Intergenerational Transfer and Estate Planning - Kelvin Leibold, ISU E&O Farm Management, from the 2014 Iowa Cattle Industry Convention, December 8 - 10, 2014, Des Moines IA, USA More presentations at http://www.trufflemedia.com/agmedia/conference/2014-iowa-cattle-industry-convention

1. Generational Transfer and
Estate Taxes
Iowa Cattle Industry Convention
Dec. 8, 2014
Kelvin Leibold
Farm Management Field Economist
Iowa State University
641-648-4850
kleibold@iastate.edu

2. We are not giving Legal
Advice
Just Providing Non Bias
background Information
Seek out your own legal council

3. Who Should do Estate
Planning?
• Everyone…….It is not just about money
• Unless you are happy with the State of Iowa
succession plan

4. Coordinate Your Planning
Retirement Estate Income Tax
Planning Planning Planning
Transfer
Planning

5. Simplified
• What do you have?
• Who do you want to get it?
• When do you want them to get it?

6. Keys to success
• Communication
• Goals
• Plan with timeline
• Team

7. What is Estate Planning?
The overall process of making
decisions as to how property is to
pass to others, during one’s
lifetime, at death, or after death.

8. Who is the Estate Plan for?
• Is it to pass a business to the next
generation?
• Is it to plan for retirement?
• Is it to jump start the kids ambitions?
• Is it to avoid taxes?
• What are your most important goals?

9. Common Estate Planning
Goals
• Minimize taxes at death
• Minimize probate costs and delays
• Conserve property during life and after death
in accordance with estate planning goals
• Provide financial security
– Parents in retirement
– Family member with a disability
9

10. Estate Planning Steps
• Examination of how property is
owned or held
• Review of family insurance program
• Advisability of lifetime gifting
• Alternatives for disposing of property
during life

11. Key is to Articulate Goals
and Objectives
• The parents together
• The parents individually
• The on-farm heirs
• The off-farm heirs
11

12. • Determine what you own and how much it is
worth. (balance sheet)
• Who do you want to receive your bounty?
• Review any past estate planning
Key is to Articulate Goals
and Objectives
http://www.extension.iastate.edu/agdm/wholefarm/pdf/c4-57.pdf

13. Property
• Real
• Personal

14. 1. Fair market value of
real estate
• You may be pleased!
• May be one of your greatest stores of
wealth

15. Ownership
a). Fee simple, life estate, life tenants,
leaseholds, remainder interest
b). Tenants in common
c). Joint tenants with right of survivorship
(car, bank account, simplified estate
settlement)

16. Forms of Co-ownership
Tenancy in common
– Each tenant holds an undivided interest in the
property
– Upon a tenant’s death, the interest passes in
accordance with the tenant’s will (or state law
if no will)
– The decedent’s estate includes only the
decedent’s interest
16

17. Forms of Co-ownership
Joint tenancy
– Passes by survivorship designation
– Precludes use of life estate/remainder
arrangement as to non-marital portion of the
estate
– Magic words of conveyance
– Takes precedence over the will
17

18. Estate Planning Implications
of Property Ownership Forms
Non-spousal joint tenancies
– Property is taxed in the estate of the first to
die except to the extent the surviving
owner proves contribution for its acquisition
– “Consideration furnished” rule
– Property included in decedent’s estate
receives a new basis at death
18

19. Estate Planning Implications
of Property Ownership Forms
Spousal joint tenancies
– The property is treated at the first death as
belonging 50% to each spouse for federal
estate tax purposes
• “Fractional share” rule
19

20. Up to date household
inventory
• Just ask the people that lost their homes in
Cedar Rapids if this is important
• Video
• Pictures
• Hand written inventory

21. Important Considerations
• Type of Asset
– Inventory
– Depreciable
• Machinery & Equipment
• Permanent Improvements
– Real Estate
• Land
• Personal Residence
• Tax Basis
• Timing

22. Financial Statement
(Net Worth Statement)
(Balance Sheet)
Now that you have inventoried all of your
assets, you might just as well make a
financial statement. It gives you your
financial position as of a certain date.

23. John and Mary
Assets:
House $50,000
’93 Lumina $1500
Personal property $10,000
CD’s $20,000
Total assets $81,500
Liabilities: None
Assets $81,500
Debts 0
Net worth $81,500

24. Financial Statement
Might want to get more detailed:
Assets
Short, Intermediate, Long
Same with liabilities
Short, Intermediate, Long

25. Size of the pie?
• Small pie – less than $5.34 million
• Medium size pie - $5.34 to $10.68
• Big pie - Over $10.68 million

26. Develop Goals under various
circumstances
• What to do if spouse dies
• What to do if both die
• What to do if entire family dies

27. Objectives under those
circumstances
Would the surviving spouse or heirs want to:
• Receive Income?
• Sell interest?
• Participate in management?

28. Key Areas of Concern
• Guardian for minor children or adult children with special needs.
• Providing income for a surviving spouse or children.
• Management of estate property, assets and investments.
• Minimization of probate and settlement expenses.
• Minimization of estate and inheritance taxes.
• Flexibility.
• Liquidity for necessary and unavoidable expenses.
• Gift planning.
• Continuation and/or transfer of the business.

29. Who should be involved?
– PARENTS
– ASSET OWNERS
– IF YOU OWN A BUSINESS - BUSINESS PARTNERS
– HEIRS WORKING IN THE BUSINESS
– HEIRS NOT WORKING IN THE BUSINESS
– NON FAMILY BUSINESS PARTNERS
– DAUGHTERS-IN-LAW & SONS-IN-LAW
– ATTORNEY KNOWLEDGEABLE IN ESTATE PLANNING
– FINANCIAL ADVISORS
– INSURANCE ADVISORS
– MANAGEMENT CONSULTANTS
– LENDERS
– MEDIATOR

30. Scheduling a Family Meeting
• SCHEDULING THE MEETING
• How often meetings will be scheduled
• Set specific beginning and ending times
• Establish a standing agenda
• How are items added to the agenda
• How are emergency meetings scheduled
• How is notice of meetings given
• What constitutes a quorum
• What happens if someone cannot attend

31. A Process of Decision Making
What criteria will be used;
Financial, values, production, time, family, etc.
Who will make the decision;
Owner/Parents, children, employees, advisors.
How will decisions be made;
Autocratic, democratic, consensus, collaboration.
How will conflicts be resolved.

32. MEETING GROUND RULES
• Agree upon the role and authority of the facilitator.
• Critique the message, not the messenger.
• Everyone must listen to learn.
• Do not interrupt. Practice good manners and model good behavior.
• Discuss your emotions. Our emotions often drive our decisions.
• Expect honest comments from others by being honest in your
comments.
• Enthusiastically support decisions made at the meetings.
• Trust the process to generate an estate plan that all will agree upon.

33. Important Considerations
• TIMING
- Choose the right time for making the decision.
Delaying a decision may be the same as not making a
decision, however do not be rushed into making a
decision.
• INFORMATION
- Remember that there is never the right amount of
information for making a decision. One always wishes
that more information were available or one feels
overwhelmed by the amount of information available.

34. Who’s got the business plan?
• If you have great communication and you
have great in-laws and you have great
ideas and you run out of money – what do
you have then?
• Kelvin’s rules:
– Practice the golden rule
– No co-signing
– Plan to take things apart

35. Methods of Asset Transfer
• Sale
• Gift
• Estate
• There are differences in tax implications

36. Basis Example
Current Land Value $6,500 / acre
Purchase Price
$1,000 $6,500 $10,000
Die $6,500 $6,500 $6,500
Gift $1,000 $6,500 $6,500*
Sell $1,000 $6,500 $10,000*
* gifting or selling to family, 2 year rule

37. Gifts
Elements of a gift.
Must have a donor.
Must have a donee (recipient) of the gift.
Must have actual or constructive receipt of the gift.
Gifts must be given free of any restrictions.
Gifts in any amount are not income to the recipient.
Gifts in excess of $14,000 per year to any one recipient will
effect the gift tax credit.

38. Why do we have Estate
Settlement?
a). Determine who gets what
b). Clear title to real estate
c). Pay taxes

39. Intestate Succession
Procedural aspects
– Petition filed with probate court
– Court appoints an administrator to “manage”
the estate
• Pay decedent’s debts
• Pay administrative costs
• Pay claims
39

40. Dying Testate (with a will)
• Hearing held to admit will & appoint executor
– Un-probated wills have no legal standing
– Executor must file “acceptance of appointment” and
file bond unless waived by will or heirs
• Court issues “letters testamentary” or “letters of
administration”
– Probate process now begins
40

41. The Probate Process
Objectives of probate
– Inventory assets
– Settle disagreements
– Obtain good title
– Pay necessary debts and taxes
– Distribute property
41

42. The Probate Process
Duties of the personal representative
– Identify and take control of estate assets
– File an inventory of the assets with the
probate court
– Pay all allowable creditor claims
– Determine tax liability
– Keep beneficiaries informed
– Distribute assets
42

43. Intestate Succession
Distribution of Property at Death
– The law of the decedent’s domicile
(permanent residence) at death governs
the succession of personal property
(movables)
– The law of the situs of property governs
succession of real estate (immovables)
43

44. Intestate Succession
In General
–The “probate” property includes all
except:
• Life insurance policies
• Property held in joint tenancy with the right
of survivorship
• Payable on death accounts
• Death benefits from pension plans
44

45. Intestate Succession
Distribution of Property at Death
– Real and personal property typically descends to
heirs immediately
– A surviving spouse generally receives at least half
of the estate
– If children also survive, the spouse generally
receives one-third and the balance passes to the
children in equal shares
– Uniform Probate Code – adopted (at least in part)
by 22 states
45

46. Iowa Intestacy Statute
Sec. 633.210 et. seq.
Only spouse survives (or spouse survives
with issue all of whom are issue of surviving
spouse)
Spouse gets all
46

47. Iowa Intestacy Statute
Spouse and issue (some of whom are not issue
of surviving spouse) survive
– Spouse receives ½ of real estate
– Spouse receives all personal property that is
exempt from execution
– Spouse receives ½ of all other personal property
– Any other property such that the sum of all
property passing to surviving spouse is $50,000
47

48. Iowa Intestacy Statute
• No spouse, but issue survive
– To issue equally
• No spouse, no issue
– To parents
– Joint deaths?
48

49. Iowa Intestacy Statute
• No spouse, no issue, no parents
– To issue of parents
• No spouse, no issue
– To parents
– Joint deaths?
• No spouse, no issue, no parents,
no issue of parents
– To grandparents
49

50. Iowa Intestacy Statute
• No spouse, no issue, no parents, no issue of
parents, no grandparents
– To issue of grandparents
• No spouse, no issue, no parents, no issue of
parents, no grandparents, no issue of
grandparents
• To great-grandparents and then issue of great-
grandparents
• If none, then to issue of deceased spouse (or deceased
spouses)
• If none, to the state (escheat)
50

51. Intestate Succession
• Disadvantages of intestacy
– Inflexible distribution scheme
– Continuity of farm business may be
jeopardized
– Conservatorship for minors and impaired
heirs
– Additional costs, taxes and delays
51

52. DISTRIBUTION by Will
WILLS
• Competency required to make a will
Know the nature and extent of your estate
Be able to formulate a plan of distribution
Know the natural objects of your bounty
Understand the relationship of the above
• Must be witnessed by two witnesses in the presence of the testator and
each other.
• Must be revoked with the same formality with which they are made.
• Amendments must be made with the same formality as a will.
• Handwritten modifications to a will are of no effect.

53. Testate – with a will
a). Sound mind, of age, not coerced
b). Disinherit a spouse?
c). Antenuptial
d). Children
e). Pets
f). The will names the executor/trix and
nominates the guardians…
g). Special bequests list attached

54. Validity of Wills
• General rule
– Governed by law of domicile as to movables
and law of situs as to real estate and other
immovable's
– If valid where executed, generally valid in
other states
• Watch attempted testamentary
dispositions
54

55. Testate Succession
Will contents: Suggested provisions
• Identification of the parties
• Statement revoking prior wills
• Provision nominating a guardian for minors
• Statement directing payment of debts and taxes
• Specific dispositions of property
• Residuary clause
• Statement appointing an executor and trustee
• Testator’s signature
• Witnesses signatures
• Date
55

56. Other Issues
a). Basis – step up, step down
b). Gifting
c). Income in respect of decedent
d). Sale of residence
e). Installment sales and private annuities
f). Special use valuation

57. Gifts of Farm Assets
• When a farming parent gives a farming child gifts of livestock or grain
produced in the farming operation, there are tax consequences.
• The farming parent won’t include the fair market value (FMV) of the
grain on their tax return, so that reduces the income and potentially
employment taxes.
• Farming child must show the FMV of the grain at the time the gift was
made and pay tax on the income when sold; but not self-employment
tax.
• If the grain is gifted by farming parent during the year the grain was
produced, farming parent must reduce Schedule F expenses by the
associated cost of producing that grain.
• Farming child then gets to use the carry-over basis as an expense.
• If the grain is produced in a year prior to the gift, the basis is the same
as the donors, which is usually zero.

58. Federal Gift Tax
a). Annual exclusion
b). Marital deduction
c). Charitable deduction
d). Unified credit
e). Below market interest rate loans
f). Gifts to minors – Iowa Uniform Transfers
to minors or trusts

59. Federal Estate Taxation
How is property valued?
– In General
• Fair market value
– Willing buyer/willing seller test
– Exception:
• Special use valuation
– Maximum value reduction is $1,040,000 in 2012
59

60. Valuing Property
a). Date of death or six months later
b). Special Use Valuation based on a
capitalization rate, often reduces value at
least 25 percent
c). Other discounts for minority
shareholders

61. Federal Estate Taxation
Alternate valuation date
– Requirements:
• Available by election
• Value of gross estate must decline by making
election
• Estate’s federal estate tax liability must decline by
making election
• Gross estate must exceed $ 5,340,000 (for 2014)
61

62. Gross Estate
• Tenants in Common – usually include one-
half of the value
• Joint Tenants – “consider furnished rule”
for non-husbands/wives. “Fractional
interest” for husbands/wives

64. Gross Estate (cont.)
3 year look back rule:
a). Life estate
b). Transfer was to occur at death
c). Revocable transfer
d). Transfer of life insurance

65. Gross Estate (cont.)
• Retirement Benefits
• Taxable Gifts after 1976

66. Gross Estate Deductions
a). Debts
b). Attorney fees
c). Executor fees
d). Court costs
e). Burial expenses
f). Marital deductions
g). Charitable deductions
h). Iowa inheritance tax
i). Part of Federal tax paid in previous 10 years

67. Size of the pie?
“Planning Zones”
• Small pie – less than $5.34 million
• Medium size pie - $5.34 to $10.68
• Big pie - Over $10.68 million

68. Potential Tax Savings
If the “pie” is a small pie (less than $5.34
million in 2014) look at impact of inflation
and legal costs.
Don’t worry about Federal Estate Tax, focus
on income tax issues, possible Iowa
inheritance tax, asset protection.

69. Potential Tax Savings
If total “pie” for husband and wife is between
$5,340,000 and $10,680,000 consider
dividing equally and using life estate or trust.
May be able to use “Portability” to increase
unified credit.

70. Potential Tax Savings
If you have a “Big Pie” seek specialized help.
Look at special tools to reduce valuation,
consider a gifting program, charitable
donations, Special Use Valuations, CRUTS or
CRATS, minority discounts and other tools
estate planners would suggest.

71. Iowa Inheritance Tax
Eliminated in 1996 for children,
grandchildren, parents and grandparents
Starts at 5% per recipient for non-lineal
decedents with a range from 5% to 15%
of taxable income

72. Administration
Executor/trix may receive $220 plus 2% of
the value of the estate over $5,000.
Attorney is the same, but often money
can be saved by hiring the attorney by the
hour.
Bonding may be required.

73. Liquidity
a). Cash
b). Life Insurance
c). 15 year installment payments if qualified
d). Borrowing

74. Unified Credit
• A credit that can be used during life to offset gift
tax liabilities or
• A credit that can be used at death to offset federal
estate tax (what ever is left over from the gift tax
credit)
• However, no tax is due if you still have enough
unused unified credit
• The excess is taxed at 40%

75. Portability
• New concept in 2011
• Allows spouse to
“capture” tax credits lost
due to unequal
ownership
• Complicated set of rules
• File an estate tax return
even if a small estate?
“Ethics issues” & “Liability Issues”

76. New rules
• Husband and wives can share the $10.68 million
(Portability) or
• Have $5.34 million of “generation skipping” each
(Reunification) or
• Have $5.34 million of “gifting” each
• In 2013 it went to 40% bracket for estates and gifts

77. ESTATE SETTLEMENT Without Portability
Husband's death Wife's death
Gross Estate $ 5,000,000 $ 5,000,000
Inheritance $ 4,970,000
Life Insurance benefits no ownership $ 0 paid to trust
Total gross estate $ 5,000,000 $ 9,970,000
Deductions
Debts $ 0 $ 0
Admin.(estimated) $ 20,000 $ 20,000
Funeral Expenses $ 7,000 $ 7,000
Charitable deducts. $ 3,000 $ 3,000
Total Expenses $ 30,000 $ 30,000
To Wife or Trust (children $5.25) To Children
Adjust. Gross Estate $ 4,970,000 $ 9,940,000
Marital Deduction $ unlimited $ 4,970,000 $ 0
Taxable Estate - Fed. $ 4,970,000 $ 4,970,000 $ 9,940,000
Gross Federal Tax $ 0 $ 2,033,800 $ 3,921,800
Unified Tax Credit $ $ 2,045,800 $ 2,045,800
State Tax Credit $ 0 $ 0
Net Federal Tax $ 0 $ 0 $ 1,876,000
State Death Tax $ 0 $
Total Costs $ 30,000 $30,000 $ 1,906,000
Combined $ 1,936,000

78. ESTATE SETTLEMENT With Portability
Husband's death Wife's death
Gross Estate $ 5,000,000 $ 5,000,000
Inheritance $ 4,970,000
Life Insurance benefits no ownership $ 0 paid to trust
Total gross estate $ 5,000,000 $9,970,000
Deductions
Debts $ 0 $ 0
Admin.(estimated) $ 20,000 $ 20,000
Funeral Expenses $ 7,000 $ 7,000
Charitable deducts. $ 3,000 $ 3,000
Total Expenses $ 30,000 $ 30,000
To Wife or Trust (children $5.25) To Children
Adjust. Gross Estate $ 4,970,000 $ 9,940,000
Marital Deduction $ unlimited $ 4,970,000 $ 0
Taxable Estate - Fed. $ 4,970,000 $ 4,970,000 $ 9,940,000
Gross Federal Tax $ 0 $ 2,033,800 $ 3,921,800
Unified Tax Credit $ $ 2,045,800 $ 4,910,600
State Tax Credit $ 0 $ 0
Net Federal Tax $ 0 $ 0 $ 0
State Death Tax $ 0 $
Total Costs $ 30,000 $ 30,000 $ 30,000
Combined $ 60,000

79. Other Considerations
• Family Business
• Fairly, not equally

80. Trusts
Property
Trustee
Beneficiary
Document

81. TRUSTS
Elements of a trust:
Settlor or donor.
Trust document.
Trustee.
Known or discernible beneficiary.
Trusts may be revocable or irrevocable.
Inter vivos or living trusts are established during the settlor’s life.
All trusts become irrevocable upon the death of the settlor.
Testamentary or pour-over trusts are established by a will.
A revocable living trust has no greater effect on tax than a will.

82. Types of Trusts
Living Trusts
Irrevocable Living Trusts
Revocable Living Trusts
Testamentary Trusts
Charitable Remainder Trusts
Life Insurance Trusts
Generation Skipping Trust

83. Overview
Crucial estate planning steps
– Examination of how property is owned or held
– Review of family insurance program
– Advisability of lifetime gifting
– Alternatives for disposing of property during life

84. EXECUTING THE PLAN
84

85. Up to date estate plan
Documents
– Will
– DPA
Property titled correctly
– TOD/POD
Plans for non-titled property
Beneficiaries current – people tend to name
and forget

86. Interest
Accumulation
(Investments)
Premiums
$$$$
Mortality
Adm. Costs
Universal Life Insurance
or
Variable Life

87. Advance Directives
• Durable power of attorney
• A grant of authority to make financial
decisions and conduct business on your behalf if
you become incapacitated
• Durable power of attorney for health care A
grant of authority to make health care decisions
on your behalf if you are unable to make such
decisions.

88. Durable power of attorney for health care
Choose a person (agent) to make health care decisions for you if you cannot speak for
yourself
Communicate instructions about your health care
Your responsibilities
Think about your values and wishes
Choose someone you trust
Choose an alternate agent
Talk to family members and the agent concerning your wishes
Complete, sign and make copies for the agent and family members
Agent responsibilities
Allows you to:
Understand your wishes
Evaluate choices about your heath care
Make decisions in accordance with your wishes
Keep the original document

89. Long term care insurance
• Your odds are 33% that you will spend more than 3
months in a nursing home (according to the
insurance industry)
• The very wealthy and very poor probably don’t need
LTC insurance
• AARP suggests those with assets of more than
$75,000 but less than $1 million may want to
consider LTC in the Midwest

90. A document directing your physician to
withhold or withdraw treatments that could
prolong the dying process. A living will
becomes effective if you are expected to
die soon and are unable to make health care
decisions for yourself.
Living will

91. Doctor’s responsibility
Allows you to:
Living will: becomes effective when death is the
alternative to treatment and you are unable to make
that decision
Direct physician to withhold or withdraw treatment that could prolong the
dying process
Follow your wishes
Your responsibilities
Clarify wishes with your family and with your physician
Complete the proper forms
Make copies for your family and physician

92. Year Estate Tax Exemption Top Estate Tax Rate
1998 $625,000 55%
1999 $650,000 55%
2000 $675,000 55%
2001 $675,000 55%
2002 $1,000,000 50%
2003 $1,000,000 49%
2004 $1,500,000 48%
2005 $1,500,000 47%
2006 $2,000,000 46%
2007 $2,000,000 45%
2008 $2,000,000 45%
2009 $3,500,000 45%
*2010 $5,000,000 or $0 35% or 0%
2011 $5,000,000 35%
2012 $5,120,000 35%
2013 $5,250,000 40%
2014 $5,340,000 40%

93. Thank you
What questions do you
have?

94. Resources available to use
with clients
• Ag Decision Maker – EYEP
http://www.extension.iastate.edu/agdm/info/eyep.html

96. Farm Transition Planning
• Complex process – labor, mgt., assets
• Iowa Beginning Farmer Center
http://www.extension.iastate.edu/bfc Ag Link, Business Succession
Programs
• Farm-On Program

97. Issues with Decision Making
• Goal Setting – simple activity on EYEP
• Health Care – POAs, Long Term Care
• Financial – retirement, gifting
Transferring:
1. Before death
2. At death
3. After death

98. “Fair versus equal” &
“Sweat Equity” issues
• Clients are looking for ideas
• Clients often have little idea of the values
of gifts and “deals”
• Bubba and Johnny
• Control versus ownership

99. Control versus ownership
• Use of trusts
• First right of refusal
• Right to buy at discount
• Right to rent

100. http://www.calt.iastate.edu/epissues.html

101. Thank You for your time.
What questions do you have?
Kelvin Leibold
Extension Farm Management Specialist
Iowa Falls, Iowa
(641) 648-4850
kleibold@iastate.edu
www.extension.iastate.edu/agdm
http://www.calt.iastate.edu/