Tape #242 - Issues of Land Inheritance

Good afternoon ladies. How's everybody. My name is Angela Corley. I work with the Department of Agriculture and it's a pleasure for me to join you this afternoon for this wonderful workshop on issues of land inheritance. Is everybody in the right workshop? Ok, wonderful. This afternoon our presenter is going to be Martha Gerber Whitttinger. She is an attorney at law with the American Agri Women from Ohio. And she's going to be leading the discussions this afternoon. This session is being recorded so as you ask your questions or as you make comments, Martha is going to repeat your questions and/or comments so that the information will be on the tape. The tapes will be available later, I understand in the registration area. If you are interested in purchasing one so that you can take all of this valuable information home with you. So are there any housekeeping questions before we get started? If not, I would like for you to join me in bringing a warm welcome to our presenter, Martha Gerber Whittinger. Thank you.

[Applause]

Thank you. First of all this is going to be an informal session. I'm an informal person and if those of you in the back would like to move up, so we can ask questions and talk back and forth, we'd be really glad to do that. You know the mind a wonderful thing. It starts to work the minute that you are born and it never stops until you get up to speak. So as I said this is going to be informal so I'm going to turn it over to you and I'm to ask each one of you to stand and introduce yourselves and tell me what country and what state, providence, territory, etc., that you are from. So we can at least know each and know what country. Could we start with Kathy?

My name is Kathy Fowler, I'm from Western Australia. I am very involved in the [inaudible] and I'm here to learn as much as I can from [inaudible].

My name is Marian [inaudible], I'm from Lancaster County Pennsylvania and I also work with the farmers program [inaudible].

[inaudible], I'm from Tennessee [inaudible]

I'm Betty [inaudible] I'm from the United States from Nebraska in the middle of the country. I'm in production with my husband.

My name is Beth Weaver and I'm from Vermont in the U.S. and I'm interested in [inaudible] issues.

My name is Norma [inaudible], I'm from Bolling Green, Kentucky. We [inaudible] I'm Martha's presentation because we have a family farm with only two children. I have a son that's leaving the farm after seven years and he's graduated from college and want so leave the farm now after farming with us. [inaudible]

I'm Betty from South Carolina [inaudible]

I'm Sarah [inaudible] from the US Department of Health and Human Services and I was a delegate to the Women's Conference in China where the issues [inaudible] were very significant and I['m sure you're going to be talking internationally [inaudible]

No, we're waiting to see how many different countries we have to be flexible.

[inaudible] farmer from Illinois. We have grain and livestock.

[inaudible] from Australia [inaudible]

[inaudible]. My husband and I own and operate a dairy farm in California. We are a second generation on the dairy farm. My father-in-law still lives with us and now a third generation is coming up and I want to know if we are going in the right direction.

I'm Julian Campbell and I come from [inaudible] Australia and I have a family farm as well with four children and I'm concerned about what's going to happen in the future.

I'm [inaudible] from North Dakota and we farm with our two sons and I'm also a member of Women Involved in Farm Economics.

I'm Cindy Howell from Australia. I have two sons and I'm interested in keeping our farm in the family.

[inaudible] Montana which is north western U.S. I serve as president of the Montana Women Involved in Farm Economic and one of our top priorities is inheritance and taxes to make sure that we can keep the family farm in the family.

I'm Gay Beth Moore from Southwest Kansas and that is one of the states that is right in the middle of the United States and I'm involved with Kansas Farm Bureau. I also farm and ranch.

Betsy [inaudible] from Manitoba Canada. We are in the center of Canada. We run a family farm and is the same thing she asked about how do we pass it on to our family.

I'm Koreen Sellers and I'm from Southwest Nebraska. [inaudible]

I'm Deborah Getts from Northeast Nebraska and we are farming with a mother-in-law, my father-in-law passed away March 7th. Do not want farm on our own land, but our son-in-laws would be with us. So we're hoping to keep it in the family and want divide it equally.

My name is Suzanne Kelly and own family farm shares a farm in southwestern Australia.

[inaudible] and I am a producer in Alaska. I have seven children.

[inaudible] South Whales. Three children.

It sounds like we're all from the United States or Australia and that was oh, Canada. I am so sorry. Well I think we all members of common law societies and I'm sure some of you may have studied in your histories many years ago that there is a common law and a civil law in the world. The common law countries are usually of British law and civil law countries are of European law. I'm not going to get into the international law since we all are have similar backgrounds in law and there's a lot of materials to cover and I hope you have a lot of questions. I'm willing to stop at any time for questions. I want it to be informal. I want you to feel free to back me up to say that I don't understand that term or let's discuss that a little more or let's skip that and go on to the next thing. And that's fine. It's no problem at all. That's what I'd like to see you do.

I'm not speaking to you as an attorney. I wouldn't even attempt to because the laws of every state are different as you know and the laws of every of area of Australia are also different. Inheritance laws in our country depend upon the state from which you are residing and they do vary quite a bit. You can't hear me. I'm not a very good one to use microphones. I've been a girl scout all my life and so I tend to speak loud enough. So I'm sorry, I am soft spoken though, generally, but I can talk louder. If those in the back like to move forward. You know, if you have questions it's easier.

I think the first thing we need to do is talk about estate. Most people have a misconception about estates. Estates are your assets, your present assets and your potential earning power for the rest of your life and that what comprises your estate. And there is two things that are very certain. First thing is everyone in this room has an estate plan. Now you may not think that you've ever written out one and you don't have to because if you don't have an estate plan, your government has an estate plan for you. And it's called the law of descent and distribution.

So if you have trouble getting your spouses to talk about it, you tell them well if you don't want do anything about it, the government is going to do it for you when the time comes. And the other thing I want to tell you is every person in this room has a different estate plan. Because there is no two of you alike. And so many times I hear somebody say to me oh so and so has got the most wonderful living trust. And it's just what I want. No, it may not be what you want. It may not be so wonderful and it may not be entirely it may be entirely wrong for you. So you have to think out your own individual needs and your own individual goals and not try to copy what someone else has because you're an individual of your own.

So what is estate planning? Well the first phase of estate planning is to sit down decide what you want to do with the rest of your life. How do you want to enjoy it? How do you want to spend what you have or what is your earning capacity. And that's your retirement goals.

And the second part of an estate plan is what do you want to leave for your loved ones. What do you want to make sure that they can have when you are gone. And you have to define those. Someone defined a perfect plan it's just live the way that you want to live and when you die the check to the undertaker bounces. [laughter]

Now I want to talk about goals. I'm not very good at the microphones though. As I said I'm not a very formal person. So how about you telling me some goals you think an estate plan should have?

[How long you think you're going to live?]

Name some goals that you think you might have. She said how long you want to live. I'm not sure we can define that in terms of a goal. You might want to take that into consideration. Ok, estimate of life time needs, how's that? in term or years? Ok, what else might you want.

[Ways of planning for your death so family don't have to pay inheritance taxes. Making plans along the way.]

Ok a goal of making plans. Ok and what all could those plans entail?

[Distribution of lands.]

Ok. Would that be with the idea of continuing the business providing for the continuity of the business. That could be.

Writing wills. Right

[Question: How do you get the continuity of the business and keep everyone not in the business happy?]

Ok. So you're saying equal distribution.

[How do you do that? Life insurance.]

Well we hope we can answer some of those things. I can't give you the answer for your situation. I can give you some suggestions. Equal distribution. That's the whole key right there, equitable. And actually I'm going to cross out equal. And I'll explain that to you later. Any other things that you can suggest?

Ok. Dependents. And that can also be an aged family member. It could be a spouse with poor health or any number of dependents. Ok, there is one thing you haven't got. Providing for yourself. [But you're suppose to be dead.] No, no, what I say an estate is for the rest of your life. Estate plan should include how you want to live for the rest of your life and what you want to preserve to give on to your children. Care for yourself. I hear so many people and you know almost everybody does that. They're so concerned about how they are going to preserve this and pass it own to their children, they forget to enjoy it themselves.

You know, this whole process can create quite a fog. And the fog is kind of like the motorist who is following a tail light in a dense fog and he crashed into the car in front of him. And he jumped out of his car and he started yelling, he said why didn't you let me know that you were going to stop and the voice in the fog came back and he said why should I, I'm in my own garage. [laughter] So we're going to try to wade our way through the fog so that we don't crash. And so the first thing, I'd like to do and you can take notes on your sheet or whatever, is to give you some ideas of things that you should have to start with.

First you know what your goals are going to be. We defined those and now what things should we be starting to gather together to study out the situation of how we can reach these goals. The first is an inventory of your assets. Would anyone care to give me some suggestions of assets.

[What about the land you own? inaudible].

Ok. You got your land and your stock, machinery. What other things? Your cash. Did you name cash? Ok, your cash assets and those could be your certificates of deposit, money market accounts, anything of that sort. Bonds, right your insurance, is very valuable. Life insurance policies or retirement and pension accounts, annuities, IRA. Can you think of anything else that might be considered an asset that you'd want list. Right, very important one if you have unusual hobby or extraordinary personal items that you want to make sure go to certain individual you might want to list those. You also want to list your titled vehicles.

The second is inventory of your debts. And that includes secured and unsecured loans, accounts and any other indebtedness you might have. For example, you may owe a family member or you may have a note where you've loaned funds to a family member and those often get overlooked. So you want make sure that you list those down.

You also want an inventory of your business structure. Now I know probably most of you are proprietorships. The same as I am. But if you aren't, you want a legal form and your provision for successorship. As I say I'm not very good with microphone. You want to list your business debts, your business properties and anything else related to your business structure. You want your tax returns -- in the United States, I can't speak for Australia, but in United States they require them for three years. Personally, I think its a good idea to keep them for a long long time. I have known a case of a good friend who they came back and said how could you possibly build up this business through the last thirty years and he said well here's all my thirty years tax returns. But it would have been hard to prove if he hadn't had all his information.

The next thing is the names and addresses of potential heirs, the next of kin and that can be very difficult. If somebody does not know where to find those names or does not know where they are and who they are. I know you don't think about it, but really if something happens to you does everyone know where your address book is and how those people are related to you. And they might be ones that just have to be given notice.

You also want to list your prior marriages. And when I do a will I always put in there for persons divorced, when they were divorced and which court and etc. So there is no question as to whether there's a legal relationship there or not.

If you have citizenship in another country other than the country where you are, its a good idea to list your citizenship information.

You also need a will and pro-over will. Now someone asked me what is a pro-over will. A pro-over will occurs if you have a living trust or some of the other documents. And its a will that's on file in case you've left something out someplace else. And it takes up the residue. It is always there for those things that are kind of hanging loose and nobody knows what to do with them. But you should always have a will regardless of what kind of instruments you have.

A living will and durable power of attorney for health care is something we have in the State of Ohio. And I think almost every state in the United States now has by state law one or the other documents. Do any of you here know if your state has it? Ok. Do we need to into what they are? You want me to discuss them?

Well a living will essentially says that if you are in a terminal condition or a permanent unconscious state, then this person has the right to deny you life sustaining treatment. And the only, in our State if you don't have a living will then they have to keep you on life support systems for one year and then they can make a determination of whether if can be discontinued. So its very important that you have this.

The durable power of attorney for health care purposes goes with the living will. And they are companion pieces and in our state you do need them both. I'm going to pass these around. I'm sorry I only brought one copy, I should have brought more copies with me. But you can look at them and we'll sing around afterwards and - I'm with Ohio. Correct.

Now general durable power of attorney is a document that says should you be unable to act for yourself then this person can sign the documents for you or at anytime for example, if you're going out of state or out of the country or going anywhere its a good idea to have a general durable power of attorney so someone could act if something would happen, if something could come up and they need to sign your name. In our State, it has to be a durable power of attorney because if you have a general power of attorney without the right wording in it, then it will not, its no longer enforceable if you are incapacitated. It does not endure past your inability to act. A power of attorney at any time is revocable by you. All you have to do is just tear it up and say this is it, you know. If it has been put in file at the bank or anywhere, then you would have to notify them that you have revoked it to make sure that the other person doesn't use it. But most powers of attorneys or at least any I've seen in our state recently are durable power of attorney. So they pretty well corrected that error. But you might want to check if you have one. Make sure it is durable.

Anatomical gifts in our state is on your driver's license. If you wish to give a body part, there is a form in our state code that you can also use. Now all of these items that I'm talking about now you just make copies of them. You don't have to originals and you can leave them at your hospital, at your doctor's office, with your children, with your next of kin. You can leave the copies in several different places.

I included funeral and burial arrangements. I lost my family when I was quite young and my mother had been ill for any number of years and in fact I lost all my family by the time I was 20 except for my mother. And she died shortly thereafter. But she had written because of her illness he had written out some instructions. Very general, but some instructions of what she wanted. And it was so much help because her death actually was very sudden. And it helps, I think if there's something specific, you know, that you want you should write it out and tell someone where it is. And that brings on the next thing.

Regardless of what you have make sure that you write out a location of where it can be found and tell somebody where it is. Because there is nothing worst than not knowing where it is. Wills, trust documents, business things can be kept in a safety deposit box. A lot of these things are left with your attorney. And another misconception is if it's left with your attorney, then you have to have that attorney probate the estate. But that's not true. You can take that document to any other attorney you want to take it to. It's not that attorney's document.

I said I wasn't going to talk to you as attorney and I'm not. Just talking to you as a friend. Other documents you might have are trust and written instructions. Written instructions can be a list of things that maybe this beautiful vase, you know. Aunt Jane always liked that vase and I want her to have that, but I don't want to put that in my will because I don't want it appraised as some kind of heirloom in the estate and you know I just want see she has it, but my daughter is my executor and she knows that I want Aunt Jane to have that, so I'm going to write these things out on a piece of paper, but I trust my daughter and I know she's going to see that Aunt Jane has that. So that would be a written instructions. It also could be a letter saying why you did what you did in your will or how you think this ought to be carried out. Just anything that you want someone to know. Write it out.

I could give you an example of what I've done since I lost my family. I've got sort of accumulated all the families things that are kind of funneled down because my mother was an only child too. And I knew that my children would fight over that picture frame or its always the little things you know that cause all the family disharmony. So I sat my children down one day and I said ok each of you are going to take a piece of paper, you're going to go through this house and you're going to tell me what you want. Oh mother. We don't even want to think about that. I said yes I want you to go through the house and I want you to tell me what you want. Well of course they all wanted the walnut secretary, you know, nobody wanted the old water pail table, but you know that's the way it goes.

So I said ok. Then I'm going to make the decision. So I did and I wrote it all out. This secretary came from great uncle Phillip's estate and you know and it was once your grandmothers and this belonged to your great grandmother and I wrote it all out and then I divided it. And I said ok. Now anything I'm not using you can have, but it's still mine until I die. If I want it back I'll come and get it. Kind of shock them first time I came got something back. But I did. But that's the way I did that. Now, that does not mean they aren't going to fight over the land, but at least I took care of that much, I think.

I think I like to have Kathy. I asked Kathy if she would like to give you a little idea of how Australia might different from us in some of these issues. Do you feel comfortable doing this? There was suppose to be two presenters from Australia and I really didn't know until noon today that they weren't going to be here so --

[Kathy] I won't say a great deal because I'm actually talking to people tomorrow morning and I'm probably answering your question. How do you tackle it, you know you've got family how do you sort it out? What do you do to begin the process where you start? That sort of stuff. So just for now, Martha and I had a quick chat earlier. Obviously the laws change according to state and according to nation. Now I'm not a lawyer and I'm not an accountant. My knowledge in this issue has grown over about ten years of experience and searching and researching so the first thing I think I'd like to mention especially for the Australian people is regard to the attorney.

I found a lot of problems emerge out of attorneys for Australians. We don't have this same terminology. Ours is power of attorney and enduring power of attorney. The power of attorney is similar to what Martha suggested whereby perhaps you people, us visitors if you like. Especially if we were say a single parent. It's smart to leave a power of attorney in charge of our affairs while we are overseas because if the plane lands up in the Pacific, then that fellow or person can actually take care of our affairs.

On the other hand the enduring power of attorney has a lot of power and I find them a misunderstood entity for some people. In Australia and it could apply here, the enduring power of attorney if for example you're a farmer and you have a stroke. Ok you're not dead so the will doesn't come into action. You are alive and what happens? You're not able to take charge of your affairs. You could be a single person or your partner may not also be able to take care of the affairs. In that case the enduring power of attorney can step in very capably and look after your affairs. But they can do other things and this is what I'm saying is people don't understand some of the power that they do have.

If for example you have a farm and you have a stroke. You're not able to take care of your business and you've left, you haven't left, but your eldest son for example might be running the farm. Now there's been no transfer of ownership, so he's just basically managing it and yet you have allowed a another son or perhaps an in-law to become enduring power of attorney. That person can in your best interest and that leaves it to their interpretation a bit, can step in and say look you to the son or to the person who is running the farm. They can say you're not doing this job well, I don't believe that you are running this business to its capacity or in the best interest of the owner. Therefore, I can offer this farm for lease or I can offer this farm for sale. They can make really significant decisions affecting you, your family and your life. So just be careful. It's really up to you to educate yourselves on these issues.

The next thing I wanted to mention was the debt. Here, Martha has listed it as an inventory of debt where you just list your own. I'll just turn it just a little and state that in Australia, we've had, especially on the eastern states, Queensland, New South Whales, Victoria, that had quite a few years of upheaval and there's been severe drought, we've gotten flood on top of the severe drought in one state and so we've had a lot of trouble with farm debt.

Now a lot of people have thrown their hands up in the air and said it all to hard and I quit. It's not necessarily the answer. Farm debt is an entity all of its own. It must be made to stand loud and clear in any farming community and certainly my experience in this area is that if you are in a situation, such as debt where you really think that there is no hope. Best sources tend to be, not necessarily your lawyers or solicitors and most likely not your accountants. But perhaps mediators who will step in and meditate with you, with the bank or lending institution.

We've got one lady in Australia in West Australia who has done it most successfully, very quietly for probably ten or fifteen years. There is quite a few in the eastern states that have had a lot of experience because of the severe extremes of climate. And they are wonderful people. They have - a good mediator is a valuable asset, but they must have an understanding of farming psychic. That's one thing I insist on.

I'll just mention because Martha has referred to both wills and basically listing assets and stuff. The other thing I push in terms of farm transfers and succession, is in your planning, be aware that you should always try and use the five and I've made it six now, but start with five finger point. Always be aware that your will is a living document. It changes according to your needs. So what it is this week, if you lose a family member, it will be different next week. And it's not always related to death. A will needs to be considered in terms of a birth, a death, a marriage, change of health, change of wealth and divorce. Ok, birth, death, change of health, change of wealth, marriage, divorce. Anyway there's five really good pointers for you for any person to sort of sit back and say hey I need to reassess this and any one of those five will happen within any five years.

So five years from now, five years from next year, five years from you know two years on from now. Count it up five is anyone of those will happen within your family. So be aware of that and use that as a guide as to when you really need to reassess your legal documents. Is that enough now?

Remember I told you anytime you have a question, just break in.

[inaudible]

The question is raised about pro bono work for farmers who do not have much money and how its handle in my state. I can't speak of other states as far as I am aware, they all have it, but we have quite an extensive system of but of legal aid. In our case every county has a legal aid office and they're very helpful with these people. We also have quite a strong network of domestic violence, with hide away houses and legal assistance for domestic violence and we have very strong domestic violence laws in our state.

As far as the court system, I know my husband use to do, he did a lot of work for people because they did it on assignment basis and if at that time before the legal aid system was established, they rotated through the bar association. Everyone had to take their turn representing people who did not have money for assistance. As far as I know the system is working very well. I have not heard, I'm kind of being a female. I'm kind of on that fringe, you know of people who often do not get assistance and we seem to feel the system is working. I can't answer for other states. Does anyone care to address what's going on in their state.

I have not found a great many attorneys that know much about farming. And I don't know that it's just because you don't have the finances. I don't think that has a thing to do with it at all. I would say that they are as knowledgeable of the needs of someone for pro bono as the man with $2 million. I guess that the best I can answer that question.

[inaudible]

Correct. That's a good point. I have to repeat the questions for this tape recorder. And you say there is a difficulty finding people who are both estate planning knowledgeable and knowledgeable about agricultural situations and problems.

Anyone else want attempt that one. She said when you go to attorney and you want to find an attorney to use what questions would you ask? I think the first thing I would ask them, how many plans have they made and what is their educational background? And could they give you the names of or would they be willing to give you the names of or call someone for whom they have done work that you could see what kind of planning they have done. Now they may not be willing to do that because there is a client [inaudible] relationship there that should not be breached. But I'd want to know more about them before I and they certainly should be willing to speak with you first before you hire them.

I would be very weary of any insurance company that wants to do estate planning. I would say the best -- she's saying that you can ask your insurance company if you have a lot of confidence in that company and they perhaps can direct you to someone. Someone that you have worked with a long time and trust. I would say in that respect ask people who are in a similar situation as you and ask several people as to whom they recommend. I get calls every once and a while. I don't practice. I never went to law school to practice. And I farm. And I have people call me and I can make recommendations because I'm not practicing. I am license, I can practice, but I choose not to.

I hope so and I think that's where we're going next or pretty soon. She's asking if there's a marriage about to take place is there any planning you should do before the marriage? That would be called prenuptial agreements. How do you introduce that without offending the new member. Well its common in our state. And neither one of my girls hesitated a minute to tell their husbands to be that there was going to be a prenuptual agreement and there wasn't any problem in either case.

It should be if it isn't. Right. Ok. I'll take one more question.

Ok, can you hold off your question. Or would you like for us to jump down to it now? Ok. Let's go on a little ways and I'll skim through this kind of quickly so we can get down to where she wants to go here.

I had future needs and growing old and I'm going to kind of lecture to you a little bit because I hear so many people are so concerned about handing on the farm that they forget the first consideration should be taking care of themselves and while its important to pass your farm on to your children, its also important that you don't pass those assets on so quickly and so

fast that you are left

END OF SIDE 1

to be done by someone who knows what they're doing. Requires filings with the state, requires meetings, requires a very rigid schedule. Requires certain documents be kept in certain and certain financial records kept. And those are the disadvantage.

Minority share holders don't have a right of partition. They can't go and say I want my share of that land. In some cases depending upon how you word the document itself, they may not have a right to buy and sell the stock or you could put a limitation in there of first option. Or if they sell it, it must be sold to another family member at some specifically appraised price. There is a number of limitations you can put in there that'll keep the control within the family.

Of course as I say the disadvantages is the formal structure and also the reporting and then also you need to be careful that you don't have problems of recognizing a taxable gain when you transfer the property and it's no longer in your name, but it goes in the name of this other entity. And you're also could lose your investment credit. You might have a recapture, I don't know that I'm talking over your heads or not. Do you all know about recapture investment credit when you sell something and you've taken an investment credit and you haven't really depreciated it and then the IRS says you have to put on this form where you have to recapture the investment credit because you've made a gain.

I'm sorry tax expert. You want to explain that one. Questions anybody? Or you want us to go on? I don't want get to hung up on tax issues because that's almost a different subject.

[Speaker from audience] Is there a good brochure or something that would explain about corporation's [inaudible]

I think it -- truthfully, no I don't know of any. I think you'd have to go someone in your state and get the information. The tax issue is a federal issue of course and that you can get from the IRS code. No, the recapture, we're talking about is a federal issue. I would go to your law library, do you have law libraries in your counties? In our counties, every county in the state has a law library that is open to the public, you go in there's a librarian even in our small county and anybody can go in there and she's the sweetest lady. I mean she -- and all you say is I want to read about subchapter S corporations and she'll bring you out the book and give it to you. And you just loan it just like you do in a regular library.

[inaudible]

Ok, she said the extension agent should have some and your business development center should have some. Then I would suggest your law library. I went up preparing for this, because I don't have never studied international law regarding estates and I went to the Supreme Court library in Columbus. And they're very helpful and that's open to the public. Most people don't realize law libraries are open to the public.

[inaudible]

Yes, we have just came into our state and I was going to get to those, I was just going to mention them though. But we now have limited liability corporations. We also have limited liability partnerships. And it's my understanding that almost all the states in the United States now have those.

A corporation that's another advantage of a Subchapter S corporation is the limited liability. And you can also have that in a partnership. However, limited partnership means that the limited partner cannot take an active part, in other words, they can have no control over the management decisions. If they exercise any control over the management decisions then they are no longer their liability is no longer limited.

Of course the advantage of a partnership is its much easier to form and dissolve and it does not affect the bases of the partnership assets. In other words they use those assets but you're not really all the income is attributable to individuals according to what they have put into the partnership and their share of the partnership. So there's it's very easy to dissolve. In fact it's so easy to dissolve that it automatically dissolves upon death unless you have made a provision in the partnership for it to continue after death.

There is a personal liability of the partners unless you have a limited partnership where one partner or more partners have limited liability and as I say they cannot act in the partnership. But you always have to have at least one general partner.

The advantage of these different structures over a proprietorship is that you have more flexibility in meeting your retirement goals and it gives you options to transfer some of the property to the off farm heirs and still have the on farm heir gradually acquire ownership of the operation of the business. It also has advantage of treating the people who are doing the actual operation as employees and then they can get the benefits of health insurance.

I know Farm Bureau has a program in our state and I assume its everywhere, where they're offering this where actually you turn yourself into an employee so you can deduct your health insurance. Now she is nodding yes, she knows what I mean. And you also can take other benefits such as maybe office deduction more easily and some of those things if you have a bonafide business structure besides a regular proprietorship. However, the IRS is expanded those rules and they've made it a little bit easier to have a home office at least for a farm is concerned. There for a while they were pretty tight on some of those regulations. And they have eased up on that today. Yeah. Oh yes, and we're going to discuss, hopefully that's why I'm hurrying. We're going to get to those but I know as I told her, I'm smart enough to put them at the end. Because once we get there we won't get any farther. And I do want to cover a few of these things and I know its kind of boring some times and I apologize and maybe I'm covering them too fast, that's why I want you to ask questions because I don't want leave anybody completely in the dark.

I've got a question for you though. Why would you want to change your business structure? You know there are other ways of doing some of these things besides having to form a corporation and I wrote down some ideas that you might think of and consider.

You can have an option to the on farm heir to acquire at death the land at death of the surviving parent. You can give them an option to acquire either by a partial purchase or some kind of agreement. You can have a lease purchase agreement and those I think are coming under scrutiny by the IRS. Correct. Would you like to address that? No, ok. She told me she taught an IRS class, see that's why I'm picking on her.

You can have a private annuity. In other words you can sell a piece of property to a child for so much a year and you could excuse the debt upon your death. So its at that point it becomes a child's debt free. Private annuity just like you would buy an annuity from an insurance company only its a private. And you can also have a lease.

[speaker from audience -I don't understand it anyway. We'll say he's purchasing the land and upon death he gets the rest of it. Well is he going to be taxed for or couldn't he just be swarmed in tax?]

Not if you've already transferred it to him and then at death you have excused that in your will. You've excused all your indebtedness from your heirs regardless of who they are in your will. You could do that. You can excuse your debts.

It's called an annuity so you're bargaining as to how many years you're going to live.

[speaker from audience - Is the only advantage to selling or having the option to buy [inaudible] the only way capital gain taxes as opposed to

Often that's the case. You have to waive the capital gains taxes compared to the inheritance tax and to take it out of your estate so that you stay under the amount.

[speaker from audience For example in the situation where younger children say the person doesn't die until they're 80 years old and the person that's on the farm farming is 50, many times they want to have that land, they want to say its their land which if they can't have that [inaudible]]

Other than giving it to them so that they can say its their land, they can make the improvements on it and anything they add. You mean waive the transferred until you die? There is a lot of advantages. Something could happen to that child. They could die and it could go to their heirs. The could be divorced. I mean there is a lot of situations that could happen. When I - I didn't graduate from law school until I was 51 and I started when I was enrolled in law school when my dad died and I had to take over the farm. So I never got to start. So it took me a long time to get there and that why I say I've really never practice except I did help out in bankruptcies because I came out of law in 1984 right when all the bankruptcies were starting. And the stories, I mean I could tell you so many horror stories of where parents got involved in farming with their children and I remember one story. They came into our house and or into our office and it was a man and his wife and they were elderly and their son and his wife. And the man just set there the whole time and sort of rocked. I just want to die in my own home, I just want to die in my own home, I just want to die in my own home. It was a saddest thing you've ever seen. And there was no way they were going to keep that. So, yeah, I've seen so many sad situations where parents got locked in with their children. That's why I tell you to beware. I mean things unforeseen happen.

[inaudible]

I've got a couple of suggestions. First of all she said she has a situation where their son-in-law is doing the farming. Is that correct? He's working with them and they have a corporation, Subchapter S corporation? Small family corporation? And she right now they are paying him waging to avoid this issue or postponing it? Ok they've only started it for two years. How can they provide for him and for his contribution to the farming operation and yet provide for the other heirs? Correct?

Ok, I've got two things that you might think about. One was you could give the on farm child a percentage discount in the price of the farm for each year he or she works on it as an adult. In other words say you would give him a 2% discount for each year that he contributes toward the price towards that farm. So if he wanted to buy it he would get for 2% off. You'd have to have -- well this would be off whatever it would be or whatever the value would be when you die. It would be a cumulative discount. The other thing you could do is appraise it. When you're ready to set this up is to appraise it that day and say this is the value for all my children. Now anything he adds to that, anything increase in that value and I don't know how this would work because you are not account appreciation. But anything increase in that value goes to the child that is actually operating the farm. So, but you have to think that out, you know.

But that's when you want to put restrictions on the stock. She says she has stock and but they are concerned about gifting the stock to their children because they don't know what would happen with their children in the future and that's exactly the point that we were making is that you need to have restrictions on that stock so that you aren't .....

Well you know you can do anything you want. The question is whether your court system would hold it up. I can't answer that question. You'll have to go home and ask somebody.

[inaudible]

I don't know anything about your marital laws. In our state I can leave it to my daughters which I have to give some things to my daughters. My son-in-laws know that they aren't going to get that. I mean, you know that was decided before they were married and they keep it separate property. In our state if you keep it separate property, its weighed on a eight step thing. There are eight different factors they take into consideration. You know, who owns the money, excuse me, who earns the money off the farm and who has maybe a special need and I don't want go through all the steps, but there is eight steps. And it works very well. Really does and I think it's better than some of these others that go with the unified system such as Wisconsin did.

[inaudible]

Now she says she gets $10,000 a year to each child. That's nice or to the one that's involved in dairy. How do you find a dairy divisible into 10,000 units? You're doing it by livestock? Ok. You're doing it by the livestock, right, by the number of cows? I know my children have said that to me. We've talked about, we've talked about machinery, but I don't think it depreciated, I don't depreciable asset is what you want to transfer. You have to be very careful of what you want to transfer. Because you want to give them something that's valued very low now, but it's going to increase rapidly in value and not the other way around.

And that also brings up the problem of liquidity indivisibility. One thing as she said that they try to sell you on liquidity as life insurance. Well if you're going to buy life insurance make sure that you don't keep any increment of ownership. You don't have any tie to that insurance policy and the my roommate back there sitting in the back Doris was telling me that she like the irrevocable life insurance trust where you put the insurance policy into a trust and you don't have any ability to revoke it or to stop it or to change it. That's the main thing, you don't want to be able to change the beneficiary, you don't want to be able to stop the premiums, you don't want to have anything to do with it, because if you do, it'll come back into your estate.

I can tell you the way I solved mine. I have a piece of business property that I lease and many years ago, I gave each of my daughters a third share of a half, in other words each got sixth share and with the income from that they bought a life insurance policy on my life. Now they've got it nearly paid for because it's been ten years. But they brought a pay out in ten years and then that where the rest of my life and then they'll have the income from the property after that. It's greatly appreciated since I gave it to them. It took me two years to give it to them. I wrote the first part of the deed, half of the deed in December and then gave them the second half of the deed in January. So I appraised their part at $60,000 and then split it down into real small increments. Do you have a comment?

The 10,000 didn't it change? It's still 1. Yeah well its 20 if it's to two. If it is you and your spouse giving to one child, you can give each give 10,000 or if you are giving to a child and their spouse, you can give 10,000 each.

[inaudible]

Ok now on the other tax issues and then we're going to get to trust so you all wake up real quick. You know, Judge Lennard Hand was a U.S. Supreme Court Justice and this is a quotation from him. "There is no patriotic duty to increase your taxes." Section, I'm sure you all probably familiar if you've done much estate planning, is 2032a which is the alterative valuation option based on farming or closely held business. I'm not sure how much you want me to go into these. 2032a of your IRS Code. We should move on. I can name them and you can look up your code or talk over with your tax attorney. Special use evaluation. If you use it wait a minute - if the business exceeds 35% of the adjusted gross income, wait a minute I got the wrong one here. I don't remember the percentage, I'm thinking its higher percentage than that. But any way you can elect to have the property oh I know its six months.

If its sold within six months then you have to take the sale value but if its in a closely held business and you're keeping the property then you can use its use valuation. Right if you have a farm and its agriculture use, right you can you use appraisal for agriculture use.

The new one is 2033a and that's for the family owned business exclusion and that's the new $1,300,000 exclusion. The last that I have heard no one knows how to interpret the law. It is quite lengthy. I have a copy of it here. Essentially, and since it is a new, you have to a citizen or residence which is what they all say. The qualified family owned business must exceed 50% of the gross estate. During the eight year period prior to death there had to be five years or more in which there was a material participation by a family member. Now I hope I don't have to deal in all these definitions, I could, but I just wanted to give you kind of a summary of what these things are.

And there is a section on what gifts are included. A section on what's business interest and what adjusted gross estate means, but actually that's essentially what it says. Until the IRS decides how they will interpret it, I don't anybody could really tell you what to look for. I'm assuming that its going to very similar to 6166 because the wording is very much the same. Section 6166 is installment payments and what that says is when your estate taxes is established that if you are a closely held business and you meet the percentage requirements then you have ten years to pay the taxes at whatever their stated interest rate is for that section of the code, but you have a five year off-set at the beginning. You have five years and then your ten years start running. So you have a total of 15 years now. And those are three very important sections of the code. And when you do any estate planning, remember to try if they can ever interpret this 2033a try to make sure that your estate fits in those percentages. So that's another reason not to just start giving away without your sure you're going to fit in the code.

She's saying if all your business is farming then you're going to be pretty safe, but you do have some personal things too. There's going to come in there that add up more quickly than you think. In fact some of them here say that your house, I think I read one place where your house could be included and another section where its excluded. You really have to look at every word in that section. That's why I hate to give out general information and tell you something wrong. But what I've given you is at least general enough that you'll have an idea of how much benefit it would be to you.

This isn't helping any of the people from Australia though and I apologize to you. You want to get on with trust now? Do you have time or you are worn out? This is more fun.

When I did this for a seminar for American Agra Women and I've done it a couple of times because they seem to like to talk about trust at our meetings. I've been Legal Concerns Chairman for 13 years and Doris is Estates and Tax Chairman and she does more the legislation. Doris came in late. Doris you want to stand up back there. This is Doris Baldwin from Wisconsin now, I use to say Illinois, but now she is from Wisconsin. And Doris work very hard to get that raise to 600,000 many years ago. And she was one of them that worked hard on that issue. So we'll real pleased that its been raised up to a million and three hundred thousand for closely held business. Of yes, its been raised. What the problem is they don't know the writing is so many pages and there is so much interpretation in it until the Regs. come out, until the regulations come out, the IRS people don't know how to interpret it.

I go to the IRS tax workshops and its real comforting when they get up and tell you and you ask them a question about a new section that's come out in the IRS Code and they say we really don't know its going to be interpreted. And then they get up and they say now well our answering service when you call in and you have a question you want to ask them a question and they say well now our answering service is getting better, we're now 60% accurate. And that does happen. I mean they tell you that themselves. You can actually give the $1,300,000, yes that is the law if you qualify under that section as a closely held business and meet the other which says in essence that a certain percentage I think its 35% has to be business property and then a certain and that can be realty and personalty and a certain percentage has to be realty and you have had to held is that the five and eight in the new one two, I believe its in the new one as well as in section 6166.

You have to have actually materially participated for five of the past eight years and you have to hold that property, the heir has to hold it and materially participate for ten years or less if they die. So it, that's what I'm saying its very strictly and then if there is more than one closely held business its 20% for each one, minimum. I remember that part. Because I have two businesses.

I'm going to give you three little sentences of history, but I think its interesting. Living trust go back to 800 A.D. in the Roman empire. So there's nothing new. What goes around comes around, right? And the English people used it, started using it in the 12th century to preserve property from the abuses of the crown, because you know the crown owned all the property and so the wealthy property estate owners in England used prime agenda and trust to keep passing it down through the family so it didn't revert back to the crown. It came to the colonies and the first recorded use of it was in 1765 by Patrick Henry. Now that's all the history I will give you.

So what is a trust? A trust is right in property real or personal held by one person for the benefit of another. That's all a trust is. I thought it might if we're going get into any depth in trust and that depends upon how much time you want to spend on it and how many questions you want to ask. But we might start out with some terms. I'm not very good at these charts.

You all know who the grantor is. The grantor is also called the settler, the donor or the creator and he's the one who supplies the property.

So who is the trustee? He's the one that's going to hold the property and a fiduciary capacity. The fiduciary capacity is any relationship in which one acts as an guardian of another person's property. An example of that is when you put money into the bank, when you deposit money, that bank is the fiduciary. They are holding that money for your behalf.

Successor trustee. It's a real important living trust because in a living trust the grantor and the trustee is going to be the same person. A successor trustee is the one who takes over the trust if the original trustee is no longer able to serve due to incapacitation, they decide that just don't want to serve any more or they die. So ultimately, it's going to go into the hands of a beneficiary. Right? Beneficiary is the one who ultimately is going to receive the property.

Now there are different kinds of trust. There is an express trust. Am I getting too deep for you? No, ok. There is an express trust and there is also an implied trust. So what's an implied trust. Implied trust is when you go to a garage and you park your car there. You trust those people to take care of your car. You're leaving it with them. That's an implied trust.

There's also constructive trust created and involuntary trust. Now there are two other important things with a living trust. It can be intervivos, which means, any of you know Latin, means during life. That's one that you create during your life time. It can be a testimentary. Testimentary trust is one that is created upon death. A living trust is oops got one more to put on there and then we're done.

Revocable and irrevocable. You can either be settler or original grantor in order words. Can either revoke it, have the power to revoke the trust or it can be irrevocable. Once they set it up they have no more power to do anything to it.

A living trust is a revokable intervivos trust in which the grantor is also the trustee. It's real important because that is why the IRS comes in and they tax that right in your estate. A lot of people I find have a misconception and they think once they set that up they take that out of their estate. They take it out of their estate for probable purposes only. It has nothing to do with the taxation. And the reason is because they kept that increment of ownership, they kept that control over that trust document and that's why I went into the definition.

But there are two other things as if you write wills that you'll run into and one is the different ways of holding title to property. And one is a tendency in common. And if you have a tendency in common, you can have it different percentages, like I have with my daughters, but each one of us owns an undivided share which means we own a share of the whole, but that has not been separated out from the whole. But that share is theirs alone and they can transfer it. That son-in-law can transfer it to his new wife or what every they want. And if they want to they can file for partition action and make it either to go to public sale or the owners buy that person out. that's a tendency in common.

Now joint tendency with right of survivorship means that you each, say two people have property of joint tendency. They both own one half. It's still an indivisible share, but with the right of survivorship means that when one dies their share automatically goes to the other person. And that's another way to get around putting it in your estate.

A POD, paid on death account at the bank. A lot of you have joint tendency with the right of survivorship in your bank accounts. And that gives you immediate access to it when the one person that owns the account dies the other can go in immediately and that's why.

Do you have any questions? A bank account is a POD, payable on death account. No you have to set it up that way. Well anymore, I think banks usually just set it up that way if there's two people on it. But you'll want to make sure that it is a joint tendency with the right of survivorship. She asked if, I'm sorry, I forget about this recording. She asked if it would automatically, if banks automatically set up the accounts as a POD account.