Green Horizons

In the last issue of Green Horizons, Kirk detailed the issues that were present in the “Dogwood Case Study.” In that real life situation, the current landowner passed away prior to completing his succession plans and left a few problems for his heirs, regarding the transition of the family tree farm to the next generation. One of the issues that the family faced was the need for additional liquidity. The need for liquid assets to pay for estate settlement expenses is not an uncommon situation. In fact, one of the obstacles that has thwarted many farm and timberland owners for years, is the need for liquid cash to pay for estate taxes. In many cases, the family forestland property had to be sold by the heirs to generate the cash to pay the estate taxes – a real tragedy!

Currently, there is no estate tax on transfers occurring in 2010 due to the “sun-setting” of the prior law. (See Death Tax Update, page 6.) Many tax experts do expect Congress to reinstate the estate tax, or some form of it, at some point in the future. However, regardless of the future of the estate tax in this country, there are numerous other needs for liquid cash in the succession planning process for timberland owners:

• To pay off remaining debts. If the woodland will pass with any significant debts attached to it, heirs may find it difficult to pay-off the note obligations. Liquid cash could increase the likelihood that the property will be retained in the family.
• To provide operating capital for the continued operation of the timberland/tree farm. New heirs may not have the expertise, or time, to operate the tree farm, or manage the woodland, in the same manner as the previous generation. Sufficient operating capital will allow the heirs to pay property taxes and operating expenses (or hire someone to perform the necessary maintenance) so that the woodland can be retained in the family for the long term.
• To “equalize” the estate. Often, some heirs are not interested in owning/operating the family woodland. It would be unwise to try to force them into such a long-term commitment if their heart is not in it. Other assets, such as liquid cash, can be given to those heirs, while the family forest can be transferred to others who have the interest and ability to continue the legacy.
• To allow for the future expansion of the family forestland. Sometimes the threats to the family property come from neighboring farms. A pool of liquid cash can be used to acquire adjoining properties when they become available. This would allow motivated heirs to correct poor management decisions on neighboring properties, or avoid sub-division and/or development of adjoining lands.
• To purchase the interests of any co-owners. If a given family-owned property is jointly owned (i.e. with other relatives), life insurance payable to the heirs of the deceased would allow the funds necessary to buy the other interests in the property.

For those families interested in preserving the family forestland, there are several potential sources of liquid cash:

• Savings – if available in the estate
• Liquidation of investment assets (i.e. stocks and bonds) – although these assets are often already “spoken for.” These assets are frequently needed to provide income for living expenses of a spouse or other heirs. If not, they could be sold to generate cash for the forestland planning.
• Borrowing – caution should be used in depending on this strategy. The uncertainties of the credit markets, interest rates, and the willingness of lenders to lend, makes this option unpredictable.
• Life insurance proceeds – this can be an attractive option if available, since the proceeds received are generally tax free and the cost (the cumulative premiums over time) are often less than the death benefit. There are two sources of life insurance – existing policies on the landowner’s life, and a new policy taken out on the landowner’s life.

Many individuals have purchased life insurance for other purposes (i.e. mortgage payoff, college funding, or income replacement), during the course of their lives. Landowners should consider this potential need for liquidity before surrendering existing life insurance contracts. It may be smart to “recycle” these older contracts for use in the family forestland succession planning. If a new policy is required, care should be taken to structure that policy for the maximum tax impact. For example, the use of a life insurance trust to apply for, and hold, the life insurance is often recommended. A trust allows the insurance to be held by a third party, so the estate taxes are not increased by the death benefit. With this strategy, soliciting the advice of the legal and financial advisors on the succession planning team is highly recommended.

We have often heard the phrase “cash in king.” This is especially true for families trying to successfully pass a large and complex asset, like a piece of forestland, to the next generation. Access to an ample amount of cash can often allow the forestland to be transferred, managed properly, and kept in the family for future generations. We remind our clients of a simple truth – “cash will be as important to maintaining a tree farm after the landowner is gone, as it is while he (or she) is alive… probably more important.”

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. Please consult a qualified professional for legal advice/services.

David Watson is a financial advisor specializing in working with rural landowners, sportsmen and conservation-minded families.

Securities offered through Royal Alliance Associates, Inc., Member FINRA & SIPC.

Advisory Services offered through Pines Wealth Management, LLC, a Registered Investment Advisor, and is not affiliated with Royal Alliance Associates.

D.A. Watson & Company, 17263 Wild Horse Creek Rd., Suite 202, Chesterfield, MO 63005, 636.230.3900, 888.230.3999.