Estate Transfer IssuesYou Built It - Now What Do You Do With It?

John MangusCustom Ag Solutions

United States Department of AgricultureRisk Management Agency (RMA)

February 25, 2011

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Program Sponsorship, Coordination, and Delivery

•USDA / Risk Management Agency (RMA)– Oversees $90B Federal Crop Insurance Program– St. Paul, MN, Regional Office (One of Ten)– Relatively Few Employees (About 500)– Main Offices in Washington, DC, and Kansas City, MO

•Custom Ag Solutions– Crop Insurance Education Programs– Risk Management Tools (BeefBasis.com and CTRAT)– Rural Appraisals– Technology Development

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Disclaimer

Custom Ag Solutions is neither your legal counsel nor your tax advisor.

This presentation is intended to inform, but not advise. Before taking any estate planning steps, you should consult with competent legal and tax professionals.

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Planning For Transition

Why Should I Plan?

•Provide for Retirement

•Provide for Heirs

•Minimize Tax Burden

•Ensure a Legacy

•Family Unity

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Estate Transfer Issues

•Build a Succession Team

• Inventory Your Assets

• Identify Goals of Affected Parties

•Build Succession Vehicle

•Costs

•Example

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Building a Succession Team

Who is on My Succession Team?

•Owners (all owners)

•Successors

•Legal Counsel

•Tax Advisor

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Estate Transfer Issues

•Build a Succession Team

• Inventory Your Assets

• Identify Goals of Affected Parties

•Build Succession Vehicle

•Costs

•Example

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Inventory Your Assets

• Identify Assets to Pass On Business Personal

•Assess Earning Potential and Value

• Include Liabilities

•Full Disclosure andDocumentation

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Estate Transfer Issues

•Build a Succession Team

• Inventory Your Assets

• Identify Goals of Affected Parties

•Build Succession Vehicle

•Costs

•Example

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Identify Needs and Goals:Owners

•Retirement Security

•Family Harmony

•Reward

•Control

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Identify Needs and Goals:Successors

•Where is My Work Taking Me?

•Planning for My Future

•Expectations Financial Family Other Successors

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Estate Transfer Issues

•Build a Succession Team

• Inventory Your Assets

• Identify Goals of Affected Parties

•Build Succession Vehicle

•Costs

•Example

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Build a Succession Vehicle

•Limited Partnerships

•Limited Liability Companies

•Corporations

•Trusts and Wills

•Others

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Limited Partnerships

•Distribute ownership

•Retain control

•Business purpose

•Operating agreement

•Limits liability

•Tax considerations

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Build a Succession Vehicle

•Limited Partnerships

•Limited Liability Companies

•Corporations

•Trusts and Wills

•Others

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Limited Liability Companies

•Liability protection

•Business purpose

•Shared Control

•Operating agreement

•Tax Considerations

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Build a Succession Vehicle

•Limited Partnerships

•Limited Liability Companies

•Corporations

•Trusts and Wills

•Others

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Corporations

• More complicated thanLLCs and LPs

• C vs. S corporations

• Ownership restrictions (S)

• Dividend restrictions (S)

• Tax considerations are the key decision factor

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Build a Succession Vehicle

•Limited Partnerships

•Limited Liability Companies

•Corporations

•Trusts and Wills

•Others

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Trusts and Wills

Trusts•Bypass Probate

•Revocable

•Irrevocable

•Grantor

•Trustee

•Beneficiary

Wills• Miscellaneous assets

• Personal effects

• “Pour-over” wills

• Guardians

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Build a Succession Vehicle

•Limited Partnerships

•Limited Liability Companies

•Corporations

•Trusts and Wills

•Others

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Other Succession Vehicles• Mortgages

• Life Estates

• Charitable Remainder Trusts (CRTs)

• Joint Tenancy

• Beneficiary Designation

• Payable on Death Account

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A Few Observations

•Avoid shared ownership

•Plan for the end of the ride

•Entities can survive multiple generations

•Avoid conflicts of interest

•Seek professional help

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Estate Transfer Issues

•Build a Succession Team

• Inventory Your Assets

• Identify Goals of Affected Parties

•Build Succession Vehicle

•Costs

•Example

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Costs

• Costs vary widely depending on size, market, and complexity

• Attorney, Tax Advisor, Other Professionals

• Small estates may cost as little as $1,000

• Larger estates may take well over $10,000 or more

• If necessary, the plan can be developed and implemented in small steps

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Estate Transfer Issues

•Build a Succession Team

• Inventory Your Assets

• Identify Goals of Affected Parties

•Build Succession Vehicle

•Costs

•Example

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Real World Example

• Bob & Betty Johnson (55 years old)

• 1,200 acres, $6 million land value

• If leased, would produce NOI of $120,000/yr

• Three married sons, the oldest (John) works on the farm

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Key Issues• Retirement

• Equal treatment of children

• Minimize estate taxes

Real World Example

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Estate Transfer Issues

•Build a Succession Team

• Inventory Your Assets

• Identify Goals of Affected Parties

•Build Succession Vehicle

•Costs

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Real World Solution

Entities• Johnson &

Johnson Trust• Johnson Family

Limited Partnership

• John Johnson LLC

Documents• Will• Operating

Agreement_____________________________________

• Living Will• Durable Power

of Attorney• Health Care

POA

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Real World Solution

Johnson & Johnson Trust

Personal Assets

(97%) Limited Partner Ownership

(3%) General Partner Ownership

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Real World Solution

Johnson & Johnson Trust

Personal Assets

22% Limited Partner Ownership

75% Limited Partner Ownership

ThreeJohnson Sons (each get 25%)

(3%) General Partner Ownership

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Real World Solution

Johnson & Johnson Trust

Johnson Farm

Johnson Family Limited Partnership

Personal Assets

General Partner Interest (3%)

The ThreeJohnson Sons

Limited Partner Interest (97%)

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Real World SolutionJohnson Family Limited Partnership• Life estate

• John Johnson LLC leases farm

• General partners compensated with lease income

• Right to purchase remaining interest

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Johnson Cash FlowsJohn Johnson, LLC

Bob & Betty Living Expenses $80,000

Johnson Family Limited Partnership

$50,000

Partnership Interest Purchase $30,000/Yr

$40,000

FamLimPart Investment Reserve

Lease Income: $90,000/YRJohn Johnson

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Wrapping It Up

• Life estate expires• John becomes general partner• Purchases 50% interest

1/3 from cash reserve 2/3 using a mortgage to brothers

• Trust allows sons to avoid probate• Pour-over will

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Final Thoughts

•Start now

•Communicate

•Utilize professional help

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For More Information

• ChristmasTreeRiskManagement.com

• Custom Ag Solutions– www.CustomAgSolutions.com– 877-227-8094– jmangus@casnow.com