As dawn breaks over the ranch, you think of the chores that await you: tending the cattle; repairing the equipment; buying feed and supplies. The life of a rancher is not easy, but it has its rewards: a life close to family and nature. But, as you age and nature takes its course, how will you protect your family and preserve the ranch?
You try to plan to minimize the impact of adversities. Maybe you build ponds to assure adequate water. Maybe you hedge prices for your goods on the commodities markets. There are other obstacles for which you can plan, as well: incapacity, taxes, death, and business succession.
Let’s look at a typical ranch family: Mike and Betty and their two kids, John and Susan, live on the ranch and have an operation that usually produces enough to support the family, but they have their lean years. Their ranch has gone up in value over the past few years, even though they aren’t much more profitable. In fact, they’ve had to borrow against the ranch to make ends meet. John is active in the business, while Susan is in college with plans to become a doctor.
Mike and Betty do not make a great deal of income, so they are surprised when they total up their assets: Land $2,150,000, Home $250,000, Livestock $250,000, Equipment $500,000, Investments and savings $150,000. They also have a loan on the ranch of $300,000. So, their net worth is $3,000,000, which they own jointly.
If Mike and Betty do nothing, they will have a tax problem. Mike and Betty can avoid this problem by using proper estate planning. A Revocable Living Trust would allow the first of them to die to send his or her assets to a “Family Trust” for the survivor and their kids. While the family would have the use of the money, it would not be included in the survivor’s estate.
Proper estate planning, including a Revocable Living Trust, also helps provide a smooth transition in the event of incapacity. When the Trust is set up, the spouses typically are the Trustees, or managers of the trust. However, Mike and Betty would also name Successor Trustees to take over when they are no longer able to handle their affairs. Perhaps John and Susan would be the successors. Another way to protect against incapacity is through a Power of Attorney. This document allows the person appointed, the “agent”, to act on behalf of the “principal,” when the principal no longer can act for himself or herself. Typically, one has a Power of Attorney for financial matters and a different Power of Attorney for health care matters.
In addition to the handling of affairs during incapacity, there are ways to soften the financial blow during incapacity. Disability insurance, health insurance, and long-term care insurance can lessen the financial burden of disability.
Mike and Betty are lucky, they have a child who wants to take over the ranch down the road. But, how do they leave the ranch to John without being unfair to Susan? How do they ensure sufficient liquidity to service the bank debt after they are gone? One way to do this would be to have Mike and Betty purchase a $3,000,000 life insurance policy on the survivor of them. By using a survivorship policy, the premiums are significantly lower than a single life policy on either of them. If Mike and Betty use a properly drafted irrevocable trust to hold this policy, the death benefit would not be estate or income taxed at their deaths. This policy can be used to provide liquidity for the estate, pay off outstanding loans, and ensure there are sufficient assets for both John and Mary. If the premiums on such a policy were too great, or if they wanted to sell the farm during life, John could be allowed to purchase the ranch over time with a buy-sell agreement.
With a ranch, as with any business, planning is the key to success. A qualified estate planning attorney, one whose practice focuses on estate planning, can help you plan so you can protect your business and your family.
Compliments of the McGee Law Firm, Attorney Brandon McGee
Written By: The American Academy of Estate Planning Attorneys