Mistake #1: Believing that having a Last Will and Testament is an “estate plan.”
Many people think that “estate planning” is really just hiring a lawyer to draft a Last Will and Testament; however, it’s more complicated than that. A good estate planning attorney will have you complete a questionnaire giving him/her information on your family tree, assets and liabilities in order to help see the bigger picture. Keeping in mind the client’s objectives, the estate planning lawyer will help guide the client through the myriad of options available to decide the best strategy at that particular juncture in time. Your objectives will help guide the entire estate planning process and will be a guidepost to your estate planning attorney in helping formulate the correct game plan.
There are several useful estate planning tools that can be utilized such as a Last Will and Testament, business organizations (such as limited liability companies, corporations), different types of trusts, power of attorneys, health care proxies, buy-sell agreements, and life insurance.
Mistake #2: Believing that trusts should only be used by the rich.
In way of background, a trust is legal entity, created by the terms of a document drafted on behalf of a person, the grantor or settlor, who transfers assets into the trust to be held or used for the benefit of named people – i.e., the beneficiary(ies). A trustee(s), selected by the grantor, is placed in charge of the trust. A big advantage to trusts is that they pass by “operation of law” and avoid probate. This expedites the transfer process and helps a family maintain privacy. The probate process can sometimes be a lengthy process, tying up farm property for 1-3 years if there are complications. The avoidance of probate can be especially useful for farms that participate in federal farm programs.
There are many different types of trusts. Trusts can be revocable or irrevocable. In most cases, revocable trusts are recommended (e.g., Revocable Living Trust). Revocable trusts can be amended at any time. Irrevocable trusts can a useful mechanism for Medicaid planning in some states. Testamentary trusts can also be created within the Last Will and Testament, which can be especially useful if there are minors involved.
Importantly, trusts are akin to a business entity with its own accounting records and Federal Employer Identification Number (“FEIN”). Trusts can be “funded” with any type of property – proceeds from a life insurance policy, shares in a corporation, real property, livestock, bank accounts, etc. Trusts can be used to build wealth in a child’s name until the child reaches a certain age. For example, a trust can own cattle or pigs listing a child as the beneficiary of the trust until he/she reaches a certain age. Many trusts like this allow the child access in one-third (1/3) increments at 21, 25, and 30 years of age (or any age the parents or grandparents choose).
Mistake #3: Believing that “estate planning” is something that you do when you retire.
Even though someone who is over the age of retirement may be in a better financial position to hire an estate planning lawyer, a much younger person/couple with a significantly smaller estate may have a greater need for an estate plan. In the words of Neil Harl in his book titled Farm Estate & Business Planning (16ed):
“[a] young couple with minor children is generally least able to afford a breakup of property interests among heirs, the complications of property ownership by minors and erosion of family capital to pay debts and estate settlement costs in addition to ownership interests in a family business that are likely to pass to their off-farm brothers and sisters.”
Estate and succession planning is a life-long process that will morph along with the changes that life brings both to you and your family members.
Mistake #4: Forgetting that business entities can be a useful estate and succession planning tool.
Multi-generational farms can greatly benefit from some types of business entities such as limited liability companies, corporations (C-Corp or S-Corp), and limited partnerships. If a farm is run as a sole proprietorship, the business dies when the principal dies. Establishing a limited liability company, for example, allows for the elder generation to maintain management in the farming operation while gradually transferring ownership and responsibilities to the younger generation. Ownership units in the limited liability company can smoothly avoid probate with the use of a trust.
Mistake #5: Forgetting to “reality check” their estate plans.
Sometimes an estate plan might seem to work on paper, but once you start playing out hypothetical scenarios, the estate plan might be improved. The off-farm heir might not have the desire or the skillset to adequately manage the farm. The heirs to the farm might not get along with one another to be a cohesive management team. Realty test each possible scenario.
Mistake #6: Forgetting to regularly update the estate plan.
It is prudent to revisit your estate plan every 3-5 years or when there is a major life event (e.g., marriage, divorce, purchase/sale of major assets, bankruptcy, children). Estate planning leads to business planning, which leads to tax planning, which leads to business succession, which should lead to disaster planning, which should lead right back to estate planning; hence, estate and succession planning is a lifelong circle.
I’m actually pretty passionate about estate and succession planning for farmers or ranchers. In the words of Ben Franklin, “Failing to Plan is Planning to Fail.” And so many agriculture operations fail to pass to the next generation.. Please talk to an agriculture estate planning lawyer this week if you don’t feel confident that you have a workable plan in place.