Green Horizons

Material discussed herewith is meant for general illustration and/or informational purposes only. Please note that individual situations can vary. This information is not intended to be a substitute for specific individual tax, legal or investment planning advice.

You may recall that David and I requested volunteers at the 2008 Tree Farm Conference to be the subject of a case study in legacy and estate planning. We would like to thank all of the landowners that expressed an interest in being the subject of our legacy project. Unfortunately, I could only take one candidate for my plan.

The subject family is one that I feel is representative of a majority of the tree farm owners in Missouri. Of course the names have been changed and I have taken the liberty of changing some of the other identifying issues such as farm location and employment. I am sure many of you will see yourselves in this subject and their circumstances. This first installment will introduce the family and provide a background that I will build upon in future articles.

Mr. and Mrs. Dogwood are in their mid ‘50s and have two children, both young, college-educated adults on their own and not married but living close to home. Mr. and Mrs. Dogwood both have full time jobs and work on the family farm, located several hours away. They can visit the property only one weekend each month, sometimes every other month.

Mr. Dogwood’s father (age 89) is the original owner of the farm and still lives close to the farm, but is physically unable to participate in its management and has been under 24-hour in-home care for about a year.

Mr. Dogwood and his dad have incorporated the farm under a Limited Liability Corporation (LLC) with each having a 50 percent ownership interest. Both Mr. Dogwood and his father purchased the property from a neighbor, so they both have the same cost basis.

Dad’s interest is actually owned by his Irrevocable Trust. This trust is an outstanding estate planning tool that will allow the property to appreciate in value outside of his estate and will be passed to Mr. Dogwood, Dad’s sole heir, at his death. The downside of this trust is that it is, as the name implies, IRREVOCABLE. He has turned the property over to the trustee of the trust to manage, which happens to be Mr. Dogwood. The language of trust mandates that the trust proceeds and assets cannot be used for the benefit of dad. Therefore, as you can see, this strategy must be fully evaluated prior to entering into it.

The farm consists of 427 acres, two-thirds of which is forested and under a management plan consisting of seven stands. Timber has been harvested three times in the past 20 years with the next scheduled harvest in 2010. They are receiving income from oil and gas leases, hunting leases and pasture leases totaling approximately $18,000 per year. The farm is currently utilizing contractors to accomplish tasks specified in the management plan and meet annually with a consulting forester to keep the plan up to date.

As you can see, this family is very interested in keeping the farm in the family. They have put some transition, tax and protection strategies in place, but got a little bit of a late start for implementing some risk management strategies. The use of a Limited Liability Corporation provides some protection for their personal assets and the trust provides for an easy transfer of assets as well as potential estate tax savings.

One planning issue that was not implemented was ensuring against estate depletion should Dad have to enter a Long- Term Care facility. The Deficit Reduction Act of 2005 may have an adverse impact on the Dogwoods should Dad need care. There is a 60-month look-back period when applying for Medicaid. Because the trust was established in 2007, should dad need Medicaid assistance, this law could create complications if he applies for benefits before 2012. Some people will use Long-Term Care insurance to provide an adequate buffer time for the transfer of assets without being impacted by the look-back period. Mr. Dogwood’s Dad does not have this insurance and is ineligible for it at this point.

The Dogwoods have engaged the services of some members of the estate planning team during their planning. Specifically, they hired an attorney to draft the trust and set up the LLC. Their CPA handles the tax issues. They have had an ongoing relationship with the consulting forester to ensure proper management of the property.

Members not included were an insurance agent and financial advisor. If these members had been used early in the process, some of the risk management issues may have been implemented. All in all, the Dogwoods are doing all they can at this stage to ensure a seamless transition of the farm to the second generation.

The next installment will begin the discussion of planning the transfer from Mr. and Mrs. Dogwood to their children and the issues involved in that process. The Dogwoods are young enough and healthy enough that, by properly employing the transition team and their suggested transfer strategies, they can make the transition to the third generation even easier.