By: The American Academy of Estate Planning Attorneys
No day is typical on a ranch. Things always seem to come up that force you to change your priorities, whether it’s a cow in trouble as she gives birth, an implement that needs repairs, or harvesting a crop before the weather turns.
Ranching is not an easy life, but if it’s your life, there’s probably no other way you’d rather make a living. You’ve paid your dues, and you gladly cope with the ups and downs of being a rancher. Virtually every day, you tackle adversities and take measures to protect the value of your land, livestock, equipment, buildings, and home.
Yet you probably also ponder the future: “How can I protect my assets, plan for retirement, preserve the value of my ranch, maybe pass the ranch on to my children, or prepare to sell it? What if I’m injured or incapacitated? What if my spouse passes away?”
Let’s look at a family ranch business to see how one couple can take charge of their future by considering an “estate plan,” a legal and ethical way to deal with matters such as asset protection, the succession of the ranch, estate and income taxes, and leaving an inheritance when someone dies or becomes incapacitated.
Dale and Dana Jackson are ranchers with two children, Troy and Teresa. The Jacksons’ ranch has appreciated in value over the past several years. Their profits, though, have been flat for the last three years, so they have taken out loans to sustain the business. Their 22 year old son, Troy, has worked on the ranch since high school, and their daughter, Teresa, is away at college studying veterinary medicine.
Dale and Dana do not pay themselves much each year, but recently, they sat down and tallied up their assets, and they were pleasantly surprised. Their land is worth about $1.4 million, their savings and stock portfolio around $165,000, their equipment and livestock, $500,000 and the house, about $200,000. The value of the couple’s assets, which are all jointly-owned, equals approximately $2,465,000. They have a $465,000 loan with the ranch as collateral, which gives them a net worth of $2 million.
What Dale and Dana don’t realize is that they have a potential tax problem because they are “joint tenants.” If Dale should pass away, his half of the jointly-owned assets would pass to Dana automatically. Dana would have the entire $2 million in her estate, and if she passed in 2013 or later, the estate would owe $435,000 in estate tax.
However, if the Jacksons were to set up a Revocable Living Trust with assets passing to a Family Trust for the surviving spouse and the children, they could pass the entire amount without any estate tax. In other words, Dale’s half of the estate would pass to a Trust at death instead of adding to Dana’s assets. Yet, the family would still have access to the money.
An estate planning document such as a Revocable Living Trust could also be an effective tool if Dana or Dale were to become incapacitated. In that case, a Trustee or a Successor Trustee would handle affairs on their behalf, ensuring a smooth transition.
Yet another legal tool for the Jacksons is a Power of Attorney. A General or Durable Power of Attorney is typically used for financial matters, while a Health Care Power of Attorney, sometimes referred to as an Advance Health Care Directive, would allow a trusted person to act on behalf of the Jacksons on health-related matters.
Of special concern to the Jacksons is the succession of the ranch. They are glad their son wants to continue ranching, and they’d love to leave the ranch to him, but they also want to be fair to their daughter. If they bought a large life insurance policy, with the death benefit payable at the death of the survivor of the spouses, and used an Irrevocable Trust to hold the policy, there would be no income tax or estate tax due on the life insurance proceeds after their deaths. Plus, premiums on a plan with a survivorship policy are quite a bit lower than on a single life insurance plan. Such a policy could provide cash to pay off debts, keep the ranch going, and provide an inheritance for both of their children. The ranch could go to Troy, and the life insurance proceeds ensure that an equal amount of assets could go to Teresa. Yet another option is for the Jacksons to sell the ranch to Troy over time, using a buy-sell agreement.
Other considerations for the Jacksons, if they want to guard against hardship during an incapacity, are general health insurance plans or insurance plans for long-term care or disability.
The point is, planning is very important, and there is no better time to plan for your future and that of your ranch, than now. There are many options and legal tools that can protect your assets, minimize taxes, and provide for your family. The key is to consult with an attorney who is specially trained in estate planning. He or she can show you the best ways to preserve your ranch while leaving something behind for your loved ones.