Farmers urged to protect assets in succession

Wednesday, February 12, 2020
Monett attorney Jim Randall, left, and accountant Steve Harner, right, with The CPA Group in Monett, addressed legal issues, taxation, trusts and limited liability corporations at the Monett Beef Cattlemen’s Conference. Murray Bishoff/Cassville Democrat

Attorney, accountant discuss trusts at Beef Cattlemen’s Conference

Monett attorney Jim Randall Sr. and Steve Harner, with The CPA Group, spoke bluntly to local cattlemen about issues relating to passing their farms on to another generation during the Monett Beef Cattlemen’s Conference, held Tuesday at the Monett National Guard Armory.

Noting the oldest Baby Boomers hit 73 this year, Randall said the pending transfer of wealth from one generation to the next will be the largest the world has ever seen. He noted it will be the adult children of the landowners who will be the most reluctant to discuss the issue, and the older generation will have to push the issue.

Randall said people have several options. If they choose to do nothing, Missouri’s laws of intestate succession will dictate what happens, giving children and their spouses an interest in the property, whether the owner wanted that or not.

Another option is to write a will. Randall said wills do one thing only: determining what happens if there is probate. Non-probate transfers are well defined in Missouri law and can identify beneficiaries.

Randall saw the most flexibility for succession comes through creating a trust. Within the trust, the owner can create limited liability corporations (LLCs), controlled by the trust, further protecting the owner from potential creditors.

“There’s always a concern with in-laws and spouses,” Randall said. “An LLC is a business, a separate entity. It’s a separate property if there is a divorce. It can’t be taken back. A gift is a separate property. If you keep property in the giftee’s name, the spouse has no part in it.”

A property owner can create an LLC and give parts to several children. Randall said someone has to be named a manager. The same can be done with a trust. Commingling control, however, can have consequences.

“Say you need to put your son on the title [of the land] with you.” Randall said. “That’s often a bad idea. If you put the name of a child on a bank account, [in the case of death], that person is sole owner and can walk away with all of it.”

Involving family members in succession plans at times becomes critical, especially if the heirs are not prepared to handle a large estate. Randall recalled a man who owned a great deal of land, more than he needed, and wanted to give the land to his daughter. Some children in that position don’t have a will and would need to be brought into the discussion to avoid unforeseen consequences from generosity.

For protection from tax issues, Randall deferred to Harner, an issue for accountants.

For farmers, Harner recommended placing all the land in one LLC and all the equipment in another, shielding each from action that otherwise could endanger both. Setting up an LLC becomes a joint effort with the accountant, who will advise how to shield the total list of assets. Using a trust and LLCs will avoid all probate issues. Then the accountant deals directly with the heirs, getting rid of “groping around for what to do.”

While many criticize the existence of an estate tax, Harner said without it, vast amounts of land would remain owned by a relatively few number of individuals. The tax forces the sale of land to the next generation.

Harner further suggested farmers could use an LLC to avoid a self-employment tax, or consider forming a small business corporation (an S Corp) to establish a salary. An S Corp creates a second layer, requiring tracking by the accountant, but can save a considerable amount of money.

These tools allow a property owner to pass assets as gifts up to $15,000 in a year’s time with no taxes assessed. If the gift is greater than that, there will be a tax penalty assessed, but only after the original owner dies, and payable by the heirs. LLCs will also make it possible to give units to children. That reduces the estate, and thus its tax liabilities.

Harner said most farms operate on a non-accrual basis. The only thing that triggers taxation is when a sale takes place.

“In a partnership, you can have specific allocations,” Harner said. “Losses can all go to Dad, profits can all go to the son, or you can send profits or losses back and forth between them on odd years or whatever you choose. If you buy land, you can give 99 percent ownership to the children, and keep 1 percent, but as manager, you can still control the rest.

“Only keep what you need to run the business. Put everything else in trust. If that leaves stocks or large sums of cash, you’re asking for trouble. Get it over to the trust.”

Randall agreed against loading an LLC with a lot of liquid assets. He said that would make an easy target for a creditor. A trust, on the other hand, could handle liquid assets. He recommended having some cash available to the entity holding the land.

“One of the worst things is to have all the land and no money,” Randall said. “You need to take care so it all works together.

“One thing you do not want to do is have your spouse as a joint operator, even if you split up operations,” Randall said. “If you’re both equally involved in the same level, and you’re both sued, you’re all subject to garnishment. If you have an LLC and the interests are owned jointly, but the wife alone is manager, if she makes a mistake, can creditors get the assets? No. If you’re both managers, you can both be sued and lose everything.”

Asked about revocable versus irrevocable trusts, Randall said simply an irrevocable trust cannot be undone, and he advises against them. The primary reason for making such trusts is to secure funding for nursing home care. Contrary to common thought, Randall said most people do not end up in nursing homes. Mostly women end up in nursing homes, statistics show, and they don’t stay there long.

Randall thought of one case where a family made a partial irrevocable trust. The couple owned 1,000 acres and wanted the 300 acres from the original century farm to always stay in the family. So they established an irrevocable trust for that portion of the farm. Not even the children can rid themselves of it, he said, making it necessary to pass it on to the next generation.

“If you have a revocable trust, you can push and pull assets without tax consequence,” Harner added. “You can move cattle to separate LLCs. They’re not taxable until sale.

“All revocable trusts become irrevocable at your death.”

In summary, Harner said there’s a cost to everything, and not using trusts and LLCs because they have an expense fails to consider even bigger expenses that could occur without them.

“A trust is a living, breathing entity,” Harner said. “It will file its own tax returns. Taxes can get high. The best tax planning is only as good as the moment you did it.”

“Protect yourself,” Randall said. “You don’t need to have everything in the same bucket.”

Brochures on LLCs and trusts are available at the office of Randall, Masri and Randall in Monett.

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