Don’t put off estate planning
December 5, 2014
An estimated 200 ranchers from across the state gathered to discuss important issues facing the cattle business at the 66th Annual SDCA Convention and Trade Show held on Dec. 2-4, 2014 in Aberdeen, S.D.
"We are enjoying record economic conditions in the beef sector, but now is not the time to ignore industry challenges," said Todd Wilkinson, South Dakota Cattlemen's Association (SDCA) vice president.
"Clearly, there is more optimism in the industry right now with record high beef prices," said Wilkinson, who co-owns Redstone Feeders near DeSmet, S.D. "Participation in the convention is up from last year, and producers are feeling pretty positive about the economic highs the industry is experiencing right now."
Despite the optimism, there are plenty of obstacles for producers to worry about, he said, and the SDCA Convention aimed to explore solutions to some of the industry challenges producers are facing.
"I have a major concern about government regulations increasing on the agricultural sector as a whole," said Wilkinson. "I worry that many producers aren't even aware of the regulatory challenges that we will soon be facing in the cattle business. That's why it's important to get involved and get educated on the issues. Now, more than ever, is the time to think about how we can overcome some of these issues."
At some point, most ranchers face the issue of planning for death and protecting the legacy of a ranch enterprise as it is passed onto the next generation. Estate planning was a hot topic at the meeting, and Carolyn A. Thompson, of Thompson Law, P.C. Estate & Business Planning in Sioux Falls, S.D. offered advice on how to best transition the operation to the next generation.
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"Most estate plans I have reviewed just don't work for the farm or ranch," said Thompson. "A lot of folks come in with cookie cutter estate plans that don't cut it. These cookie cutter plans have what I call the '3Ds' – divide, dump and destroy. What happens is ranchers simply divide the ranch equally and then wonder why the farm isn't intact after it's been split up into many pieces."
Thompson said estate planning shouldn't be something that ranchers dread; instead it should be looked at as a small investment in time and money that protects a lifetime of hard work.
"I had a client who rented a limo and brought in the whole family to complete his estate plan," she said. "It was a celebration. He had done a lot of work in planning his transition, and he wanted to share his efforts with his loved ones. It was great to be a part of. In contrast, there are so many families who are fractured because of a poorly written estate plan. I see so many individuals who haven't talked to their own siblings for decades because of how things played out after a loved one passed away. People wonder why siblings can't get along. Well, who wrote the plan? Mom and dad wrote it. So when you look at how you want your farm to be passed on, look in the mirror and put the responsibility on yourself to do it right."
Thompson's law firm specializes in what she calls a Legacy Land Trust, which is a multi-generational wealth transfer that allows some extra protections against unnecessary or double taxation on the same land.
"A Legacy Land Trust is a generation skipping trust," she explained. "It doesn't mean you're skipping the children, but it helps avoid paying the taxes each time it's passed onto another generation. It's a multi-generational wealth transfer. A lot of times, we're building an exit strategy. I sometimes use the example of a steel and concrete bridge – it's pretty solid, but it also has to ebb and flow to account for ice and flooding. We need the estate plan to have multiple layers of protection but also flexibility, just like that bridge. I've had one client who has had to pay the estate tax on the same land four different times, and that's something we hope to avoid with this trust."
Too often, ranchers put off going to the lawyer because it's difficult to have conversations about what happens after death; however, Thompson said it only takes a few hours and a rancher only needs to have a few pieces of information to get started.
"Typically, completing an estate plan takes three visits, or about eight hours," she said. "Before you come in, all you need to have is the name of your children and a balance sheet. There's not a lot of preparation going into these three meetings, and we can efficiently protect your estate. It's all about keeping things in perspective. You spend several hours preparing a combine getting ready for harvest, so why wouldn't you spend a couple hours preparing for what will happen to your life's work after death? You need to know where your legacy is going."
When should ranching families begin estate planning? As soon as possible, said Thompson. Her typical clients are in their 50s, so the challenge is projecting the value of the estate with decades of life ahead of the rancher.
"We plan for an average life expectancy of 85-years old, so this means we're planning for 30 years of growth on the estate," she said. "If you have a 10-million estate now, what does it look like in 30 years and how do you protect it? For a lot of farmers and ranchers, once they get passed the debt reduction mode, there gets to be a tipping point and things start really rolling. If you are above or near the tax exemption of $5.34 million, you need to do much more than the basic planning. If you're at that edge, be cautious."
Thompson offered some words of caution, based off of mistakes and pitfalls other ranchers have encountered over the years.
"When you split a ranch equally amongst multiple siblings, it's a lawsuit waiting to happen," she warned. "One sibling alone can force a bad scenario. It's called a partition action. Do not tie operators and non-operators together in an operating business. If you want a non-operator owning a legacy interest in the equity land trust, that's a piece of cake. They get cash rent. Yet, if you have non-operators weighing in on the business decisions of a million-dollar operation, the operators have all the risk."
She also warned against gifting everything to the spouse, as remarriage or a lawsuit after an accident could put the estate at risk.
"So many ranchers just hope everything works out," she said. "Hope is not a plan. Then, there are those who get so fixated on having the absolute best plan, but that's impossible. Generally, just know what you want and get it in writing. Right or wrong, make a decision and stick with it. The most important thing is your kids need to have clarity and simplicity, so they can understand your wishes completely. You've got to just buck up and get it done."
For Wilkinson, who has also practiced law for 25+ years specializing in agricultural law and estate planning, protecting his family's operation was a no-brainer.
"Our family operation consists of three brothers, and we own land together," said Wilkinson. "With family limited partnerships and an LLC, we have been able to include the next generation. From a business standpoint, we needed to answer questions about what would happen if one of us passed away. We couldn't just bury our head in the sand and hope it goes away. I wouldn't put our kids in that position of not having a plan in place."
Wilkinson said the hardest part about estate planning is just getting started.
"The idea of estate planning is more intimidating for folks than it is in reality," he said. "Once you sit down, you cover a lot of topics that everybody tends to avoid. We aren't seeing a lot of changes in estate taxes coming down the pike, so the big issue right now is just getting producers to sit down and discuss how to turn their estate over to the next generation. With the rapid increase in land values, how do we do that effectively without having to pay Uncle Sam a ton of money? This is the question producers really need to answer for themselves and get it down on paper."
Thompson's presentation at the SDCA Convention was sponsored by Zoetis in conjunction with the annual Zoetis Cattlemen's College.