Estate and Transition Planning
We mourn the passing of Paul L. Wright, an agricultural attorney, mentor, leader, professor, farmer advocate, and the founder of our OSU Agricultural Law Program. Paul passed on August 17, 2024, due to cancer.
I remember receiving my first letter from Paul Wright. I had sent him my resume with the hope he and law partner Tony Logan would hire me for their law firm, Wright & Logan. I was a young attorney and I knew about Paul Wright and his respected reputation as an agricultural attorney. Paul sent me a return letter encouraging my interest in agricultural law and requesting an interview. A few months later, I was working with Paul. That letter gave me the opportunity I so badly wanted, and I’ve held onto it for years.
Paul didn’t set out to become an agricultural law attorney, his passion for agriculture led him there. He grew up on a farm in Coshocton County, Ohio, was active in 4-H and vocational agriculture, and decided to pursue a degree in agricultural education at Ohio State. He then began his career in 1959 as the county 4-H agent for OSU Extension in Madison and Clinton counties. But it didn’t take long for him to recognize his curiosity and natural aptitude for farm management and agricultural economics. While he was completing a Master of Science degree in Agricultural Economics, OSU Extension promoted Paul into a Farm Management Area Extension Agent position in Fremont, Ohio.
Paul once told me how his work as a Farm Management Specialist for OSU kept pulling him into legal issues, and that he felt compelled to try to solve those issues for farmers. I can easily imagine that, as his desire to help farmers seemed always at the front of his mind. That desire took him to the University of Toledo College of Law for a law degree, and he soon transitioned to become the first Agricultural Law Specialist for Ohio State University, a faculty member in what was then the Department of Agricultural Economics. He shared stories with me about his days of driving across Ohio to teach at farm meetings, equipped with boxes of files, articles he had written, and “overhead transparencies.” Paul said he always tried to be prepared for “whatever legal issue they might want to talk about.” He loved teaching about those legal issues and resolving problems and questions from farmers. In addition to teaching farmers, Paul also established the first agricultural law course at Ohio State, a course still offered to undergraduate students in the College of Food, Agricultural, and Environmental Sciences.
With his knowledge in both law and economics, Paul and Ohio State were well equipped to help farmers during the economic crisis that hit farming in the mid-1980s. He talked with me about the often painful meetings and kitchen table sessions he had with farmers back then and that despite his knowledge, he again felt the need to do more for farmers. He began connecting with other attorneys across the Midwest and eventually, those connections resulted in the formation of the American Agricultural Law Association—the first official recognition of lawyers who work in agriculture as “agricultural attorneys.” Paul shared that he and other founding members of AALA recognized the role they could fill for farmers and the need to constantly expand their knowledge base and broaden the network of agricultural attorneys and other professionals who could help farmers. He taught for educational sessions at AALA annual conferences, served on committees and the Board of Directors, and was elected to a term as the AALA President. In 1994, the AALA awarded Paul its highest honor, the Distinguished Service Award.
For years, Paul maintained connections with AALA colleagues across the country and met regularly with a group of AALA friends who constantly identified and analyzed issues and needs in agricultural law. When he brought me into that community of colleagues, I always walked away learning something I could use in my work as an agricultural attorney. That type of networking was a common practice for Paul that provides us wisdom today. In his 1998 presidential address to the AALA, Paul challenged association members to become better attorneys through networking within the agricultural community. “I wonder how many differences are grounded in a lack of thorough communication, or a lack of taking the time to create a forum to really hear another’s thoughts and knowledge,” Paul stated. “With confidences and resources, there is hardly an agricultural law issue that cannot be refined and improved as a result of networking.”
Paul retired from OSU in 1988, but many in Ohio know that Paul’s career didn’t end at that point. He wanted to be a private attorney who could personally advise the farm community. Paul partnered with Tony Logan to form the law firm of Wright & Logan, which was likely the first “agricultural law firm” in Ohio focused on representing farmers. That's when I met Paul and joined the firm. As a young attorney working with Paul, I lived in both awe and fear—awe for all he had accomplished in agricultural law and fear that I would not live up to his knowledge level and standards. To the contrary, Paul always encouraged and taught me. I often struggled to keep up with his expertise, but he never expressed disappointment in me.
Wright & Logan later transitioned to Wright Law Co., LPA. When Robert and Kelly Moore joined, the law firm became the current Wright & Moore Co., LPA, now led by Ryan Conklin. Like the farmers he admired, Paul never completely retired from Wright & Moore but continued in an “Of Counsel” capacity and served clients up to his death. In his private law practice, I’d estimate that Paul served hundreds of farm families and prepared hundreds of business, estate and transition plans. He was well known in Ohio’s agricultural community and had clients that stretched across the state. I wonder how many times farmers and others have asked me, “do you know Paul Wright?” and how many times my answer of “yes, I used to work for him” opened doors for me and gave me immediate credibility. In Ohio’s agricultural community, Paul was a celebrity.
The Ohio agricultural community honored Paul by inducting him into the Ohio Agricultural Hall of Fame in 2006. I recall receiving an invitation from Paul to sit at his table for the induction ceremony. He was nervous, excited, and humbled. It was something I had witnessed before with Paul, when Ohio State recognized him with its Distinguished Alumni Award in 2003. Those awards meant so much to him, and he said once that he couldn’t believe a farm boy who had spent his time fixing fences in Coshocton County could ever be so fortunate to have the career and recognition he had.
Paul’s career, recognition, and impact on Ohio agriculture certainly won’t end with his passing. Being the meticulous and creative estate planner he was, Paul developed a succession plan for agricultural law in Ohio. In 2006, he established an endowment with OSU’s College of Food, Agricultural & Environmental Sciences to further agricultural law and farm management education in Ohio. Having followed in Paul’s footsteps as the agricultural law specialist at OSU, I have been able to use Paul’s funds in the OSU Agricultural & Resource Law Program to provide educational programs for attorneys, farmers and Extension educators and scholarships for law students and undergraduate students interested in agricultural law. Paul's goal was to ensure a long-lasting commitment to agricultural law and farm management at Ohio State, and his endowment will carry that goal well into the future.
I’ve thought of trying to locate that old worn letter I received from Paul when I asked him to hire me. That letter, and knowing Paul, changed my life. Because of Paul, I and many of my colleagues can repeat his words about the unbelievable fortune of being an agricultural attorney in Ohio. But I don’t need the letter to remind me of Paul, as his presence has always and will always be embedded in me, in others he has mentored, in Ohio State, and in Ohio’s agricultural community. The loss is immeasurable, but so is the legacy he left us.
Tags: Paul L. Wright, Paul Wright, Agricultural Law
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Farmers often face the challenge of being "land rich, cash poor." While they may have significant wealth tied up in land and other assets, they can lack sufficient cash to cover expenses, taxes, or distributions when planning for the farm’s transition to the next generation. This "land rich, cash poor" dilemma can complicate farm transition and succession planning, creating potential obstacles for a smooth handover of the farm.
Life insurance can provide a solution to this problem by introducing liquidity into an estate or trust, which can be used to cover expenses, taxes, and distributions to heirs. By incorporating life insurance into a farm transition plan, legal complexities and costs can be reduced, and the transition process can be streamlined. However, life insurance, like any estate planning tool, may be appropriate in some situations but not in others. This bulletin aims to explain different types of life insurance and how they can be used effectively in farm transition planning. Given the complexities of life insurance policies, it is essential to work with insurance and legal professionals to ensure that life insurance is appropriately included in your plan.
Types of Life Insurance Policies
Term Life Insurance:
Term life insurance provides coverage for a specific period (e.g., 10, 20, or 30 years). If the insured passes away during the term, the policy pays a death benefit to the beneficiaries.
- Pros: Lower premiums compared to permanent life insurance; simple and straightforward; ideal for temporary needs like covering a mortgage or debt.
- Cons: No cash value accumulation; coverage ends at the term’s expiration unless renewed, often at a higher premium; not ideal for long-term estate planning.
Whole Life Insurance:
Whole life insurance provides lifetime coverage with a guaranteed death benefit and includes a cash value component that grows over time. Typically, the premiums are fixed for the life of the policy.
- Pros: Permanent coverage with a guaranteed death benefit; cash value can be accessed through loans or withdrawals; fixed premiums for the life of the policy.
- Cons: Higher premiums compared to term life insurance; cash value grows slowly in the early years; limited flexibility in adjusting the death benefit or premiums.
Universal Life Insurance:
Universal life insurance offers permanent coverage with more flexibility than whole life. Policyholders can adjust premiums and death benefits within certain limits and earn interest on the cash value.
- Pros: Flexible premiums and death benefits; cash value accumulation with potential for higher returns; can be tailored to specific estate planning needs.
- Cons: More complex than whole life insurance; interest rates may fluctuate, affecting cash value growth; requires careful management to avoid policy lapse.
Variable Life Insurance:
Variable life insurance provides permanent coverage with investment options for the cash value. Policyholders can invest the cash value in various sub-accounts, such as stocks and bonds.
- Pros: Potential for higher returns through investment options; tax-deferred growth of the cash value; permanent coverage.
- Cons: Higher risk due to market exposure; policy performance depends on the chosen investments; requires active management and carries higher fees.
Difference Between Universal Life and Variable Life Insurance
Universal life and variable life insurance are both types of permanent life insurance, but they differ in flexibility, investment options, and risk. Universal life offers adjustable premiums and death benefits, with cash value growth based on an interest rate set by the insurer. This makes it a more predictable option with lower risk, though it offers moderate growth potential as the cash value isn't directly tied to market performance. Variable life, on the other hand, requires fixed premiums but allows policyholders to invest the cash value in various sub-accounts, offering the potential for higher returns. However, it introduces greater risk as the cash value fluctuates with the market, and there’s no guaranteed minimum cash value. Variable life policies are also more complex, requiring active management and often incurring higher fees. In summary, universal life provides predictability and flexibility, while variable life offers the potential for higher returns with greater risk and complexity.
Second-to-Die Life Insurance Policy
A second-to-die life insurance policy, also known as survivorship life insurance, covers two individuals, typically a married couple, and pays the death benefit only after both individuals have passed away.
- Pros: Second-to-die policies generally have lower premiums than two individual life insurance policies since the insurer pays out only after both insured individuals have died, reducing their risk exposure. Additionally, they are often easier to obtain for couples where one partner has health issues, as the payout depends on both individuals passing away.
- Cons: The death benefit is delayed until both individuals have passed, which may not provide financial assistance when the first spouse dies. This delay makes the policy less useful for covering immediate expenses or providing cash flow to the surviving spouse. Furthermore, second-to-die policies do not offer cash flow benefits during the policyholders' lifetimes, as the payout occurs only after death.
In the next post, we will discuss the advantages and disadvantages of life insurance as well as strategies to incorporate life insurance into a farm transition plan.
The costs of long-term care (LTC) continue to rise, creating potential financial risks for farmers who want to protect their farm assets for future generations. In the last two years alone, the cost of in-home care has increased by more than 20%, while nursing home costs have risen by 10% to 15%. According to the 2023 Genworth Cost of Care Survey, the following are the most recent costs of long-term care services:
- U.S., Home Health Aide: $75,552/year
- Ohio, Home Health Aide: $73,212/year
- U.S., Nursing Home – Semi-private room: $104,016/year
- Ohio, Nursing Home – Semi-private room: $100,380/year
These figures make it clear why long-term care costs are a significant risk to the continuity of the family farm. Even a short stay in a nursing home can incur substantial costs.
According to data from the Administration for Community Living, individuals turning 65 have a 69% chance of needing some form of LTC, with an average of three years of care required. Typically, one of these three years is spent receiving at-home care provided by spouses or family members, one year in paid at-home care, and one year in a nursing facility. For farmers needing LTC, this equates to an average of approximately $180,000 in costs per person, and double that for a married couple. However, some individuals will require more than three years of care, which can cause LTC costs to increase significantly.
Medicaid can help cover LTC costs, but it has stringent eligibility requirements. One major condition is that Medicaid limits the amount of assets an individual can own and still qualify for benefits. In Ohio, an unmarried person cannot own more than $2,000 of countable assets. Most farmers will not qualify for Medicaid without aggressive planning. Another critical factor is the five-year look-back period, during which Medicaid reviews any asset transfers made within five years of applying for coverage. If assets were gifted or transferred below market value during this period, Medicaid may impose penalties, delaying eligibility for benefits.
Given these costs, statistics, and Medicaid rules, it is crucial for farmers to explore strategies that can minimize the risk of LTC expenses depleting their farm assets. Here are some common strategies farmers can consider:
- Gifting Assets: Transferring farm assets to family members while retaining enough to cover immediate needs can help reduce exposure to LTC costs. However, this strategy should be approached with caution, as it is subject to Medicaid’s five-year look-back period.
- Irrevocable Trusts: Placing farm assets in an irrevocable trust can protect them from being considered in LTC cost calculations, ensuring that the farm remains intact for future generations. However, this plan is also subject to Medicaid’s five-year look-back period.
- Self-Insurance: Farmers with significant savings or assets may choose to self-insure by setting aside funds specifically for potential LTC expenses, thereby reducing the need to sell farm assets.
- LTC Insurance: Purchasing long-term care insurance can provide coverage for LTC costs, offering a buffer against the high expenses associated with nursing home or in-home care. However, LTC insurance can be expensive, and not everyone will qualify for coverage.
- Wait and See: This strategy involves holding back enough assets to pay for five years of LTC while awaiting Medicaid eligibility.
- Do Nothing: Some individuals with adequate income to cover LTC costs may not need to take action to protect assets.
- Combining Strategies: Often, a combination of these approaches can provide the most robust protection, balancing immediate needs with the long-term preservation of farm assets.
By understanding the risks and costs of LTC and carefully considering these strategies, farmers can take proactive steps to help ensure their farm's legacy remains intact, even in the face of unforeseen health care costs. Always consult with legal and financial advisors to tailor the best approach for your specific situation.
For more information and a detailed discussion on LTC, see The Long-Term Care and the Farm publication available at farmoffice.osu.edu.
The OSU Agricultural & Resource Law team just returned from Cincinnati after hosting the Second Annual Cultivating Connections Conference. What a thrill to bring together 121 professionals from across the country who work in farm transition planning! The group consisted of attorneys, tax professionals, educators, farm legacy counselors, financial planners, and law students. The commonality among our attendees: the desire to help farms transition their assets and operations to the next generation.
The old saying, “it takes a team,” rings true for farm transition planning. The conference illustrated the myriad of topics and expertise required to assemble a farm transition plan and the hurdles a farm family faces. Like the long line of hurdles that awaited our Olympic athletes in their races this week. But the difference is that farm families aren’t always trained to overcome those hurdles, let alone at a high speed. That’s where the professional team comes in—to help move a family over the hurdles it faces.
Here are a few takeaways on the “hurdle” topics we focused on at Cultivating Connections.
- Don’t jump right to the plan--talk first. An important first step to building a plan: get the family talking and thinking. David Marrison of OSU Extension recommended strategies for working with farm families, including understanding the legacy; encouraging the family to assess its strengths, weaknesses, opportunities and threats; and helping the family deal with the elephants in the room.
- Organize, organize, organize. A huge amount of information goes into a farm transition plan and organizing that information is a challenge. Kelly Moore of Make Hay Consulting demonstrated a new tool that can help, the FARMS spreadsheet, currently under development by OSU Extension.
- Know what’s in an appraisal. We use appraisals regularly in farm transition planning and estate administration, but do we understand what goes into an appraisal and what limitations it has? Tim Harpster, an appraiser with Consolidated Appraisal Services Company, answered those questions.
- Divorce is a threat to reckon with. But a well drafted pre-nuptial agreement can help reduce the impact a divorce can have on a farming operation, as Susan Montgomery of Gottlieb, Johnston, Beam, Dal Ponte PLL explained. Farm transition planners also need to understand the process of divorce and parenting plans, and how they can affect a farm family.
- Be careful with business entity discounting. Whether for “lack of marketability” or “lack of control,” business entity discounts can reduce the value of an estate and limit federal income tax exposure—but they need to survive IRS scrutiny. Peter Woodlock of Youngstown State highlighted issues with discounting.
- It’s time to think about the 2025 estate tax sunset. There are strategies to employ now to prepare high-wealth farms for the possible reduction of the federal estate tax exemption in 2025. David Malson of Barnes and Thornburg LLP walked us through a few of those strategies.
- We need to encourage and mentor more rural professionals. There's an alarming shortage of legal and tax experts who can advise farm owners and operators in rural areas. Beth Rumley of the National Agricultural Law Center led a panel of young attorneys--Johnny Cottingum of Wright & Moore, Eli Earich of Barrett, Easterday, Cunningham and Eselgroth, and Jennifer Harrington of Iowa State University--to discuss issues and solutions for reducing these "rural deserts."
- Know the ethics rules. When an attorney represents a farm couple, farm family, and/or farm operation, lack of awareness about potential issues with confidentiality and conflicts of interest can get an attorney in trouble. Jesse Richardson of West Virginia College of Law laid out the rules of professional responsibility that can affect farm transition planning.
- Plans can differ. The conference ended with a case study that challenged all to assess a family’s situation, its farm transition plan, and the administration of its estate and federal tax return. A range of ideas and analysis by conference attendees emerged. What we learned: there can be different paths to the same goal—different ways to jump the hurdles. But in all cases, it takes a team of professionals to get the family through those hurdles.
Learn more about the Cultivating Connections Conference on the Farm Office website. Consider joining us next year for the third annual conference, hosted by Iowa State University’s Center for Agricultural Law and Taxation, on August 4 and 5, 2025 in Ankeny, Iowa. And to stay involved with professionals involved in farm transition planning, consider joining the Association of Farm Transition Planners by signing up for the list serve.
Tags: Cultivating Connections, farm transition, Estate Planning, business planning farm succession
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Join us for another "Planning for the Future of Your Farm" workshop on August 22, 2024 from 9:00 am to 4:00 pm in northeast Ohio. This popular workshop aims to help farm families have difficult conversations and learn strategies and tools to transfer farm ownership, management, and assets to the next generation. Extension Farm Management Field Specialist David Marrison will join Robert Moore of the OSU Agricultural & Resource Law Program to present the workshop.
Workshop topics include: Developing Goals for Estate and Succession; Planning for the Transition of Control; Planning for the Unexpected; Communication and Conflict Management; Legal Tools and Strategies; Developing Your Team; Getting Your Affairs in Order; and Selecting an Attorney.
The registration fee is $25 per person and includes lunch, refreshments, and course materials. Registration deadline is August 16, 2024. This program is made possible at a discounted rate due to the generous support from the Hertzer Family Trust.
Extension Educator Lee Beers at the Trumbull County Extension office is the local host for the workshop. Contact Lee with questions at 330-638-6738 or via email at beers.66@osu.edu. For more information about the workshop, visit go.osu.edu/farmsuccession.
Tags: planning for the future, Estate Planning, transition planning
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As the 2026 deadline for the significant reduction in the federal estate tax exemption approaches, high net worth individuals and estate planning professionals are seeking effective strategies to mitigate potential tax burdens. One possible strategy is the Spousal Lifetime Access Trust (SLAT), a tool that can offer substantial tax advantages while providing financial security for spouses. Our latest bulletin, "Using Spousal Lifetime Access Trusts in Estate Plans", delves into SLATs, offering an explanation of their benefits, mechanisms, and considerations.
Understanding SLATs
A SLAT is an irrevocable trust designed to provide income to a beneficiary spouse while removing the principal assets from the donor spouse’s taxable estate. This strategy can significantly reduce estate taxes and ensure financial stability for the beneficiary spouse during their lifetime. The following are some of the key components and characteristics of SLATs:
- Irrevocability: Once assets are transferred into a SLAT, the trust cannot be modified or revoked, and the assets cannot be returned to the donor spouse. This permanence is crucial for excluding the assets from the donor spouse's taxable estate.
- Trustee Management: A trustee, who can be the beneficiary spouse, another individual, or multiple co-trustees, manages the SLAT’s assets. The trustee’s role is to ensure that the assets are used according to the trust’s terms and in the best interests of the beneficiary spouse.
- Beneficiary Distributions: The beneficiary spouse receives income from the trust during their lifetime, providing ongoing financial support. Upon the beneficiary spouse’s death, the remaining trust assets are distributed to designated beneficiaries, such as the couple’s children, free of estate taxes.
Estate Tax Advantages of SLATs
SLATs offer two primary mechanisms for reducing estate taxes:
- Exclusion from Taxable Estates: Assets transferred to a SLAT are excluded from both the donor and beneficiary spouses’ taxable estates. This means that any future appreciation of these assets is not subject to estate taxes.
- Pre-Exemption Reduction Transfers: By transferring assets to a SLAT before the federal estate tax exemption is reduced, individuals can lock in the current higher exemption amount. Any value exceeding the new, lower exemption amount set for 2026 is not "clawed back" into the estate, providing significant tax benefits.
Practical Considerations
While SLATs offer substantial benefits, their effectiveness depends on careful planning and consideration of several factors:
- Appreciation of Transferred Assets: The strategy is most beneficial when the transferred assets are expected to appreciate in value, as the growth occurs outside the taxable estates.
- Exceeding the Exemption Amount: SLATs are particularly advantageous for individuals whose wealth exceeds the new estate tax exemption amount. Large transfers made before the reduction can result in significant tax savings.
Advantages and Disadvantages
Like most estate planning strategies, there are both advantages and disadvantages. The advantages include:
- Exclusion from Estate: Assets transferred into a SLAT are not included in either spouse’s estate, protecting any appreciation in value from estate taxes.
- Lifetime Benefits: The beneficiary spouse can receive income and, in some cases, principal from the trust, providing financial support during their lifetime.
- Asset Protection: SLATs offer a level of protection from creditors, safeguarding the assets from potential claims against either spouse.
Disadvantages to consider are:
- Irrevocable Nature: The donor spouse loses control over the assets once they are transferred into the SLAT, which can be a drawback for individuals who prefer flexibility.
- Dependency on Spousal Relationship: The effectiveness of a SLAT is tied to the stability of the marriage. Divorce or the death of the beneficiary spouse can impact the donor spouse’s ability to benefit indirectly from the trust income.
- No Step-Up in Basis: Heirs do not receive a step-up in tax basis upon inheriting assets from a SLAT, potentially resulting in significant capital gains taxes.
Conclusion
The Spousal Lifetime Access Trust (SLAT) is a valuable estate planning tool that can help reduce estate taxes, especially in anticipation of the potential reduction in the federal estate tax exemption in 2026. While a SLAT is not suitable for everyone, it can be effective in specific situations, particularly for individuals with highly appreciating assets or those who can gift assets near the current federal estate tax exemption limit. Implementing a SLAT requires careful planning and close collaboration with legal and tax advisors. As always, consult with an experienced attorney and tax advisor to ensure that a SLAT aligns with your estate planning goals and complies with all relevant laws and regulations.
For more detailed information and practical insights, see the new bulletin, "Using Spousal Lifetime Access Trusts in Estate Plans" available at farmoffice.osu.edu.
We're building a forum for professionals who meet a critical need: helping farm operations transition to the next generation. The second annual Cultivating Connections Conference is for attorneys, tax professionals, appraisers, financial planners, educators and others who work in farm transition planning. The conference is an opportunity to discuss laws, consider new tools, analyze planning strategies, work through a case study, and meet other professionals. If farm transition planning is what you do, we hope you'll join us for the conference in Cincinnati, Ohio on August 5 and 6. For those who want to attend but can't travel, we also provide a virtual attendance option.
Cultivating Connections Conference highlights include:
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Timely topics. Sessions include preparing for the 2025 tax sunset, utilizing business entity discounts, understanding rural appraisals, drafting prenuptial agreements, divorce impacts on transition planning, implementing the estate plan and estate tax return, communication strategies, organizing client information, and ethical issues in farm transition planning.
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Expert speakers. A faculty of experienced attorneys, accountants, academics, and appraisers will share their knowledge and insights.
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Problem solving. A real-life case study will provide an opportunity for collaborative in-depth analysis of practical farm transition planning techniques, estate planning considerations, and tax implications.
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Relationships. Attendees can meet new peers, share experiences, and build relationships with a network of other farm transition professionals.
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Continuing education credits. We offer Continuing Legal Education credits for Ohio and Iowa, IRS Continuing Education credits, and assistance applying for credits in other states.
The University of Cincinnati College of Law is the site of this year's conference, hosted by the Ohio State University Agricultural and Resource Law Program. Conference co-sponsors are Iowa State University's Center for Agricultural Law and Taxation and the National Agricultural Law Center. The three institutions partnered on the inaugural conference last year, and have since formed the Association of Farm Transition Planners to continue supporting the nation's farm transition planning professionals.
The Cultivating Connections Conference agenda, list of speakers and registration are at https://go.osu.edu/cultivatingconnections. The website also highlights attractions and events for conference attendees, such as the nearby Cincinnati Zoo, Kings Island, the Newport Aquarium, and the Great American Ballpark, where the Cincinnati Reds will host the San Francisco Giants on August 4. Cincinnati is a prime location for those who want to combine farm transition learning with a little summer fun. We hope to see you there!
Tags: farm transition planning, Cultivating Connections, Estate Planning, succession planning
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The landscape of federal estate taxes is poised for significant change in 2026, with the potential reduction of the federal estate tax exemption on the horizon. Currently, the exemption stands at $13.61 million per person for 2024. However, without congressional intervention to extend or make permanent the current exemption, it is expected to drop to around $7 to $7.5 million, adjusted for inflation, in 2026. This looming reduction brings a sense of urgency for farmers and individuals with substantial estates to consider strategic planning to mitigate future tax liabilities.
The OSU Agricultural & Resource Law Program has released a comprehensive bulletin, “Gifting to Reduce Federal Estate Taxes”. This bulletin delves into the nuances of gifting as a viable strategy to reduce federal estate taxes. It explores various gifting options, their implications, and the potential benefits and drawbacks associated with each approach.
Types of Gifts and Their Implications
The bulletin categorizes gifts into two primary types: annual exclusion gifts and lifetime credit gifts.
- Annual Exclusion Gifts: These are gifts of up to $18,000 per person, per year, to an unlimited number of recipients. This type of gift is not subject to federal gift tax for either the giver (Giftor) or the receiver (Giftee). For example, a grandparent can gift $18,000 to each of their ten grandchildren, amounting to $180,000, without incurring any federal gift tax. This strategy is particularly effective for those slightly over the estate tax exemption threshold, as multiple small gifts can cumulatively reduce the taxable estate.
- Lifetime Credit Gifts: These are larger gifts that exceed the annual exclusion limit and count against the federal estate tax exemption. For instance, if a mother gifts a farm worth $1,018,000 to her daughter, the excess amount over $18,000 (i.e., $1,000,000) reduces the mother’s estate tax exemption. While no immediate gift tax is due, the exemption is decreased by the value of the large gift. This strategy can be advantageous for gifting appreciating assets, as future value increases occur outside the Giftor’s estate, effectively reducing potential estate tax liabilities.
Strategic Gifting to Optimize Estate Planning
The bulletin outlines several strategies to optimize estate planning through gifting:
- Annual Exclusion Gift Strategy: By consistently making annual exclusion gifts, individuals can gradually reduce their taxable estate. This method is beneficial for those with many potential gift recipients and can effectively lower estate value over time. However, for those with significantly higher estate values, this strategy may have limited impact due to the relatively small amount per gift.
- Lifetime Credit Gift Strategy: Making large lifetime credit gifts before the 2026 exemption reduction can be a powerful tool. For example, a high-net-worth individual might gift $13.62 million in 2024, capturing the higher exemption before it potentially decreases. This preemptive action can save heirs millions in future estate taxes, although it requires careful consideration of the Giftor’s financial security post-gifting.
- Appreciating Assets: Gifting assets expected to appreciate significantly can maximize the benefit of lifetime credit gifts. By transferring these assets out of the estate, future appreciation is not subject to estate taxes, providing a substantial tax-saving advantage.
Considerations and Potential Drawbacks
While gifting can offer substantial benefits, it is not without potential drawbacks. The bulletin emphasizes the importance of understanding these implications:
- Loss of Stepped-Up Basis: Gifting eliminates the possibility of a stepped-up basis at death, potentially increasing capital gains tax for the Giftee upon the sale of the gifted asset.
- Loss of Control and Income: Gifting requires relinquishing control and ownership of the asset, which can be difficult for those reliant on the income generated by the asset.
- Risk of Mismanagement: The risk of the Giftee mismanaging or losing the gifted asset to creditors is a concern, which can sometimes be mitigated through business entities or irrevocable trusts.
The OSU Agricultural & Resource Law Program’s bulletin provides valuable insights into the strategic use of gifting to reduce federal estate taxes. As the potential reduction of the estate tax exemption looms, understanding and implementing these strategies can significantly impact future tax liabilities for farmers and individuals with substantial estates. However, due to the complexity and potential consequences of gifting, it is crucial to seek professional legal and tax advice before taking action.
For a detailed discussion on gifting strategies and their implications, access the full bulletin “Gifting to Reduce Federal Estate Taxes” at farmoffice.osu.edu.
Those familiar with serving as an executor or navigating probate understand the daunting nature of the task. The process often entails numerous filings and can extend over several months or even years. Consequently, seeking legal counsel is frequently necessary to navigate this complex procedure and ensure the estate is managed appropriately. One common question concerning the engagement of attorneys for probate concerns their fees: what are their charges?
The Ohio Revised Code allows attorneys to receive "reasonable fees" for their services in aiding with estate matters. However, Ohio law doesn't offer a specific definition of what constitutes reasonable fees, nor does it prescribe a straightforward formula for determining them. Ultimately, it falls upon the county probate judge to decide whether an attorney's fees are reasonable for overseeing estate administration. Given the potentially burdensome task of assessing fees for each estate, many county probate courts set standardized rates that estate attorneys can charge, thereby streamlining the process.
The probate rates vary from county to county but generally range from 1% - 5% of the total value of the estate. As an example, the following are the probate rates for Brown County, Ohio:
For all personal property:
5.5% on the first $50,0000;
4.5% for $50,000 - $100,000;
3.5% for $100,000 - $400,000;
2.0% above $400,000.
For real estate:
1% for all real estate transferred to a spouse;
2% on the first $200,000 transferred to a non-spouse;
1% over $200,000 transferred to a non-spouse.
Let's examine the potential probate fees for a medium-sized farm located in Brown County. This farm comprises $1,000,000 worth of real estate, $500,000 of machinery, $300,000 in crops/livestock, and $200,000 in savings/investments. Under these circumstances, an attorney could charge up to $37,500 in legal fees, which would be automatically approved by the probate court.
Probate fees work well for smaller/simpler estates. In fact, attorneys are sometimes justified in asking for more than the county rates to cover their fees. However, for farm estates, especially with significant real estate, the county probate rates can cause permissible legal fees to become very high. For example, a large farm estate in Brown County with $5 million of land and $2 million of equipment/crops/livestock would result in permissible legal fees of $97,500.
To tackle the issue of high legal fees in farm estates, two strategies can be employed. Firstly, opting out of using the county rates to determine legal fees can be beneficial. The county rates represent the maximum fees that the court will approve but are not obligatory for attorneys to charge. For farm estates, billing on an hourly basis often leads to substantially lower legal fees compared to using the county rates. Therefore, when engaging an attorney for estate assistance, inquire about their estimated fees based on both the county rates and an hourly basis. If the hourly rate proves to be less expensive than the county rates, simply proceed with hiring the attorney based on their hourly rate. It's crucial to recognize that you always retain the option to request an attorney to bill on an hourly basis instead of using the county rates.
The second option is to avoid probate. The same $5 million dollars of land that can cost $50,000 to probate can be transferred for a few hundred dollars using a transfer on death affidavit. It is relatively easy to transfer any titled asset outside of probate. Bank accounts, investments, vehicles and business entities can all be transferred using transfer on death or payable on death designations. Especially for financial accounts, an attorney may not even be needed to transfer the asset to the beneficiaries. Let’s consider this point using an example:
Farmer owns $5 million of land and $2 million of equipment and crops in Brown County, Ohio. As already provided above, county probate rates would allow legal fees for probating the estate to be up to $97,500. Before death, Farmer executes a transfer on death affidavit transferring his land at death to his children. Farmer also sets up a single-member LLC for his farming operation and transfers his equipment and crops into the LLC. He then makes his LLC ownership transfer on death to his children. Now, when Farmer dies, his $7 million of assets can be transferred outside of probate with only a minimal amount of paperwork needed.
By spending perhaps a few thousand dollars on a transfer on death affidavit, an LLC and minor paperwork at death, Farmer can save his heirs up to $97,500. Avoiding probate is a great way to minimize legal fees for an estate. For more information on avoiding probate, see the Legal Tools for Avoiding Probate bulletin available at farmoffice.osu.edu.
Farm estates are not obligated to adhere to the county probate rates. In fact, it's possible to title many, if not all, assets in a manner that bypasses probate altogether. For assets that do undergo probate, it's advisable to inquire with the estate attorney about the fees based on both the county rates and an hourly rate. While some extensive and intricate farm estates may still incur substantial legal fees even if probate is avoided and hourly rates are applied, for many farm estates, the legal fees could be significantly lower than those dictated by the county rates.
Tags: probate, county probate rates
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The Cultivating Connections Conference, an annual event dedicated to farm transition planning, is returning for its second year on August 5th and 6th, 2024. This year's conference will be held at the University of Cincinnati College of Law and will convene farm transition planners—attorneys, accountants, educators, and other professionals—from across the country.
Cultivating Connections serves as a forum for learning, discussing, and collaborating on the latest strategies, tools, and legal and tax aspects of farm transition planning. The conference fosters a supportive community dedicated to preserving the legacy and sustainability of family farms for future generations.
Conference Highlights:
- In-depth sessions and workshops: Featuring a real-life case study, the conference delves into practical farm transition planning techniques, estate planning considerations, and tax implications.
- Networking opportunities: Attendees can connect with peers, share experiences, and build relationships with a network of farm transition professionals.
- Expert speakers: The conference brings together a distinguished faculty of attorneys, accountants, professors, and other professionals who share their knowledge and insights.
- The Association of Farm Transition Planners: This newly formed association offers ongoing support and resources for farm transition professionals beyond the conference.
Registration and More Information
For detailed information about the Cultivating Connections Conference agenda, speakers, and registration, please visit https://go.osu.edu/cultivatingconnections or use the QR code below. For more information or questions, contact Robert Moore (moore.301@osu.edu).
About the Cultivating Connections Conference
The Cultivating Connections Conference is a partnership between The Ohio State University Agricultural & Resource Law Program, Iowa State University Center for Agricultural Law & Taxation, and the National Agricultural Law Center.
Tags: Cultivating Connections, Farm Transition Conference
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