From
Ivette Santaella
Law Office of Ivette M. Santaella
 231 Market Place #255
San Ramon CA 94583
925-698-3711
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Farming or ranching is more than a means of livelihood – it is about
preserving a legacy and unique way of life. Unfortunately, many farmers
and ranchers don’t fully protect their legacy with an up to date
estate plan. An out of date or inadequate estate plan could result in
a farm or ranch that has been passed down for generations ending up being
sold and converted into non-agricultural use.
Sadly, farmers and ranchers are not the only ones who avoid making or
updating an estate plan – many others, including business owners
and parents, also avoid planning, which can cut their legacy short. In
this issue you will learn about three common estate planning mistakes
farmers, ranchers, and others make and how you can avoid them.
Lesson #1 – Make a Plan and Keep it Up to Date
Like farmers and ranchers, others have complex estate planning needs.
For example, you may be a small business owner who has children who want
to continue the business and children who do not, or you and your spouse
may have a blended family or children with differing needs. This complexity
can make it difficult for you to decide what to do, which may result in
no estate plan being created at all. On the other hand, you may have taken
the time to create an estate plan but failed to maintain and adjust the
plan as your life and family have changed.
Planning Tip #1:
If you do not have an estate plan, you need to seek expert advice about
your planning options and assurance that your goals can be achieved. You
will need to work with a team of advisors (including attorneys, accountants,
bankers, and insurance specialists) who can help you create a plan that
will work for your current situation.
If you already have an estate plan, you need to understand the importance
of keeping your plan up to date as life events happen (births, deaths,
marriages, divorces, illnesses, bankruptcies, lawsuits, jackpots) and
laws are modified or repealed. As your personal and financial situations
change, your team of advisors (including attorneys, accountants, bankers,
and insurance specialists,) will help you update your plan so that it
will work for your new situation.
Lesson #2 – Don’t Rely on Joint Accounts and Beneficiary Designations
Like many farmers and ranchers, you may believe that the easiest way to
plan your estate and avoid probate is to own property in joint names with
family members, establish payable on death (POD) or transfer on death
(TOD) accounts, and name family members as beneficiaries of your life
insurance policies and retirement accounts. Relying on joint accounts
and beneficiary designations is a huge mistake on many fronts.
First and foremost, you are giving up control of your real estate and
other property by owning it jointly with others. In many cases, business
entities (corporations, partnerships, and limited liability companies)
or trusts are better options for maintaining flexibility, minimizing liability,
and retaining control.
While you may have taken the time to make an estate plan, the use of joint
property with rights of survivorship, POD or TOD accounts, and individual
beneficiary designations on life insurance policies and retirement accounts
can frustrate the intent of your plan. This is because these assets pass
outside of your will or trust. In addition, outright distributions by
rights of survivorship will not be protected from creditors, predators,
and lawsuits.
Finally, although joint and beneficiary assets will avoid probate, these
assets will still be included in your taxable estate. This may create
an estate tax liability at the state and/or federal level without a well-planned
means for payment since the assets will go directly into the hands of
your beneficiaries. In turn, other property that passes through intestacy
or a will or trust will be used to pay your estate tax bill, potentially
creating unfair and unequal inheritances.
Planning Tip #2:
How property is titled dictates who inherits it. You need to coordinate
assets held in business entities and trusts with assets that are jointly
owned or pass under a beneficiary designation. Otherwise your intended
heirs may end up with nothing and payment of your estate tax bill may
cause unintended consequences.
Lesson #3 – Don’t Overlook Liquidity Needs
Incapacity and death are expensive. Aside from day-to-day family expenses
and medical bills, attorneys, accountants, trustees, and other administration
expenses need to be paid. To make matters even more challenging, federal
estate taxes are due within nine months of death, and state death taxes
are also typically due within this same time frame.
Where will your family get the cash to pay these expenses? Like farms
and ranches, a primary residence, vacation home, investment real estate,
collectibles, and a family business are illiquid. Without properly planning
for immediate and long-term cash needs, your family may be forced to quickly
sell your real estate and other illiquid assets at a reduced rate.
Planning Tip #3:
You need to assess your liquidity needs and create a plan for managing
debt and expenses upon your incapacity or death. Your financial advisor,
insurance specialist, and banker can assist you with securing lines of
credit and the proper amount of disability insurance, long-term care insurance,
and life insurance. You should also consult with an experienced estate
planning attorney to help you create a trust, business entities, and other
liquidity strategies.
Takeaways for Business Owners and Others
Like farmers and ranchers, you may have unique circumstances that require
specialized estate planning solutions. You need to assemble a team of
professionals to help you create and maintain a plan that will preserve
your legacy. We are experienced with helping farmers, ranchers, and others
achieve their estate planning goals. Please call us if you have any questions
and to arrange for a consultation.
This newsletter is for informational purposes only and is not intended
to be construed as written advice about a Federal tax matter. Readers
should consult with their own professional advisors to evaluate or pursue
tax, accounting, financial, or legal planning strategies.
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