providing timely, critically objective
information to producers, professionals
and agribusinesses concerning the
application of important developments
in agricultural law and taxation
2321 N. Loop Drive, Suite 200 n Ames, IA 50010 n (515) 294-5217
Common Mistakes in
Agricultural Estate Planning
& Leasing
Erika Eckley, Staff Attorney
Center for Agricultural Law and Taxation
2321 N. Loop Drive, Suite 200 n Ames, IA 50010 n (515) 294-5217
Contact Information
Erika Eckley
• (515) 294-5217
• www.calt.iastate.edu
2321 N. Loop Drive, Suite 200 n Ames, IA 50010 n (515) 294-5217
What is estate planning?
The overall process of making decisions as to how property is to pass to others, during one’s lifetime and at death.
– The key to estate planning is articulating objectives
• The parents together
• The parents individually
• The on-farm heirs
• The off-farm heirs
2321 N. Loop Drive, Suite 200 n Ames, IA 50010 n (515) 294-5217
Common goals include:
• Minimize taxes at death
• Minimize probate costs and delays
• Conserve property during life and after death in accordance with estate planning goals
• Provide financial security
– Parents in retirement
– Family member with a disability
2321 N. Loop Drive, Suite 200 n Ames, IA 50010 n (515) 294-5217
The Eckley Family
2321 N. Loop Drive, Suite 200 n Ames, IA 50010 n (515) 294-5217
Crucial estate planning steps
• Examination of how property is owned or
held
• Review of family insurance program
• Advisability of lifetime gifting
• Alternatives for disposing of property
during life
2321 N. Loop Drive, Suite 200 n Ames, IA 50010 n (515) 294-5217
Federal Estate Tax
• In 2013, the federal exemption is $5.25 million per person or $10.5 million per married couple.
• The tax rate increased from 35% to 40%.
• Portability remains
– Married persons can use combined estate tax exemption when an election is made after death of first spouse
• The annual exclusion for gifting in 2013 is $14,000 per year, per person.
2321 N. Loop Drive, Suite 200 n Ames, IA 50010 n (515) 294-5217
Illinois Estate Tax
• $4 million exemption in 2013
• Top rate is 16%
• Marital deduction exists for assets passing
to certain qualifying trusts for benefit of
surviving spouse
2321 N. Loop Drive, Suite 200 n Ames, IA 50010 n (515) 294-5217
Federal Estate Taxation
• What is included in the gross estate?
– In General
• The gross estate is the totality of property that the
federal estate tax reaches
– All property interests of decedent at moment of death
– The decedent’s portion of tenancy-in-common property
– Property owned in joint tenancy
2321 N. Loop Drive, Suite 200 n Ames, IA 50010 n (515) 294-5217
Gross Estate
• Retained Interests
– The value of property transferred by the decedent over which at the time of death the decedent held a power to revoke, alter, amend or terminate the transfer
• Income retention for life
• Retained life estate
• i.e. Gifting several farm properties before death, but retaining the right to live on the property and landlord’s share under a crop share lease
2321 N. Loop Drive, Suite 200 n Ames, IA 50010 n (515) 294-5217
Gross Estate
• Gifts within three years of death
– Some property that is transferred within three
years of death is pulled back into the estate.
• Retained life estates
• Transfers taking effect at death
• Revocable transfers
• Life insurance policies
2321 N. Loop Drive, Suite 200 n Ames, IA 50010 n (515) 294-5217
Deductions from Gross Estate
• Administrative expenses – If allowed under local law, and are reasonable
and necessary administrative expenses.
• Decedent’s obligations – If founded on promises or agreements that
represent bona fide obligations contracted for full and adequate consideration in money or money’s worth. (Promissory notes given to children or grandchildren without consideration not deductible)
2321 N. Loop Drive, Suite 200 n Ames, IA 50010 n (515) 294-5217
Deductions
• Indebtedness against estate property
– Amounts of mortgages or liens against property
included in the gross estate are deductible
• Taxes
• Marital Deduction
– Unlimited
• Charitable Deductions
2321 N. Loop Drive, Suite 200 n Ames, IA 50010 n (515) 294-5217
Common Estate Planning Mistakes
• Simply doing nothing.
• Not staying informed as to changes in the law that could impact the plan.
• Failure to review (and update if necessary) the plan.
• Not meeting regularly with advisors.
• Making the plan too complex.
• Not being able to find the will.
2321 N. Loop Drive, Suite 200 n Ames, IA 50010 n (515) 294-5217
Common Estate Planning Mistakes
• Failure to fund a trust.
• Failure to utilize annual exclusion gifts (larger estates).
• Failure to plan to have sufficient liquidity at death.
• Failure to check the beneficiary designations on non-probate property and to keep them up-to-date.
• Not taking into account issues that arise because of order of death of the spouses.
• Failure to check titles to property.
• Not maintaining good records.
• Failure to use disclaimers post-death to correct errors in the estate plan.
2321 N. Loop Drive, Suite 200 n Ames, IA 50010 n (515) 294-5217
Common Estate Planning Mistakes
• Too much property owned in joint tenancy (large estates) or too little property owned in joint tenancy property (small estates).
• Failure to balance property ownership (in terms of value) in larger estates.
• Utilization of a simple “I love you” will in larger estates.
• Gifting a remainder interest, and retaining a life estate and thinking the property will avoid inclusion in the estate.
• Incorrect ownership of life insurance.
2321 N. Loop Drive, Suite 200 n Ames, IA 50010 n (515) 294-5217
Common Estate Planning Mistakes
• Not understanding the difference between
“equal” and “fair”.
• Making gifts or loans to the children without
clarification in the will.
• Not discussing succession planning with the
children.
• Not having a well drafted buy-sell agreement.
2321 N. Loop Drive, Suite 200 n Ames, IA 50010 n (515) 294-5217
Common Estate Planning Mistakes
• Naming only one child as a financial
fiduciary when there are multiple children.
• Not having a medical power of attorney
and living will.
providing timely, critically objective
information to producers, professionals
and agribusinesses concerning the
application of important developments
in agricultural law and taxation
2321 N. Loop Drive, Suite 200 n Ames, IA 50010 n (515) 294-5217
Agricultural Leases:
Common Issues
2321 N. Loop Drive, Suite 200 n Ames, IA 50010 n (515) 294-5217
Agricultural Leases
• Lease not in writing
– verbal leases can be misconstrued
– lack of discipline in negotiating terms
– lack of protections for both parties if problems
– memories fade without documentation
2321 N. Loop Drive, Suite 200 n Ames, IA 50010 n (515) 294-5217
Agricultural Leases
• Failure to properly terminate lease
– In Iowa, Sept. 1 must be sent or lease
continues into next year under same terms;
– In Illinois, notice must be provided four
months prior to end of leases by October 31
(typically) for year to year leases (always
includes oral leases) ending at end of
February.
2321 N. Loop Drive, Suite 200 n Ames, IA 50010 n (515) 294-5217
Agricultural Leases
• Landlord’s failure to reserve access rights.
– Lease grants possession to tenant
– Problems occur if landlord wants right of
inspection, ability to enter land to hunt, or
other reasons for entry without specifying
these rights in the lease.
2321 N. Loop Drive, Suite 200 n Ames, IA 50010 n (515) 294-5217
Agricultural Leases
• Failure to designate timeframe for
payment of rent and amounts
2321 N. Loop Drive, Suite 200 n Ames, IA 50010 n (515) 294-5217
Agricultural Leases
• Failure to keep a copy of the lease after
signing.
– Both parties need a copy
– Have 2 copies that both parties sign
– Keep it in a safe location
– Don’t rely on landlord, tenant, or government
agency to keep copies
2321 N. Loop Drive, Suite 200 n Ames, IA 50010 n (515) 294-5217
Agricultural Leases
• Failure to provide for repayment option for
improvements if lease terminates
– tiling
– storage bin
– upgrade to equipment based on reliance
– Fertilizer/lime application
2321 N. Loop Drive, Suite 200 n Ames, IA 50010 n (515) 294-5217
Agricultural Leases
• Locking in lower than market rates in long-
term leases
– long-term tenant situations with elderly
landlords
– family members taking advantage
2321 N. Loop Drive, Suite 200 n Ames, IA 50010 n (515) 294-5217
Agricultural Leases
• Failure to require documentation of good
husbandry practices
– i.e. addition of lime, potash, etc., from tenant
– include documentation to be provided every
year
– include right to do soil survey
2321 N. Loop Drive, Suite 200 n Ames, IA 50010 n (515) 294-5217
Agricultural Leases
• Not discussing the legal ramifications with family to ensure everyone in agreement regarding rights and responsibilities
– wife signing as spouse to be able to recoup investment in tiling, because she is employee for benefits, but she wants to be able to continue farming and run operation if anything happens to husband and hates signing as “spouse”
2321 N. Loop Drive, Suite 200 n Ames, IA 50010 n (515) 294-5217
Agricultural Leases
• Failing to change form lease terms when
different arrangements negotiated
between parties, creating either an
inconsistency in the lease or failing to
accurately describe agreed upon terms.
2321 N. Loop Drive, Suite 200 n Ames, IA 50010 n (515) 294-5217
Agricultural Leases
• Failure to read the lease before signing.
2321 N. Loop Drive, Suite 200 n Ames, IA 50010 n (515) 294-5217
Thank You
• (515) 294-5217
• www.calt.iastate.edu