Estate Planning for Equine and Farm Owners
For many horse owners, the property that the family and horses live on is the centerpiece of daily life. Most people remember with vivid clarity the first time they visited their current farm and what caught their eye. For some it was a view of the mountains or that perfect pond, for others it was finally finding a barn that "Somebody built with some sense!" The land we and our horses live on is crucial to the continuation of horse sports into the new millennium. However, as we see the baby boom generation retire and pass away, this country will witness the largest transfer of wealth in history. How is this going to affect the horse industry today? Very drastically if the proper measures aren’t taken to plan for the transfer of property and assets on to the next generation!
The goal of this article is to provide a brief overview of the basic concerns regarding estate planning. Remembering the words of Winston Churchhill, “All men make mistakes, but only wise men learn from their mistakes.” Please realize that it isn’t you who suffers when your estate is poorly planned; it is your spouse, your children, and your grandchildren that will be affected. If you fail to take the proper steps now, a substantial portion of your assets may be lost. Every estate will be disposed of; either by you or the state and federal government. By doing nothing, you are allowing the government to make that decision for you. The following are some of the most common pitfalls of improper estate preparation:
- Excessive transfer costs: Simply put, many families may pay significant dollars for the inaction of senior family members. Estate tax law has a history of change. There are various laws that differ between federal estate tax law, and state specific law. Our current federal laws (as of 2015) allow each decedent to pass $5.25 million of assets free from Estate Tax; a married couple can pass $10.5 million. If an 800 acre farm was valued at $6,500/acre upon the death of a landowner, then it would be worth $5.2 million, and would trigger no Federal Estate Tax. However, that $6,500/acre value may be a low value depending on the various dynamics of the property. Many farmers and ranchers underestimate their property in regards to the $5.25 million federal estate tax exclusion. As an example of state specific inheritance tax rules, Oregon has an exemption amount significantly less than the federal limit - $1M. Reviewing and keeping up to date with the true value of property, and the overall net worth and balance sheet of the farm or ranch owner is very important. It is amazing how property might appreciate, retirement accounts may grow and many estates could start pushing towards that cap.
- Lack of liquidity: insufficient cash to pay administrative costs, taxes, and other settlement expenses. Many people count the value of the farm into the overall estate. While it is often a valuable asset, it is not a liquid one that cash can be quickly pulled from at fair market value. When a loved one passes away, do you want to sell the farm to have adequate cash on hand? No! In times of loss the security of the farm is often the biggest comfort. Many people also underestimate how much it will cost to settle their estates or how quickly the taxes and other expenses must be paid. Generally, federal estate tax must be paid in cash within 9 months of death. If a substantial amount of the estate is tied up in illiquid assets like large amounts of land and horses, a forced sale may occur to acquire the cash within 9 months. The sale may be made below market value which would add further strain on the needs for cash.
- Improper disposition of assets: When the wrong asset goes at the wrong time to the wrong person in the wrong manner, the result is often a troubling situation. Make sure beneficiaries are structured properly for various accounts and insurance policies. Is your 18 year old mature enough to handle large amounts of cash at your death? Also, don’t forget your animals. A lack of preparation can result in improper care or sale of the animals you lived your life around.
- Many people misunderstand a will to be the end-all-be-all of estate planning. Though it is a good place to start, there are many things to consider. A will is a legal document that describes how you want your property distributed and managed after your death. If you die without a will, the probate court distributes your estate according to state laws. During this often lengthy process, the will may be contested and it is a judge who decides the ultimate distribution, which may be different from your wishes. For many families, the drafting of a trust may be more effective to avoid probate costs than a will. Trusts are more than a means of distributing property at your death; they can help reduce estate taxes, provide liquidity for your heirs, prevent the costs and delays of probate and provide professional management of your assets.
This general information is meant to get you thinking. Have you and your spouse talked about the what-if’s? If you have a horse business, do you want it to continue after you are gone? Is there enough cash on hand to provide for the proper care of your horses if you and/or your spouse aren’t there to feed them tomorrow?
The key principle in estate planning is that you can’t eliminate the big mistakes in your estate plan until you’ve identified them. In the words of Benjamin Franklin, “An investment in knowledge pays the best interest.” Every family and individual, every year, should conduct a ‘financial fire drill.’ Establish an order of priorities and then develop and put into effect plans to make certain that you are on target to meet your financial security needs. Open communication between family members and business partners is critical to effective estate planning. Start talking, get the ball rolling, and don’t leave your estate and your horse’s fate up to chance!
Published: May 13, 2010; Updated: August 10, 2015
Filed Under: Equine
Revised 7-31-2015 from original article - published in Flying Changes April 2007
Author: Mackenzie has been actively involved in the northwest horse community for many years. She grew up eventing in Emerald Hills Pony Club, played polo while pursuing a Bachelor of Science degree at Oregon State University, and currently travels around the Northwest playing polo. Currently working for Medical Professionals Financial Group, she strives to bring strategic solutions to the unique needs of the veterinary and equine communities. Mackenzie would welcome any questions you have; please contact her at 503-697-0817 or email@example.com.*This information is a general discussion of the relevant tax laws. It is not intended for, nor can it be used by any taxpayer for the purpose of avoiding federal tax penalties. This information is provided to support the promotion of marketing of ideas that may benefit the taxpayer. Taxpayers should seek the advice of their own tax and legal advisors regarding any tax and legal issues applicable to their specific circumstances.
Advisory services offered through Medical Professionals Financial Group, a Registered Investment Advisor. Securities and additional advisory services through Independent Financial Group, LLC (IFG) , a registered broker-dealer and investment advisor. Member FINRA/SIPC. Medical Professionals Financial Group and IFG are not affiliated entities. Office of Supervisory Jurisdiction 310 N. State St. Suite 206 Lake Oswego OR 97034.