $219,550. That's a savings of $960,700.) They were also able to keep their land in the family.

Call Farm Credit If estate planning is something that you have been putting off -— or if you'd simply like more information about these and other tools. Call Ken Lassen today at 602.431.4150 or 800.822.3276 or E-mail Ken at kenyon.lassen@fcssw.com. He's ready to help!

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