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Estate Planning and Small Business/Farm Succession and Transfer Eaton County Date: Sept 2, 9, 16, 2004

Estate Planning and Small Business/Farm Succession and Transfer Eaton County Date: Sept 2, 9, 16, 2004. Roger A. Betz District Extension Farm Management Agent. Mona Ellard Director, Eaton County MSU Extension . Phil Taylor Extension Agriculture & Natural Resources Agent.

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Estate Planning and Small Business/Farm Succession and Transfer Eaton County Date: Sept 2, 9, 16, 2004

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  1. Estate PlanningandSmall Business/Farm Succession and TransferEaton County Date: Sept 2, 9, 16, 2004 Roger A. Betz District Extension Farm Management Agent Mona Ellard Director, Eaton County MSU Extension Phil Taylor Extension Agriculture & Natural Resources Agent

  2. Why Develop An Estate Plan? Mona Ellard Michigan State University Extension

  3. Why an Estate Plan? • Pass assets & business structure to next generation • Control transfer • How to transfer debt • Retirement income – LOTS! • Security - health care issues • Issues at passing of 1st spouse • Issues - Fairness, equitable, harmonious • Durable Power of Attorney and Patient Advocate • Peace of mind • Minor children - care, finances • Gifts • Reduce Taxes

  4. What Is Your Estate?Who Gets Your Property? Eaton County Estate Planning & Business Transfer Seminar September 2, 9, 16, 2004 Targeting Farm and Small Businesses Phil Taylor – MSU Extension Agriculture and Natural Resources Agent

  5. Estate Planningwills, probate, & trustsE2120 A discussion of alternative property ownership patterns and estate transfer methods.

  6. Property • Intangible and invisible rights, powers, privileges and responsibilities of the owner • Real Property Land Land improvements • Personal Property (everything not real) Tangible Intangible

  7. Property Rights • Property is not just real estate • Numerous separable Rights for an item of property • Land example: Right of Access, Security right (Mortgage against it), Leasing right, hunting rights, mineral rights, development rights, etc. • Truck example: Use rights, leasing rights, gifting rights, lending rights

  8. Property Rights • More than one person can own rights in property • Rights can be referred to as “Economic Interests” – there is value to the rights • Economic Interests are part of a person’s estate and can be transferred

  9. Real Property = Real Estate • Land or improvements upon the land • Buildings, fences, timber, growing crops • Oil, mineral, and development rights – houses etc. • Evidence of ownership: DEED • Provides description of the property

  10. Personal Property Everything other than Real Property TANGIBLE – “SEE IT” AND INTANGIBLE – “PAPER”

  11. Tangible Personal Property * Physical Property that includes… …Goods, Wares, Merchandise Clothing, Furnishings Livestock, Harvested Crops Machinery and Equipment

  12. Tangible Personal Property (cont.) * Titled property (title proves ownership) Cars, Trucks, Trailers, etc. * Other proof of ownership Bill of sale or other document showing ownership

  13. Intangible Personal Property A claim capable of being enforced on or against other individuals or entities. “Paper Property” – A piece of paper shows ownership. Securities, notes, bank accounts, patent rights, land contract, life insurance contract etc.

  14. Ways to Hold Rightsdeed, contract, or otherevidence of ownership • Fee simple (sole ownership) • Co-ownership 1.Joint Tenancy (with rights of survivorship) Tenancy by the Entirety 2.Tenancy in Common (Default)

  15. Ways to Hold “Own” Property • JOINT TENANCY • With Rights of Surviorship • Whoever lives longest – gets the goods • By the Entirety • Same as above, only between husband and wife. • Each spouse has equal ½ ownership irregardless of how the property was obtained

  16. Ways to Hold “Own” Property TENANCY IN COMMON • No rights of survivorship • Co-owners have right to transfer their interest • At death, % ownership transfers subject to will or state law. • Two brothers own land Tenancy In Common. What happens to the land if when one brother dies. • His portion of the land is subject to his will or state law. • Significant effect on multiple owner businesses.

  17. Methods to Transfer • Contract Life Insurance, Annuity, Trust • Tenants in Common – goes to heirs • Joint Tenancy (rights of survivorship) Ownership vests to survivors • Probate Will State law • Transfer prior to death Complete severance Retained rights

  18. Methods to Transfer Property • Question: My will says my life insurance goes to my son. Who receives the life insurance?

  19. Resources

  20. SUMMARY Property: Know what you own. Ownership: Know how you own it. Transfer: Know when it gets transferred. Plan: Know why & how it gets transferred. Heirs: Know who’s going to get it. PROPERTY OWNERSHIP TRANSFER PLAN to your HEIRS.

  21. How Do Taxes Affect Your Estate? Roger Betz Michigan State University Extension District Farm Management Agent

  22. Property Transfer Taxes Government Doesn’t Care Which Method You Use, Just Pay the Appropriate Tax GIFT • Federal Gift Tax SALE • Federal Income Tax • Michigan Income Tax ESTATE (no inheritance) • Michigan Estate Tax • Federal Estate Tax

  23. Federal Gift Tax Excise tax on gifts Lifetime transfers Without full consideration Donor pays tax due Annual exclusions (indexed for inflation) $11,000 per donee and per person 100% Deductions for GIFT TAX (Income Tax?) 100% Spouse, College Tuition, Medical Care marital, charitable, partial consideration Lifetime exemption above the annual exclusions $1 Million Starting 2002 and beyond

  24. Federal Estate & Gift Tax Schedule 2004

  25. Gift Tax Calculation (example) • Year 1 $6,000 X 18% = $1,080 • Year 2 $21,000+$6,000 = $27,000 • 3,800 Plus 22% of 7,000 = 5,340–1,080 = 4,260 • Year 3 $51,000+$21,000+$6,000=$78,000 • 13,000 Plus 26% of 18,000 = 17,680 – 1,080 –4,260=12,340 • Must add up gifts above the annual exclusion for entire lifetime

  26. Unified Credit • Used to calculate effective Federal Estate and effective Gift tax exemptions • Currently the credit is applied to both the Federal Gift Tax and the Federal Estate Tax • Credit used for gifts is not available to pay your estate taxes • Beginning in 2004 different thresholds exist for gifts versus estate taxes • What is the Unified Credit for ‘04-’05? • Gift Tax =$345,800; Estate Tax = $555,800

  27. Unified Credit Reduction (Example) Gift Tax Unified Credit (2004 ) $345,800 (1M) Year 2001 used -1,080 Year 2002 used -4,260 Year 2003 used -12,340 Remaining Gift Tax Credit $328,120 Died in 2004 with no gifts over limit ’04-’05 Estate Tax Unified Credit $555,800 Minus U.C. used by the Gifting -$17,680 Remaining U.C. for the Estate Tax $538,120

  28. Gift Tax Effective ExemptionGifts are during your Lifetime • Increases over years • 1997 and before = $600,000 • 1998 = $625,000 • 1999 = $650,000 • 2000 and 2001 = $675,000 • 2002 - 2010 = $1.0 million • 2011 = $1.0 million ? probably • Congress action? • Same as Estate Tax Exemption up to 2004

  29. Gift Tax Rate Schedule 2001-2011 Red area is where Unified Credit or Exemption is used up

  30. Filing Requirements IRS Form 709A or 709 - Gift Tax Return 709A=<$20,000 Gifts of more than $11,000 per donee in any year Return due April 15 following the year of the gift

  31. Gifts: Planning Pointers • $11,000 per person per year • Spouse can use spouses annual exemption so $22,000 per year • Two married people can give two other married people 44,000 per year before starting to use Unified Credit • Children, grandchildren and spouses $44,000 each set

  32. Federal 709 Gift Tax Return

  33. Federal 709 Gift Tax Return

  34. Federal EstateTaxes An Excise Tax It is levied upon the transfer of property at death.

  35. Federal Estate Tax • Tax applies to total estate transferred, after allowing for deductions and credits • Tax not affected by relationship of beneficiary to you: Except marital deduction - Special deduction for surviving spouse • Amount of tax based on: Estate Size Amount of deductions and Credits

  36. Estate Tax Effective Exemption • Increases over years • 1997 and before = $600,000 • 1998 = $625,000 • 1999 = $650,000 • 2000 and 2001 = $675,000 • 2002 and 2003 = $1.0 million • 2004 and 2005 = $1.5 million • 2006, 2007, 2008 = $2.0 million • 2009 = $3.5 million • 2010 = No Estate Tax • 2011 = ? back to $1mil without congress action • Same as Gift Tax Exemption before 2004

  37. Federal Estate Tax Rate Schedule Red area is where Unified Credit or Exemption is used up

  38. GROSS ESTATE “The value of the gross estate includes the fair market value of all property owned by the deceased and all property the deceased had an economic interest even though outright ownership had been transferred to someone prior to death.”

  39. Value of Gross Estate Appraised at Fair Market Value at date of death or 6 months after • Personal representative chooses date • Factors such as: local sales rental rates expert testimony • Exceptions: • “Special Use Valuation” of certain real property • “Family Owned Farms and Businesses” exclusion (Stops beginning 2004) • “Qualifying Conservation Easements” - 40%

  40. Property Value in Gross Estate Kind of Property Value in Estate Sole Ownership Entire Value Tenancy in Common % Owned Joint Tenancy % Contributed With Rights of Survivorship Tenancy by Entirety One-half of Value Life Insurance Policy Value Retained Life Estate Economic Interest Annuity % Contributed

  41. Joint Tenancy with Rights of Survivorship Question: If you add your daughter’s name to the title of a $100,000 piece of your real estate, how much reduction in the size of your estate?

  42. Joint Tenancy with Rights of Survivorship Reduction in gross size of your Estate?? Final Answer: Depends, but probably none. 1. Who contributed to buying it? 2. Does she bare the burdens and benefits of ownership? Rent income, pay taxes etc. 3. Is there debt against it? Who will own it when you die?

  43. Examples of Economic Interest in Property • Retained rights to income • The right to change who inherits • The right to change the future use • The right to change enjoyment

  44. Adjusted Gross EstateExample: Gross Estate $2,300,000 Funeral - 9,000 Administration - 15,000 Losses (casualty, theft) - 5,000 Debt claims against estate - 12,000 State Estate Taxes (2005- 2009) Mortgages and Liens - 125,000 Adjusted Gross Estate $ 2,134,000

  45. 2004 Taxable Estate Adjusted Gross Estate $2,134,000 Charity, Education, Religion 35,000 Adjusted Taxable Estate $2,099,000 Federal Estate Tax (on 2,000,000) $780,800 plus 48% of $99,000 47,520 Total Potential Tax $828,320 Unified Credit (2004) -555,800 Total Estate Taxes $272,520

  46. Estate Tax Examples Taxable Estate Tax Paid 19972004 $600,000 None None $675,000 $18,500 None $800,000 $75,000 None $1,000,000 $153,000 None $1,350,000 $298,500 None $2,000,000 $588,000 $225,000 Saves $363,000

  47. Filing Requirements Estate Tax Return must be filed when the Gross Estate value exceeds the exemption equivalent. File within 9 months after death. Tax is DUE! Federal Estate Tax Return 706

  48. Federal 706 Estate Tax Return

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