A well-crafted, comprehensive estate plan includes a will, power of attorney, medical directive and frequently a trust. The estate plan should dovetail with your business documents to ensure the business plan and estate plan fly in formation. An estate plan will save your family time and money down the road, but also protect your familial relationships. It will ensure your farm businesses and land pass onto the next generation the way you want.

Once you are ready to work on your estate plan, make sure to avoid these common mistakes:

1. Mistake: Intestacy

Solution: Get a will at the very least

Intestacy means that you died without a will. For assets owned in your individual name without beneficiary designations, Oregon law determines to whom the assets are distributed, which may not be where you want the assets to go.  Ensure your farm and other assets are distributed according to your wishes through a properly drafted will.

2. Mistake: The plan doesn’t match asset ownership

Solution: Review ownership and beneficiaries for all of your assets

Oftentimes, people have a will or trust, but the way their assets are titled does not match the distributions under the will or trust. You may have a joint bank account with your son and a will that states your accounts should be divided evenly among your children. Which controls? Frequently, the bank account ownership controls. Your family may be confused or upset by this if your intent is unclear.

Make sure you regularly review asset titles, account ownership and beneficiary designations to avoid a mismatched plan.

3. Mistake: Unintended heirs or accidentally disinherited heirs

Solution: Set up trust and estate beneficiaries that are legally binding

Spouses commonly give everything to each other with the understanding that upon the death of the second spouse, it will be divided equally among the children. This may be problematic upon the death of the first spouse, especially in blended families. For example, the surviving spouse can change the will to disinherit the deceased spouse’s children. Consider creating a plan that is binding if one of you passes away or a plan that carves off assets for your children at the time of your death.

4. Mistake: Unenforceable last wishes

Solution: Create legally binding estate distributions

If you give too much discretion to a trustee or personal representative with “wishes” to do certain things, they may not happen. Your trust or will should not just express a desire or wish. It should mandate the manner in which your estate should be distributed per your instructions.

This situation frequently arises with distributions of personal effects. The decedent may have told individuals or even put some tape on the back of the china, but the decedent did not make it mandatory for family members to receive certain personal items.

To minimize family conflict, ensure that distributions of farm business assets, land, personal property and other last wishes are legally part of your estate plan.

5. Mistake: Poor tax planning

Solution: Maximize tax savings

As land continues to rise in value, in order to keep the farm in the family, advanced estate and income tax planning may be required. In the 1990s, people who owned farms frequently created tax plans that would minimize federal estate tax because there was a tax of 55% on estates exceeding $600,000.  Federal estate taxes change annually. Currently, you can transfer $5.49 million to someone other than a spouse free of federal estate tax. If the estate exceeds $5.49 million, there is a 40% tax. In 2018, you can transfer $11.18 million to someone other than a spouse free of federal estate tax. If the estate exceeds $11.18 million, there is a 40% tax. A married couple can plan to ensure they each capture this federal exemption to pass on over $22 million estate tax free to their families.

Oregon taxes estates that exceed $1 million and transfer to someone other than a spouse on a sliding scale of 10%-16%.  However, Oregon also has the Oregon Natural Resource Credit (“ONRC”) that farmers can take advantage of to keep the farm in the family. The ONRC is an estate tax credit for Oregon farms that meet the following requirements:

1. The adjusted gross estate must be less than $15 million.
2. ONRC property exceeds 50% of the adjusted gross estate.
3. ONRC property was operated for five of the last eight years by the decedent immediately before death or by a decedent’s family member.
4. ONRC property is inherited by the decedent’s family and continues to be used to farm for five of the eight years following the decedent’s death.
5. The ONRC is limited to the first $7.5 million of ONRC property.

Aside from estate taxes, capital gains on the sale of farm property have increased.  Analyze potential estate and income taxes with your attorney and CPA to determine the best way to reduce taxes for you and the next generation.

6. Mistake: Selecting the wrong helpers

Solution: Name representatives and trustees who are able to handle the job

When looking for designated agents, trustees and personal representatives, choose trustworthy, organized “doers” who get along with everyone in the family and are excellent communicators. Ask yourself: “Will appointing this person increase tension among siblings or other family members?” If the answer is yes, appoint a neutral person or professional to manage your trust and estate.

7. Mistake: Failing to address family dynamics

Solution: Work through potential family issues in advance

If one child is inheriting the farm, tell the other children and explain why. Have an honest and open dialogue about the succession and your goals. Perhaps the child worked on the farm his or her whole life and this is fair, albeit not equal. For any potentially sticky situation, take the next step of not just telling the family as a group, but writing a letter to your children explaining your decision.

8. Mistake: Failing to address disability

Solution: Execute documents and instructions for your family to have in the event of an emergency

Who knows all the details of your farm business? Who is legally authorized to run it if you had an emergency? Would the contracts, leases, supplies, payments and employees all run smoothly? If not, these issues need to be addressed in your business and estate planning documents. Disability guidelines are key. Where do you want to live? How do you want to live? Are there special circumstances relating to your business or properties that need to be addressed? If one child leases part of your land, was that done through a handshake or a legally binding document that your representatives need to honor?

Ensure that you have documents in place that allow someone to step in to manage your assets and make health care decisions on your behalf in the event of an emergency.

9. Mistake: Failing to seek advice from a qualified attorney

Solution: Find an attorney who focuses on estate planning and farm succession to make sure your plan is prepared correctly

The law is complex and our situations, especially in farm and business, are unique. Seeking help from a lawyer who performs this type of work can mean the difference between a plan that works and one that fails.

10. Mistake: Failing to update estate and business plans

Solution: Review your plan regularly

Any time a beneficiary, trustee, agent, personal representative or other helper’s circumstances change, update your plan. Any time your circumstances change, update your plan.

Have your attorney review your plan every three to five years for law and tax changes.

About the author: Maria Schmidlkofer is an attorney with Schwabe, Williamson & Wyatt. She focuses her practice on estate planning and works with many farmers throughout the Pacific Northwest to create comprehensive succession plans for their families. You can reach her at mschmid@schwabe.com or (503) 540-4265.   

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