Most folks dream of being successful in life, and over the course of a lifetime such drive builds assets. For some, these assets are modest, either by design or consequence. For others, they can be substantial.

In the case of farmers and ranchers, estates commonly consist of land, buildings, machinery, livestock, feed, investments, savings, life insurance, personal possessions and debts owed to or by the owner. But a large part of the asset base is often tied up in the value of the land. That's particularly true today as land values — spurred by outside capital chasing rural property's recreational and aesthetic value — soar well beyond their productive value.

A look at the chart on page 7 demonstrates the dramatic growth of pastureland value over the past five years. Put together a few thousand acres on which a rancher runs cattle or grows crops, add a home, some life insurance and a few other assets, and many folks approach the threshold where being without a plan to minimize their estate-tax liability can compromise a family ranching business for the next generation.

The federal estate tax exemption for 2007 and 2008 is $2 million, with a 45% tax rate on the estate's value beyond that figure. In 2009, that exemption rises to $3.5 million, and is completely repealed in 2010.

But in 2011, as the law is currently written, the exemption is reinstated at $1 million with a 55% tax rate. At today's land values, it doesn't take a huge operation, or even the most aesthetically appealing piece of nature, to eclipse $1 million.

“While a $3.5-million exemption level (in 2009) may seem high enough to make estate taxes a concern only for the very affluent, it's important to remember that your estate includes all your assets,” says Bruce Hoffman. He's a vice president, Investments and Financial Consultants, Wachovia Securities, LLC in Corpus Christi, TX, and a partner in his family's 130-year-old ranch.

Before assuming you don't need to worry about an estate tax, he says it may pay to consult with an estate-planning attorney who can advise you on your need for planning to reduce the taxes that could come due on your estate if you die in any year but 2010.

The good news is there are plenty of tools available to help alleviate or minimize that tax bite, but some homework and diligence are needed to take advantage of them. And the help and counsel of a professional are highly advised.

“It's never too early to start planning for the transfer of ownership of your farm. Once an owner is married and/or has children, it becomes critical to have a plan in place,” says Jim Lethert, a lawyer and wealth management consultant with U.S. Bank in St. Paul, MN. “And when the net worth of the business eclipses $1 million, including life insurance and death benefits, planning becomes mandatory.”

Estate-planning goals

Minimizing estate transfer taxes is often a top goal for large operations. But there typically are a number of goals producers want to accomplish when transferring their estate. These often include:

  • Providing a smooth transition of the ownership and operation of the business.

  • Providing sufficient funds for their own retirement.

  • Providing adequate income for survivors and dependents.

  • Passing on a viable farm operation to the next generation with a reasonably fair distribution among beneficiaries.

  • Minimize income tax, legal fees, accounting costs and complications in transferring property.

A good estate plan should also create tranquility within the family, Lethert adds. Avoiding family conflict requires serious open discussions and honesty regarding each family member's goals and objectives.

The most important component of an estate plan, however, is you. If you can't muster the initiative to put your financial house in order, it won't happen.

“Most people are unprepared in this area, not because they're foolish, but because they're busy,” Lethert says. “Good estate planning is a wonderful gift that you leave those you care most about, but it's a gift that isn't appreciated until you're gone.”

But the fact is, without proper foresight, planning and diligence, your life's work might not make it to your heirs, or might make it in a form greatly diminished by the tax burdens placed on it as a result of death or disability.

“The number-one important thing is to just get started, and to do that you have to come to grips with the fact you will die someday. And you shouldn't wait until it's too late to at least address some sort of plan,” Lethert says.

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He describes three stages in the average person's financial lifetime. In the first stage, most folks work to pay off debt, followed by the second stage in which their assets in land, equipment and livestock grow. In the third stage, building a retirement portfolio takes precedence.

“The third stage is the transition phase. This is when most folks begin trying to decide who will get the assets and a strategy for getting those assets to them, as well as providing for the security of the surviving spouse,” Lethert says.

Most estate planning typically tends to occur in the second half of the middle stage of a professional career, he adds.

“Most folks don't think about estate planning at all in the first stage. You're probably still heavily in debt and, for the most part, you have sufficient life insurance to serve as a replacement for the income lost with the death of the primary wage earner.”

Once you've decided to act, the hardest aspect of estate planning is developing a list of your assets and liabilities, Lethert says.

“It's the hardest part because it's boring,” he adds. “Many ranchers are interested in ranching and may not like dealing with a lot of numbers, but you need to know what you have, how it's titled, and what you owe,” he says.

Next, get good advice. “Force yourself to read articles on the topic; there's a lot available. Attend one of the many estate-planning seminars sponsored by financial institutions.”

His third step is to ensure you have the right documents in place. This is where it's important to employ trained professionals.

“At least have a will, the right kind of will that fits your circumstances — whether you have a young family or you have a large net worth — and make sure it's drawn up by a professional. No one should ever draw up his or her own will,” Lethert says.

Financial advisor Hoffman agrees.

“The first thing most everyone should do is have a will drawn up, especially if they have kids,” he says. “And I would recommend using a board-certified estate attorney because the laws are very complicated and it's worth it to utilize someone who's on top of it.”

He cites the case of a young married father of an 18-month-old child who purchased a $200,000 life insurance policy designating the benefit be split between his wife and child.

“After he was killed in a car accident, his wife had to spend $4,000 in legal fees to get herself named as the guardian because an 18-month-old can't legally manage assets and his estate didn't spell out a guardian,” he says.

What is an estate?

Essentially you have an estate if you own anything. It includes the obvious personal assets, such as your home and money, and not-so-obvious assets such as the value of term-life insurance, says Cole Ehmke, University of Wyoming Extension specialist.

Writing in “Passing it on: An estate planning resource guide for Wyoming's farmers and ranchers” (read it at http://ces.uwyo.edu/PASSINGITON.asp), Ehmke says that, before drawing up estate transfer documents, identify everything you own and its value so that you know what you have to work with. That includes cash and money in checking and savings accounts, investments in mutual funds, stocks and bonds, etc. Include assets in taxable accounts and those in tax-deferred accounts such as IRAs and other retirement savings plans. And don't forget your residence and household property, land, vehicles, machinery, livestock, etc.

“Too many farmers rely on a balance sheet prepared by a lender, which often values assets too conservatively,” Hoffman interjects. He says it's important that assets be evaluated accurately in order to be provide sufficient protection for the overall estate.

Once your asset list is completed, figure what you owe, Ehmke says. This would include your mortgage, unsecured credit such as balances on credit cards or charge accounts. And don't forget to include any other unpaid bills, such as dentist and utility bills, telephone charges, etc.

The next step is to construct a personal balance sheet in order to arrive at a net worth. You may learn your estate is much larger or smaller than you anticipated. Your net worth statement will serve as the base for financial planning and estate transfer decisions. It also allows you to gain insight into your personal financial position, Ehmke says. A few questions to ask yourself might include:

  • Do I have adequate emergency funds?

  • Did I discover any surprises, such as excess debt or forgotten assets?

  • Is my insurance coverage adequate to cover the value of my property?

  • Are my invested assets working for me to increase my net worth?

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If your estate is less than you expected, you may want to concentrate on accumulation in the coming years, he says. If you're satisfied with the size of the estate, preservation is likely your priority.

“Your net worth statement is a record that should be updated on a regular basis and kept with valuable papers. It should be updated every few years or after some important life event has occurred, such as after children finish college, retirement, marriages or divorces, the addition of children and grandchildren, a business success or failure, a series of gifts or other important events,” Ehmke says.

Once you've determined what you have, the next step is to choose the tools to help you reach your goal of protecting your assets, reducing your taxes and capital gains. You need tools that will allow you to continue to conduct your business on a daily basis, provide an income stream for the day you decide to retire, provide for your spouse and children, and be protected from liability.

Such tools might include a will, life insurance, various forms of trusts, annuities, gifting, etc. And, of course, a will is a key feature in the estate plan.

Another important aspect of estate planning is communication, not only among the principal owners of the estate but the people and entities who figure into the disposition of the estate. What are their goals and wishes, do they mesh with your goals and wishes for your estate, and how can you resolve those issues?

So what's it cost?

Lethert and Hoffman estimate the cost of a simple will to be several hundred dollars, with wills utilizing some sort of trust running in the neighborhood of $1,000 to $2,000.

“A family limited partnership could cost $10,000 to $20,000,” Lethert estimates, “but you have to remember that if you have a sizable estate, a 55% estate tax rate could cost an unprotected estate much more than that.”

Very large estates generally will utilize a team of professionals for estate planning. This would include a lawyer, accountant, insurance agent, a certified financial planner and a banker.

“You also need to consider tax-planning strategies, a durable power of attorney and an advanced health care directive to protect you and your family in the event the primary earner is incapacitated. You should have all those documents in place,” Lethert says.

For those with simpler estates, Lethert says estate-planning costs can be minimized by developing your own list of assets and liabilities and by educating yourself on the process and instruments of estate planning.

“Those two steps you can do yourself. You don't have to go see the lawyer first. Having the correct documents is where you start to pay some well-spent money,” Lethert says. “And some of these services involved in estate planning may be tax-deductible.”

Communication throughout the process is a big key to successful estate planning, all sources say — communication between principals, between principals and beneficiaries, and between the principals and their advisors.

“It all starts with overcoming inertia,” Lethert says. “If not, you can end up leaving the problem to your family. Without estate planning, what you worked so hard for all your life to build could present a huge financial challenge for your family to retain.”

Getting Started
  • Make up your mind to begin planning. Without your buy-in to the estate-planning concept, it won't happen.

  • Take a good look at where you are today by developing a net worth statement. The inventory of assets and liabilities should include firm market values, not those utilized by your lender, which are likely conservative numbers. Talk not only to your banker but your appraiser, says Bruce Hoffman, vice president, Investments and Financial Consultants, Wachovia Securities, LLC in Corpus Christi, TX, and a partner in his family's 130-year-old ranch.

  • Hoffman adds that the financial statement should include not only the assets you have but what you think you might inherit, particularly if your parents are elderly.

  • Once you've accounted for and documented your assets, incomes and liabilities, set your goals. Sit down with your spouse and decide what's most important to you.

  • Organize your team. It might include your banker, your insurance agent, financial planner and Extension agent.

  • Plan for risk. What happens if one of the principals dies prematurely or is disabled in an accident?

  • Revisit the plan periodically. Family events — births of children or grandchildren, divorce, etc., can necessitate a periodic review of the plan to determine if changes are needed.

2006 Pasture Values and Lease Rates

Value ($/Acre)

Region/State

2006 Value

1-year change (%)

3-year change

(%) 5-year change (%)

Northeast:

3,050

10.1

39.3

57.2

Maryland

8,300

13.7

127.4

140.6

New Jersey

11,700

3.5

17.0

23.2

New York

890

7.9

23.6

39.1

Pennsylvania

2,480

12.7

34.1

41.7

Other States3

4,960

10.7

27.8

53.6

Lake States:

1,490

15.5

56.3

85.8

Michigan

2,150

10.3

34.4

65.4

Minnesota

1,150

22.3

84.0

119.0

Wisconsin

1,700

14.9

54.5

78.9

Corn Belt:

1,610

11.8

43.8

62.6

Illinois

1,880

9.3

77.4

86.1

Indiana

2,090

8.3

25.9

42.2

Iowa

1,300

21.5

62.5

78.1

Missouri

1,500

11.9

42.9

64.8

Ohio

2,380

6.3

22.1

36.0

Northern Plains:

396

15.5

53.5

64.3

Kansas

620

17.0

51.2

59.0

Nebraska

360

12.5

41.2

50.0

North Dakota

250

13.6

47.1

56.3

South Dakota

360

16.1

63.6

80.0

Appalachian States:

3,320

14.1

66.0

82.4

Kentucky

2,100

6.1

43.8

48.9

North Carolina

4,500

12.5

49.5

70.5

Tennessee

3,420

6.2

45.5

59.1

Virginia

4,800

24.7

113.3

140.0

West Virginia

1,880

13.3

56.7

77.4

Southeast:

5,710

36.0

184.1

224.4

Alabama

2,100

7.7

55.6

68.0

Florida

7,500

45.6

257.1

305.4

Georgia

7,150

27.7

160.0

213.6

South Carolina

2,550

10.9

34.2

56.4

Delta States:

1,800

11.1

46.3

63.6

Arkansas

1,740

9.4

43.8

62.6

Louisiana

1,800

7.8

37.4

45.2

Mississippi

1,900

18.0

58.3

81.0

Southern Plains:

1,030

24.1

74.6

85.3

Oklahoma

760

18.8

68.9

78.8

Texas

1,080

24.3

74.2

84.6

Mountain States:

610

54.4

114.0

137.4

Arizona1

1,120

72.3

138.3

180.0

Colorado

800

29.0

86.1

105.1

Idaho

1,630

71.6

132.9

132.9

Montana

650

75.7

140.7

170.8

Nevada1

620

77.1

143.1

153.1

New Mexico1

400

60.0

150.0

166.7

Utah1

1,160

68.1

132.0

157.8

Wyoming

360

28.6

63.6

80.0

Pacific States:

1,340

12.6

40.8

57.8

California

2,160

13.1

44.0

66.2

Oregon

540

5.9

20.0

25.6

Washington

605

3.4

16.3

21.0

National Average2

1,000

22.0

65.3

79.5

Data is based on the National Agricultural Statistics Service June Area Survey, conducted during the first two weeks of June. Land value estimates are as of Jan. 1 for each calendar year. 1Excludes American Indian reservation land. 2Excludes Alaska and Hawaii. 3Includes CT, DE, ME, MA, NH, RI and VT.
Source: USDA