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.

First and foremost, I would like to apologize for not completing my installment for the fall issue. As you may have read, I lost my father unexpectedly and was preoccupied with handling his estate issues and had to put the article on hold. I’d like to thank all of you who let me know my family was in your thoughts and prayers.

I had intended to make this issue about the planning that Mr. and Mrs. Dogwood needed to put in place for a smooth transition to the third generation. However, Mr. and Mrs. Dogwood also lost his father since the last installment which provides us with an opportunity to evaluate the effectiveness of their plan.

As you may recall, in the first part of this case study, I discussed the transition planning and tools that the Dogwoods had in place to make the transition smooth at his dad’s death. It consisted primarily of an Irrevocable Trust in which his dad’s share of the farm was to be held. Unfortunately, as is the case with many trusts I have encountered, the Dogwoods did not understand, and the attorney did not communicate, that the assets to be placed in the trust actually had to be re-registered to the trust. Too many times, an individual will have a trust drafted and never complete the process by registering assets into the trust.

A trust is simply a stack of legal paperwork creating an entity. That entity can “own” assets and remove them from a person’s estate, but ONLY if the owner constructively transfers ownership to the trust. The attorney drafting the trust should provide the individual with directions on how to register the assets as well as assist in designating specific assets to be transferred. It appears that this did not happen for the Dogwoods.

So the planning they thought they had in place was not complete and the transition process has become much more complicated than they expected. As a result of not registering the farm in the trust, the Dogwoods found that they would be required to file additional paperwork with the state at a cost of $5,200 in attorney fees. Talk about rubbing salt in the wound! Mr. Dogwood’s dad passed away in March 2009 and, as of the writing of this article, the estate has not been completely settled.

Another unexpected issue arose once the Dogwoods began trying to settle the estate. The state in which the farm is located has a State Estate tax of 7 percent of any value over a $338,000 exemption. As you might expect, the value of his dad’s 215-acre ownership interest and home will exceed this exemption, so additional expenses will be incurred with this tax. This issue emphasizes the need to include a “local” CPA and financial planner in your transition planning. Had this been done, the resources to pay the tax may have been established through life insurance or other liquid assets. Fortunately for the Dogwoods, Federal Estate tax exemptions should be high enough in 2009 to preclude any taxes at the federal level.

Those of you planning for a smooth transition of your woodlands should keep the following checklist in mind:

1. Develop a “team” consisting of local professionals (attorney, CPA, financial planner, insurance agent, consulting forester);
2. If a trust is involved, transfer registration to that trust as soon as possible;
3. Plan for estate settlement costs;
4. Include estate preservation tools such as Long Term Care and life insurance in your plan.

In the next installment we will get back on track and begin a discussion of the Dogwood’s plan for the transition to the third generation. We’ve learned a lot over the past year and will be applying those lessons to the plan.