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"The No. 1 reason people do not estate plan is fear," Roberts said. "Most people are afraid to tackle the estate planning because they've heard horror stories about how complicated it is or how much it costs, or they can't face the subject entirely. They don't know how to start so they never do."
Fear was not an obstacle in the Fuller brothers' situation. They just needed knowledge, so Roberts began the process by explaining the current estate tax laws (the very laws that could change dramatically in 2013). For the next 16 months (until the end of 2012), estates with assets, which includes every piece of property owned, from houses and equipment to mineral rights and investments, that total less than $5 million can gift the entire estate to an heir without the penalty of an estate tax. Any assets exceeding $5 million are subject to an increasing graduated tax scale that ranges between 35 to 50 percent.
"Throughout my 35 years of experience, there have been windows to take advantage of tax law, and we are in a window now," Roberts said. "Why wait and see what the government does in 2013, when you can handle your estate under the current guidelines? Some people say the government will get rid of the estate tax. Don't believe that. They're never going to get rid of the estate taxes."
If the federal government ever eliminated the tax, many states, such as Texas, have laws that would become active and would begin a state-level estate tax. Additionally, under the current system, the federal government already sends a portion of the estate taxes back to the states.
Roberts gave the example of a couple who lives in Michigan, but owns a vacation home in Florida. "Their estate is split, so the government gives each state a certain percentage of the taxes collected," she said.
Arthur Uhl, an attorney who specializes in estate taxes, a TSCRA director and chairman of the TSCRA legislative and tax committee, echoes Roberts' call for ranchers to pursue estate planning, especially under the current law. Uhl says unless the estate tax laws are changed in less than a year and a half, the law will automatically shift to a 50-percent tax on any assets exceeding $1 million.
"To be safe, you should prepare now," Uhl says. "We have a decent situation now, but unworkable situation looming unless a new law is passed."
Businesses like ranching and construction are usually among the industries hardest hit by the estate taxes, because they require large capital assets and have low returns. "The rate of return for the ranching industry is usually less than 1 percent," he says. "It usually takes millions of dollars worth of land and equipment to produce thousands of dollars of food."
Uhl says, beyond facing extraordinary operational challenges from weather to animal health, ranchers often pay taxes multiple times on the same asset, making estate taxes redundant and ineffective.
"Ranchers pay taxes every minute of their life and multiple times on the same piece of property. To tax their heirs is not right. It is a patently unfair tax," Uhl says. "Additionally, estate taxes bring in less than the cost of compliance. In other words, the amount of revenue generated from estate taxes is less than the amount it costs to operate the program. Still, these taxes exist, and if a rancher does not plan for them, they can be disastrous for a ranch and the people who depend on it."
Like many ranchers, the Fuller brothers' construction business requires a great deal of capital investments. They knew they were going to exceed the assets threshold and be subject to extraordinary taxes rates, making estate planning even more vital. "Most people in our business are second or third generation contractors, just like farmers and ranchers," Fuller said. "You just can't wake up and want to get into these types of businesses, because of the capital required. You have to spend half a million dollars on a piece of equipment and not bat an eye. It just costs too much. " |
Assembling a cost-effective planning team
Cost is often a deterrent to estate planning. Many ranchers believe that the cost of estate planning (both time and resources expended) will far outweigh any benefit achieved. Fuller understands that thought process, but summed up his argument for estate planning with a little simple math.
"You can pay some fees to knowledge people, or you can lose 50 percent to taxes," he said. "It would have cost us a whole lot of more money to be unprepared than be prepared."
Roberts, Uhl and Fuller all believe the key to developing a successful estate plan was assembling the right team with specialized knowledge.
Roberts, who is a financial planner, not an attorney nor an accountant, acts as the "quarterback of the team," working to outline the goals and objectives of the family; bringing in the right attorneys and accountants to produce the correct documents; and then review every line of documentation with the family, so they fully understand each aspect of their estate plan.
Roberts offered some straightforward advice for those who are considering beginning their own plan. "If you decide not to bring a financial advisor and, instead, just to work with a lawyer and accountant yourself, then I urge you not to go to an oil-and-gas attorney, a real-estate attorney or your family attorney," she said. "Go to a specialist. Go to a tax attorney. Go to someone who knows this particular set of laws."
Additionally, Roberts said not to use your local bank as a trustee. "Your local bank is usually not your friend," she said. "Local banks want to hold onto the money. I have seen countless horror stories from widows who needed foundation repairs, to children who need money for college, that were denied funds from the bank."
Uhl offered additional advice for first-time estate planners, who are selecting professional help. "Do your research on any attorney or any financial advisory group," he said. "Ask for references. If you don't understand what they're saying, then go find someone who will. If it sounds too good to be true, then it probably is."
As for the Fullers, their estate planning went smoothly. In about a year and a half, the brothers — led by Roberts' team — had assembled a plan that ensured a seamless transition of the business in the event that either brother passed away. (The Fuller brothers' complete estate planning process, as well as tips on subjects ranging from decoupling to community property, will be detailed in the second-part of The Cattleman's special series on estate planning.)
"Nobody likes to think about when they're going to die," Fuller said. "Apprehension of that is what keeps people from doing their estate planning. They get foolish about it. Dying is a part of living. It's not going to go away. The only thing you can do is prepare the best you possibly can because that moment will catch up with us sooner or later."
Unfortunately, that moment came much too soon for Mark Fuller, who was diagnosed with cancer less than 2 years after the brothers had locked in their plan.
"When he was first diagnosed, you have all the emotions and thoughts that run through your mind. There is fixation on the chemo and radiation. You know it's going to be awful," Mike Fuller said. "Even with all of that hanging over our heads, we knew that if he got well, we'd continue as planned. We also knew if he didn't make it, the company and his family were not going to be in peril."
In 2004, Mark Fuller passed away at the age of 54. "You always think you have plenty of time to get your estate in order," his brother said. "We all think we're bullet proof. We all think we have a lot of life left and a lot of time to do things, but no one is guaranteed the next moment."
The estate plan that Mark was so eager to initiate worked flawlessly, providing his family ample means to live and Mike the ability to keep the company functioning.
"Mark was more than my brother he was my best friend," Fuller said. "I miss him terribly every day. We hunted together. We skied together. We worked and played together. That's why you do estate planning. You do it for your family. You do it because you love them." |
