Estate Planning for Equine Owners

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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 who 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 exclusion amounts are gradually increasing from $2 million in 2007 to $3.5 million in 2009. In 2010 there is no estate tax, and in 2011 the applicable exclusion amount remains uncertain. Estates that exceed the exclusion amount may be subject to federal tax ranging from 36%-55% (1). This can leave a large hole in what remains of the estate for heirs. You may be thinking, “My estate couldn’t possibly be over the exclusion amount, $2 million is a lot of money so I shouldn’t worry about estate tax." Remember the uncertainty surrounding the exclusion amount in 2011, the lower that amount remains, the more revenue the government gains in taxes. If the amount settles back to a $1 million exclusion, 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.

Probate issues

The ultimate goal of estate planning is to efficiently transfer assets and property from one generation to another. There are a few different ways this can be accomplished: 1) by passing through the probate process, 2) by right of a contract with named beneficiaries, or 3) by rights of survivorship whereby when one owner dies, everything transfers automatically to the other owner.

The probate process is one of the most important concepts to understand in estate planning. When an individual dies and leaves a will, his or her estate goes through probate, by which a state court supervises, administers and distributes the property. The probate estate includes all of the property that is in your name at the time of your death. Providing that there is no successful challenge in probate proceedings, the court will allow a final distribution of your estate after all debts and taxes are satisfied.

In the alternative, property owned by right of contract and by right of survivorship will pass outside the probate process. These assets avoid the delay and public record of the judicial system. Some examples of non-probate property includes: 1) property held in a trust where the property passes to others on death according to the terms of the document, 2) property owned in joint tenancy at death which passes to the surviving joint tenant automatically on death, 3) life insurance on your life that names a beneficiary other than your estate, and 4) qualified plans, such as 401(k)s and IRAs that name a beneficiary other than your estate.

Revocable living trusts

One of the more popular probate-avoiding estate planning tools is the revocable living trust. A revocable living trust creates a legal entity that owns your assets. You can dictate the provisions of the trust document which will control the disposition of the assets inside the trust during your disability or your death. For example, if you have certain wishes for a pet or a horse you can outline them within these trust provisions. The person who must follow the directions outlined in the trust is the trustee, they hold fiduciary duty. Typically, the initial trustee of a revocable living trust is you. Upon your death or disability, a successor trustee, whom you named in the trust document, takes over to distribute your property according to your wishes.

Equine assets in the estate

Please remember that anyone with assets, family, children or horses should evaluate an estate plan. If you have children, a will is necessary to ensure that if you die, you (and not a judge) have chosen a guardian for them. For those of us with horses, remember that with proper care and a little luck, horses can live for 25 to 30 years, sometimes even outliving their owners. When that happens, the surviving horses become tangible personal property in the estates of their deceased owners. Though subject to laws prohibiting cruelty to animals, the law treats surviving horses and other companion animals just like any other assets in the estate. Unless specific instructions are provided in an estate plan, the executor or administrator of the estate has the discretion to keep the equine asset in the estate, sell it at auction or by private treaty or otherwise humanely dispose of it, such as by euthanasia.

Pet trusts

Another trust which is becoming increasingly popular with pet owners is a pet trust. Several states, including Oregon, permit legally enforceable pet trusts so that individuals can transfer funds to an enforceable trust to provide for the care of their pet. In a pet trust, you name a trustee who will carry out your wishes for the animal, and provide detailed instructions for the distribution of trust funds for the animal’s care. In addition, you name a caretaker who will care for the pet if you cannot do so. The document should include the identity of the pet, the amount of compensation for the pet’s caretaker, and should specify additional details and instructions about the care of the animal, its habits and needs, end-of-life decisions, and other guidelines and instructions that would be important to the care and support of your companion animals.

Estate planning for pets and other companion animals like horses is a new niche, so you will want to seek out an attorney who is well-versed in this area of the law. When establishing any trust, however, you will need to hire an attorney to draft the trust, preferably a lawyer with experience in estate planning. Eden Rose Brown, an estate planning attorney out of Salem, OR has drafted many pet trusts over the years and has found that, “We’ve had a number of clients who feel that sometimes their pets are more important than their children.” She emphasizes that in the right situation, a pet trust is a responsible, loving thing to do for your pets and is an important part of a comprehensive estate plan.

It is important to understand that a trust is just an empty bucket until the appropriate assets are re-titled into the name of the trust. As we discussed above, the way the asset is titled dictates whether the asset will avoid probate. Many times clients spend a great deal of money to have an attorney draft a trust in order to avoid probate but never change the ownership of their assets. The consequences of this inaction may force some of these “unfunded” assets to go through probate. Therefore, it is very important that if you do set up a trust, be sure to use an attorney who knows how to assist you in the proper transfer of your assets into the name of the trust.

Estate planning is important

Though proper estate planning can sometimes be a complex process, having the right professional team can lift much of that burden. And while getting started can be daunting, remember the values that guide you and your family, and let those guide the process. Taking the time to think about these issues will preserve your life’s work for your family, your horses and your community.

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:

Filed Under: Equine

Author: Mackenzie Martin has been actively involved in the Northwest horse community for many years. She grew up eventing in Emerald Hills Pony Club and played polo while pursuing a Bachelor of Science degree at Oregon State University. Currently working for McCoy Foat Wealth Management 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 (971) 204-1200 or mbmartin@mccoyfoatwmg.com.

1) www.irs.gov
*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 or 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.

 

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