A PLAN OF ACTION

Assembling the Parts of the Plan

By E.C. Carson

Editor's note: The following story is the second feature in The Cattleman's 3-part series on estate planning. Part 1 of the series, now available online at thecattlemanmagazine.com, provided an overview of estate planning, and discussed why many ranchers avoid this vital aspect of business. In this story, The Cattleman covers key areas that must be considered when assembling an effective estate plan. The final story in the series, scheduled for the November issue, will provide pointers on properly implementing an estate tax plan.

C. Beth Roberts knows the window is closing.

Having been a Registered Financial Consultant for 25 years, a registered representative with Lincoln Financial Advisors, and a member of the Texas and Southwestern Cattle Raisers Association (TSCRA), Roberts' experience tells her farmers and ranchers must act now to protect their estates.

In late 2010, the U.S. federal government extended the current level of estate taxes for 2 years. Without this extension, the heirs of businesses, such as family ranches, would have faced upwards of 50 percent inheritance tax on any income over $5 million.
In less than 15 months, elected officials will once again debate the merits of estate taxes and there remains the potential for the taxable threshold to be dropped to $1 million.

"The federal government could make sweeping changes in less than a year and a half, so this is the time to act," Roberts says. "Most people are afraid to tackle estate planning because they've heard horror stories about how complicated it is or how much it costs. They don't know how or where to start, so they never do."

Arthur Uhl, a TSCRA director and chairman of the TSCRA legislative and tax committee, specializes in estate planning for those in the agricultural industry. His advice for taking the first step — find an accountant and/or an attorney dedicated to estate planning.

"This is a complicated field," Uhl says. "Individuals beginning an estate plan need to find an advisor who understands the specific laws that govern estate planning, instead of just a general practitioner."

Roberts believes financial planners, such as she, can provide an additional service, becoming the quarterback of a team of attorneys and accountants, while providing clear direction and translating sometimes complicated legal issues to the client. "No matter if you choose just an attorney, or select a financial planner, always remember that if someone is talking above you, go find someone else," Roberts says. "You need to find someone [clients] trust. It will make the process much smoother."

What do you consider a successful life?
Mike Fuller can attest to the value of smooth estate planning process.

Fuller, along with this brother, best friend and business partner, Mark, owned L.A. Fuller and Sons Construction, a large paving contractor founded by their father in the 1940s.

The company has built everything from interstates to parking lots in Texas and, like many agricultural operations, consists of millions of dollars in overhead and machinery. In the fall of 1998, the pair hired Roberts to help map out an estate plan that would protect both brothers and their respective families in the case that either passed away.

Unfortunately, the Fuller brothers' estate plan was put into action much sooner than expected when Mark passed away from cancer in 2004 at the age of 54.

"You're never guaranteed the next moment," Mike Fuller says. "You have to be prepared. If you own a business, it is the responsible thing to do."

Roberts explains that all successful estate planning begins with a question that will define the rest of the process: What is a successful conclusion to your life? "The answer to this question will help them formulate the specific objectives," she says. "Those objectives serve as the foundation for the plan."

Additionally, the family dynamic is an early-stage variable that must be addressed. Only spouses, not children or the children's spouses should be involved in the formulating the estate planning. "When I speak of children, I mean people who are in their 40s or older," Roberts says. "There is a tremendous amount of emotion involved in this topic, and couples have to work through that emotion without the influence of their children. The worse thing they can do is bring their children into the mix.

"They must remember 2 things. You are dealing with human nature, and discussing who gets what and why. That is complicated at best. The second thing they must remember is they are doing this for their family. If there is no plan in place when they pass, the grieving will turn into conflict, which will turn into chaos, and that ultimately turns into a legal battle."

In the case of the Fuller brothers and their wives, they found unity in the process. "We were all on board," Fuller says. "Had someone not been on board, it would have been awkward. We all wanted the best not only for the company, but best for the family, so that was our goal from the start and we worked from there."

Assembling the details
Once goals have been defined and family dynamics considered, those who undergo estate planning will need to provide virtually every imaginable document pertaining to their life and finances including bank accounts, investments, tax returns, business agreements and investments.

"I never consider the process burdensome. It was just sort of in the background," Fuller says. "Assembling some of the information was tedious since we were trying to run a business, but it is much less painful than you expect. More so, you're protecting what you've spent a lifetime building, and that's worth any amount of time and effort."

Often, appraisals will need to be made on the estate's assets. Uhl points out that land appreciates rapidly, which could easily impact the overall value of the estate, and needs to be tracked. "Ranches that are worth $3 million today could be worth $10 million in 15 years," Uhl says. "This is something to consider at the very beginning."

When working with a financial planner, such as Roberts, the documents and appraisals are dissected by a team, which develops a variety of options. Among the alternatives are holding assets or beginning a gradual transfer to the next generation. Additionally, investment opportunities are discussed, and insurance policies are usually updated or purchased.

"A good estate planner will provide you with several options, then educate you on what is possible," Roberts says. "Each option can have varying degrees of risk, so again make sure that you and your spouse fully understand each step." Uhl usually suggests ranchers consider transferring the estate into a limited family partnership, which reduces the tax burden on any one individual. "In a limited family partnership, no one owns the ranch; instead, they own a stake in it," Uhl says. "This discounts the value because of the lack of liquidity and lack of control. This is usually a helpful step."

The Fullers developed a buy-sell agreement wherein if a brother passed away, his spouse would sell to the remaining brother. Neither wife wanted to be a partner, nor had the experience to manage a massive paving business. The estate plan provided financial security for Mark's wife, and removed the pressures of the business from her, while allowing the business to pass securely to Mike. "There could have been many uncomfortable scenarios if we had not had a plan in place," Fuller says. "Suppose we had nothing, no plan. We were just going down the road and then something happens," Fuller says. "We would have had a huge problem. My sister-in-law would have had a huge tax issue. I'd want to buy the business from her, but maybe couldn't have afforded it. The business and the family would have suffered. It could have been a complete disaster."

The Fullers' estate plan took about a year and a half to develop; however, Uhl says that many can be completed in 2 to 6 months. Still, every plan is unique and every timeline is different. Roberts emphasizes a few of the more tricky factors that can gum up the estate planning process, specifically decoupling and community property states.

Decoupling refers to a potential division between the federal government and individual states in the collection of estate taxes. Currently, the federal government provides a certain amount of estate taxes back to each state. However, a handful of state governments, such as in Massachusetts, are writing their own estate tax laws that no longer run in tandem with the federal agenda. This means that even if an estate does not reach the minimum $5 million value to be taxed by Uncle Sam, it could still be subject to estate taxes at the state level.

This decoupling factor also would play a role if the federal government ever abolished estate taxes — a political red herring, according to Roberts. "There was some talk of getting rid of estate tax, which will never happen," Roberts says. "When the discussions heated up, each state wrote their own laws. If the federal estate tax went away, then the state laws would kick in. There are no freebies in life."

Another blind spot in estate planning are the 9 (sometimes 10) community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin and, in some cases, Alaska).

In a community property state, each spouse owns a "present, equal and undivided interest in each asset." In other words, everything is split 50-50. However, if the spouse dies, their family could lay claim to that spouse's share of the assets, meaning in-laws in community property states could take a portion of the ranch, cash, etc. "This just shows another value of estate planning, which is radically different from a will," Roberts says. "Through an estate plan, you can ensure that the ranch passes only along the family line."

Lastly, Roberts brings the discussion back to family, specifically, children. Dividing property among siblings is often difficult, especially if one child is involved in the family business and one is not. Parents often look for an even split; however, Roberts suggests that "fair and equal are not necessarily the same thing."

While not as arduous as most people imagine, assembling an effective estate plan does require time and patience, as well as careful consideration about family dynamics. Still Roberts knows it is worth any potential cost or time. "The only barrier keeping someone from beginning an estate plan is their own fear, but they have to remember the window is closing," Roberts says. "My estate plan is done, and I have to tell you, I sleep well at night."