Presented by:

April 2, 2013

Succession Planning forFarmers, Ranchers & Vintners

5555 Lakeview Drive, Suite 201Kirkland, WA 98033(425) 803-9500 | office@brislawnlofton.com

5555 Lakeview Drive, Suite 201Kirkland, WA 98033

(425) 803-9500 | office@brislawnlofton.com

C. Dennis Brislawn, Jr. J.D.

Principal in The Private Client Law Group

Member of a Washington Pioneer Family that homesteaded in Omak & Sprague (Wheat Growers)

25 years as an estate planning attorney with experience in family business transitions including Farms, Dairies, Forest lands and Vineyards

5555 Lakeview Drive, Suite 201Kirkland, WA 98033(425) 803-9500 | office@brislawnlofton.com

5555 Lakeview Drive, Suite 201Kirkland, WA 98033

(425) 803-9500 | office@brislawnlofton.com

• I/we Love the Land“Never sell my land!!”

• Accepting that Equal is not Fair Equity vs. Control

• Family Communications Do the kids all want/need the same thing? Should they? Can they?

Farm Family Issues

5555 Lakeview Drive, Suite 201Kirkland, WA 98033

(425) 803-9500 | office@brislawnlofton.com

Big Farm Family Issue

• “Exit” can be a planned or an unplanned event!

• What “Value” Does Our Farm Have to Players?– Heirloom?– Investment?– Commodity?

• What Should We think about?– Cash Flow– Fairness– Risks & Rewards– When to “Let Go”

Right to HarvestSell DevelopOr Subdivide

Exclusion

Right of Use

WaterRights

Access

Bundle of Property RightsBundle of Property Rights

Bill & Mary’s Story

Pasture of Perfection

Dairy Farm Family•3rd generation, same land•One kid involved in business, lives on farm, has grandchildren•One kid, professional, in city, has grandchildren

The Kids Today

• Susan is a “gem”– Dependable– Good with money

• John loves the farm– Good with farm; can

make anything grow– Not so good with

business– All like John

Bill and Mary’s Farm Plan• Estate of $2,000,000

• Retired & Secure

• Goals Met– Preserve Farm– Care for each other– Cut hassle & taxes– Help kids, keep peace

How Did They Get Here?

Three Phases of Planning

• You are healthy.

• You are legally incapacitated.

• You have passed on.

What should my plan do?

1. Protect Your Life Savings2. Apply Assets for Your Benefit3. Keep You in Control4. Keep you retired!5. Preserve Assets for Your Heirs6. Fulfill your legacy7. Produce Peace of Mind!

First – Adopt a Process

ESTATE ESTATE PLANNINGPLANNING

BUSINESS BUSINESS PLANNINGPLANNING

Financial Goals

The Three Liability DragonsThe Three Liability Dragons

Catastrophic RiskCatastrophic Risk

Loss of ControlLoss of Control

Income and Estate Income and Estate TaxesTaxes

Catastrophic RiskCatastrophic Risk

Loss of ControlLoss of Control

Income and Estate Income and Estate TaxesTaxes

Scary Facts• We are living longer and saving less.• 3 out of 5 people over 65 will spend time in a

nursing home as a result of being incompetent• Up to 65% of nursing home residents spend their

entire life savings within the first 12 months• Millions of lawsuits are filed in American courts

each year• 7 of 10 people have no estate plan

• You get one chance to get it right… Is a plan just a document? Or does it take some time and careful introspective thought?

Some Business Facts• 80% of all U.S. businesses are family

owned or managed– Accounts for 50% of the employment in the

U.S. and the GNP– 30% of family owned businesses survive

past the first generation– 15% survive past the second generation

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Small Business Succession

• Conflict among family members accounts for 60% of succession failures

• Heirs who are not prepared to manage the business are 25% of the failures

• Only 10% of failures result from taxes

… and you worked decades for this.

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Second – Business Plan

ESTATE ESTATE PLANNINGPLANNING

BUSINESS BUSINESS PLANNINGPLANNING

Financial Goals

Tools for Farm SuccessTools for Farm Success

Form of Business

•Landowner in business, and business will remain after incapacity or death of the landowner.•Asset protection is a key planning issue.•Form of business will impact income flow and taxes.•Most small farms will form as partnership, S Corporation, or Limited Liability Company (LLC).•Selection of a business structure should be done in consultation with an attorney and accountant.

Comparison of Business Structures*Comparison of Business Structures*

• Corporation– C Corporation– S Corporation

• General Partnership

• Limited Partnership

• LLC*Make sure to discuss taxes, fees, etc.

PartnersPartners

GENERAL

• Control, gets share of profits, compensation

• Unlimited Liability Exposure

LIMITED

• No Right to Management, gets share of profits

• No Liability Exposure

• Limited Transfer Rights, Return of Capital Later

Limited Liability CompaniesLimited Liability Companies

• Owned by members

• Managed by member or manager(s)

• Eliminates or minimizes corporate formalities

• Flexible tax treatment

• Disregarded entity (Sole proprietorship)

• Partnership

• S or C Corporation

CorporationsCorporations

•Owned by shareholders

•Overseen by Board of Directors

•Managed by officers

•President/CEO

•Treasurer/CFO

•Secretary

•Vice President(s)

Review of Critical DocumentsReview of Critical Documents

Articles of Incorporation/Certificate of Incorporation

• State Filing (Specific information)

• Business Name & Trade Names

• Resident Agent/Agent for Service of Process

• Business Purpose

• Capital Structure

• Voting Rights

• Indemnification

Review of Critical DocumentsReview of Critical Documents

Corporate Bylaws

•State Specific (to a degree)

•Corporate Governance

•Board of Directors

•Statutory Officers

•Voting Rights

•Indemnification of Officers and Directors

Review of Critical DocumentsReview of Critical Documents

LLC (Operating) Agreement

• State Specific (to a degree)

• Entity Governance (Member vs. Manager)

• Designation of Officers (Optional)

• Member Rights

• Democracy or Dictatorship?

• Concerns re Applicable Restrictions?

• Business Purpose

Consider Exit PlanningConsider Exit Planning

“Exit”, “succession”, or “transition” planning is the controlled transfer of the farm to someone else.

Consider that without a plan… You can mess it up. Family can mess it up. Partners can mess it up. Employees can mess it up. Cash flow can mess it up. Taxes can mess it up.

Third – Estate Plan

ESTATE ESTATE PLANNINGPLANNING

Business PlanningBusiness PlanningFinancial Goals

The First DragonThe First Dragon

CatastrophicRisk

CatastrophicRisk

Creditor ClaimsCreditor Claims

• STRESS !

• Loss of Privacy

• Delays and Hassle

• Attorney Fees

• Accounting Fees

• Court Costs

• STRESS !

• Loss of Privacy

• Delays and Hassle

• Attorney Fees

• Accounting Fees

• Court Costs

Types of ClaimsTypes of Claims

• Officer/Director Liability Officer/Director Liability (Corp.)(Corp.)

• Employee SuitsEmployee Suits• Business or Business or

Professional LiabilityProfessional Liability• DivorceDivorce• Tax LiabilityTax Liability• Creditor LawsuitsCreditor Lawsuits

• Officer/Director Liability Officer/Director Liability (Corp.)(Corp.)

• Employee SuitsEmployee Suits• Business or Business or

Professional LiabilityProfessional Liability• DivorceDivorce• Tax LiabilityTax Liability• Creditor LawsuitsCreditor Lawsuits

• Vicarious Liability for Other People

• Partnership Liability• Car Accidents

(Elderly?)• Unknown Claims

– Product Liability– Environmental Liability

• Vicarious Liability for Other People

• Partnership Liability• Car Accidents

(Elderly?)• Unknown Claims

– Product Liability– Environmental Liability

How do you mitigate catastrophic risks?

Catastrophe Odds Insure ?

• House fire: Risk 1:1200 Yes• Auto accident: Risk 1:240 Yes• Medical event: Risk 1:15 Yes• LTC Risk: 1:2 Yes

DO YOU PAY OR DOES AN INSURANCE COMPANY?

USE OTHER TOOLS TO ENHANCE INSURANCE…

The Second DragonThe Second Dragon

Loss of Control Loss of Control

Losing Financial Control

• Financial Loss of Control– Adequate income now?– Adequate principal now?– What about the future?– How do I analyze my current and future needs and compare to my “plan?”– How do I protect myself against the unknown?

Protect the Business “Engine”Protect the Business “Engine”This is business “succession” or “transition” planning

Transfer of the property or operation to another. First priority – Landowner & family considerations. Second priority – discussing decision with others. Third priority – establish the right legal tools.

Note: Tax considerations may be important.

Losing Legal Control (Disability)

• Guardianship is a “Trial”– Public Proceeding– Court decides what is “best”– Can be Humiliating– Inter-family strife and dissension– Costly in terms of money, time, emotions

Durable Powers of Attorney

• Inexpensive

• BUT Generally Give Absolute Power– Blank Checkbook for ALL Property– Few Instructions, If Any– Financial Institutions May Refuse

• Easy to Abuse

Losing Legal Control(Death)

• Probate is a “Trial”– Public Proceeding (?)– Court oversees settlement– Provides a Forum for disputes– Arguably costly in terms of money, time, emotions– Many estates are not well-planned

Option – a Living Trust Plan

• Retain Control• Disability Plan

– Detailed Guidelines

• Distribution Plan– Avoids Probate(s)– Retains Privacy– Detailed Guidelines

• Components– Funding DPOA– Health Care DPOA– Living Will– Limited CP

Agreement– Trust (+/- Tax

Provisions)– Pour Over Will

Lawyer’s Primary Tool Kits• Revocable Living Trust

– Customized Trust– Pour Over Will– Power of Attorney– Health Care Directive– HIPAA Waiver & Living Will– Property Agreement

• Will Plan– Customized Will– Power of Attorney– Health Care Directive– HIPAA Waiver & Living Will– Property Agreement

Lawyer’s Advanced Tool Kits• Irrevocable Trusts (Gifts)

– QPRT– Children’s Trust– Asset Protection Trusts– Dynasty Trusts, etc.

• Business Systems (Gifts)– Family LLC or LP– Buy-Sell Agreements

• Philanthropic Systems– Conservation Easements– Charitable Trusts

Estate Plans for Kids

• John’s Plan– Cotrustee– Primarily for Needs– Some now, later– Some for retirement– Asset Protection

features (marriage, business failure, etc.)

– Runs the farm

• Susan’s Plan– Elective Cotrustee– Liberal Distributions

above Needs– Asset Protection

features– Has say indirect say

in farm

– Dynasty Plan?

The Third DragonThe Third Dragon

Taxes Taxes

Income TaxesIncome Taxes

• Rates are High and may go higher

• “Inflation Tax”

• Fewer Deductions– No “Fun” Write-Offs

• Hard to Pass Income to Other Family Members

• Rates are High and may go higher

• “Inflation Tax”

• Fewer Deductions– No “Fun” Write-Offs

• Hard to Pass Income to Other Family Members

Death TaxesDeath Taxes

• Federal and State Estate Taxes

• Generation Skipping Transfer Taxes

THEY’RE STILL HERE!

• Federal and State Estate Taxes

• Generation Skipping Transfer Taxes

THEY’RE STILL HERE!

Techniques for Funding Estates Taxes

• Irrevocable Life Insurance Trust or Others May be useful for meeting the estate tax burden of an estate composed of illiquid assets

May provide liquidity for buyouts

• Create New Family Business Entities

A Family Investment CompanyA Family Investment Company

LLCLLC

(Stocks, (Stocks, Bonds, Etc.)Bonds, Etc.)

LLC 2 - LandLLC 2 - Land

LLC 1 - AptLLC 1 - Apt..

ManagerManager

(Entity?)(Entity?)

LLCLLC

(Farm Ops)(Farm Ops)

Benefits for Family

• Bill & Mary keep control

• Bill & Mary receive management fee & distributions

• Bill & Mary can share “fairly” with kids– Management of estate is better through

training and succession– Family income taxes may decrease– Estate tax is reduced

Opportunities for Children

• Real estate partnerships– If children own the operating entity, keep rents

low (to keep estate from growing as fast)– Mechanism for giving of partnership interests to

non-active family members

• Operating partnerships– Allocation of current earnings to younger

generation

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More Opportunities for Children

• Withdrawals by older generation create effective redemption of partnership interest– Each year, the older generation’s percentage

ownership declines

• Gifts of partnership interests to children while maintaining control

• Upon death, discounts available

• Leverage business loans to children

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Reducing Estate Tax

• Creative Use of Entities

Defer Tax on a Family Business (6166 – deferral)

Reduce estate tax by discounting… adjusting value of the business as a “going concern”

Valuation Adjustments• What is Your Company Interest Worth?

– Can’t be Easily Sold or Transferred– Can’t be Pledged– Can’t Demand Distributions– Can’t Force a Liquidation

• Going Concern Value is Substantially Less than the Liquidation (Asset) Value!

Valuation Adjustments

• Liquidation Value– Is the Asset Value Desired by the IRS– $1.00 of assets is $1.00 in share value

• Fair Market Value– Is the Going Concern Value– $1.00 of assets is $0.70 or less in share

value

Selling or Giving Assets

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Family Business Planning

• Family Involved as an Economic Unit

• Elder Generation May Retain Control

• Investment Efficiency - Work a Plan

Family Investments• Active Business

– C Corporation– Sales Company– Services Company

• Passive Business– Public Stock– C Corp Stock– LP or LLC

• Real Estate– Apartment Buildings– Raw Land

• Insurance

• Cash

Techniques for Minimizing Disputes

In all cases prepare a Buy-Sell Agreement requiring the active children to buy out the passive children and vice-versa.

• Puts and Calls• Long term buyouts to not jeopardize liquidity• Valuation with or without minority discounts

Equalizing Gifts Among Heirs1. Create two classes of ownership

• The class received by the active children would have managerial duties and would receive both a salary and a distribution from profits.• The other class would not have managerial duties and would not receive a salary, but would still receive a distribution from profits

2. Create two LLC’sThe Farm Operations LLC will be distributed to the activefarming children. The other LLC would own the farmland and lease it on a long term lease to the Farm Operations LLC

• General Rule – Hackl Test– Donee right to immediate use, possession or

enjoyment of property or income therefrom

– That provides substantial economic benefit

• Facts and circumstances

• Governing documents critical

5555 Lakeview Drive, Suite 201Kirkland, WA 98033

(425) 803-9500 | office@brislawnlofton.com

Gifts of Interests in Closely-Held Businesses

• IRC 2503(b)

• Must be “present interest” gift

• “An unrestricted right to immediate use, possession or enjoyment of property or income from property …” Treas. Reg. § 25.2503-3(b)

5555 Lakeview Drive, Suite 201Kirkland, WA 98033

(425) 803-9500 | office@brislawnlofton.com

SALE OF LAND

• Can sell various interests in the property.

• May retain a life estate interest. Can do installment sale (cash flow, defer tax)

• Requires market analysis of the property, including buildings and equipment.

• Especially important for sale to one child if landowner has others.

• Tax considerations for sale.

SALE OF ASSETS

• Capital gains or ordinary income tax– Where might rates go?

• Installment sale benefits

• Increase in tax basis for depreciation purposes for buyer

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LEASE OF PROPERTY

Lease - Two forms: Crop-share or Cash Farm Lease

1.Crop-share = where rent is paid by a share of crops produced.

2.Cash Farm Lease = traditional lease agreement.a. To a third party.

b. Landowner retains interest in property.

c. Lessee receives right to use the land and to remove crops.

d. Lease should define acceptable use, water use, responsibilities for care of the land.

TRANSFER OF DEVELOPMENT RIGHTS

Farmland preservation tool with significant potential to provide added income to rural landowners, while meeting growth management objectives for density in urban areas.

Right to develop property is part of the “bundle of rights” that comes with property ownership.

This development right can be sold and separated from the property.

Local governments can allow for the transfer of the development right of one parcel to another parcel.

Whiteacre40 Acres

Zoned Rural Ag1:5

Right to develop sold

Developer owns

development right

WhiteacreDeed

RestrictionLimited to 1:40

City allows greater

density in certain areas

with rural DR

Developer project

increases density in city area with TDR

Transfer of Development Rights

Preserving the Land

• Conservation Easements (share with public)

Allows land to be preserved

Income tax deduction/reduces estate tax

Lifetime or testamentary

5555 Lakeview Drive, Suite 201Kirkland, WA 98033

(425) 803-9500 | office@brislawnlofton.com

CONSERVATION EASEMENTSCommon charitable legal tool for the long-term protection of farm and forest land… a transfer of part of landowner’s right to develop or alter the land.

Provides immediate income to the landowner, income tax deduction, estate tax reduction in some cases.

Rights can be parceled in many ways: Right to develop Right to graze Right to produce crops Right to harvest crops Removal of valuable resources (i.e. minerals, timber)

CONSERVATION EASEMENTS

Examples: Easement to protect prairie habitat – may allow only

limited grazing. Easement to protect trumpeter swan habitat – graze

only at certain times. Purchase of development rights – landowner may

not build on or subdivide the property.

Fourth – Passing the Torch

ESTATE ESTATE PLANNINGPLANNING

BUSINESS BUSINESS SUCCESSIONSUCCESSION

Financial Goals

Bill and Mary’s Legacy• Estate of $2,000,000

• Retired & Secure

• Goals Met– Preserve Farm– Care for each other– Cut hassle & taxes– Help kids, keep peace

Their Story

Tools of Farm & Forest Transfer

5555 Lakeview Drive, Suite 201Kirkland, WA 98033

(425) 803-9500 | office@brislawnlofton.com

Estate•Disability Tools

– GDPOA vs. Living Trust– Health Care Documents– Liquidity Issues– Care Issues

•Death & Tax Planning– Will vs. Living Trust– Tax Exemption Planning– Remarriage Planning– Liquidity Issues

Business•Entities

– LLCs– Corporations

•Business Agreements– Leases– Management Contracts– Buy-Sells

Special•Conservation Easements•Dynasty Protection Trusts

5555 Lakeview Drive, Suite 201Kirkland, WA 98033

(425) 803-9500 | office@brislawnlofton.com

Financial Tools

• Agreements– Land use leases– Management contracts

• Sale– Selling to family– Selling to 3rd party– Value…– Rights

• Development

• Grazing

• Crop production, harvest

Protecting the Land

• Charitable Leverage– Conservation Easements

• Income tax deduction

• Estate tax reduction

• Perpetuate land use

Tools of Farm & Forest Transfer

Interdisciplinary Approach• Legal

– Control Tools– Risk Management– Quality of Life Plan– Legacy

• Financial/Insurance– Resources– Financial Plan– Risk Analysis– Policy Reviews

• Tax and Compliance– Tax Review– Tax Reduction and

Deduction Plan

Call us if we can help

The Private Client Law Group

5555 Lakeview Drive, Suite 201Kirkland, WA 98033(425) 803-9500 | office@brislawnlofton.com

PLAN FOR YOURSELF… BUT NOT BY YOURSELF

5555 Lakeview Drive, Suite 201Kirkland, WA 98033

(425) 803-9500 | office@brislawnlofton.com