Estate, Business and Retirement Planning for the Farm Family – Annapolis and Towson Estate Planning

The family is at the center of most farms and agricultural businesses. Each family has its own history, values and goals. A good place to start the planning process is to take the time to reflect on the family and the farm history, says Ohio County Journal in the recent article “Whole Farm Planning.”

There are lessons to be learned from all generations, both from their successes and disappointments. The underlying values and goals for the entire family and each individual member need to be articulated. They usually remain unspoken and are evident only in how family members treat each other and make business decisions. Articulating and discussing values and goals makes the planning process far more efficient and effective.

An analysis of the current state of the farm needs to be done to determine the financial, physical and personnel status of the business. Is the farm being managed efficiently? Are there resources not being used? Is the farm profitable and are the employees contributing or creating losses? It is also wise to consider external influences, including environmental, technological, political, and governmental matters.

Five plans are needed. Once the family understands the business from the inside, it is time to create five plans for the family: business, retirement, estate, transition and investment plans. Note that none of these five stands alone. They must work in harmony to maintain the long-term life of the farm, and one bad plan will impact the others.

Most planning in farms concerns production processes, but more is needed. A comprehensive business plan helps create an action plan for production and operation practices, as well as the financial, marketing, personnel, and risk-management. One method is to conduct a SWOT analysis: Strengths, Weaknesses, Opportunities and Threats in each of the areas mentioned in the preceding sentence. Create a realistic picture of the entire farm, where it is going and how to get there.

Retirement planning is a missing ingredient for many farm families. There needs to be a strategy in place for the owners, usually the parents, so they can retire at a reasonable point. This includes determining how much money each family member needs for retirement, and the farm’s obligation to retirees. Retirement age, housing and retirement accounts, if any, need to be considered. The goal is to have the farm run profitably by the next generation, so the parent’s retirement will not adversely impact the farm.

Transition planning looks at how the business can continue for many generations. This planning requires the family to look at its current situation, consider the future and create a plan to transfer the farm to the next generation. This includes not only transferring assets, but also transferring control. Those who are retiring in the future must hand over not just the farm, but their knowledge and experience to the next generation.

Estate planning is determining and putting down on paper how the farm assets, from land and buildings to livestock, equipment and debts owed to or by the farm, will be distributed. The complexity of an agricultural business requires the help of a skilled estate planning attorney who has experience working with farm families. The estate plan must work with the transition plan. Family members who are not involved with the farm also need to be addressed: how will they be treated fairly without putting the farm operation in jeopardy?

Investment planning for farm families usually takes the shape of land, machinery and livestock. Some off-farm investments may be wise, if the families wish to save for future education or retirement needs and achieve investment diversification. These instruments may include stocks, bonds, life insurance or retirement accounts. Farmers need to consider their personal risk tolerance, tax considerations and time horizons for their investments.

Reference: Ohio County Journal (Feb. 11, 2021) “Whole Farm Planning”

 

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Tax Planning in Your Retirement Planning – Annapolis and Towson Estate Planning

Once you are retired, the only tax you will not have to pay will be—can you guess? Yes, payroll taxes. However, there are plenty of other taxes to be paid, advises Forbes in the article that answers the question “What Taxes Will I Owe In Retirement?”

People who are accustomed to having employers handle income taxes throughout their working lives, are often surprised when they learn that not working does not mean you are not paying taxes. Income is taxable, whether you are working or not. You will not have to pay into Social Security when you retire, and Medicare becomes a premium, not a deduction from your paycheck. However, there are still taxes to be paid.

Federal income taxes range from 10 to 37 percent, depending on your income bracket and marital status. Pensions, annuities, IRA withdrawals, defined benefit plans, 457 or any other pre-tax retirement accounts will generate tax liabilities.

Is any income tax-free in retirement? Withdrawals from Roth IRAs are tax free, since you paid tax on the money before it went into these accounts. The same goes for the Roth 401(k)s.

Are there taxes on Social Security? Approximately 60% of retirees will not owe federal income taxes on Social Security benefits. However, your Social Security benefits might be taxed, depending upon your retirement income. This tax also varies depending upon where you live. Some states tax Social Security benefits, others do not. Rental income and royalties are also counted as income.

Consumer taxes. Sales tax and property taxes will still need to be paid. For many people, property taxes are their highest tax expenses.

Is there a tax on Medicare? The Medicare Surtax, also known as the Unearned Income Medicare Contribution Surtax or NIIT, is a 3.8% Medicare tax that applies to income from investments and regular income above specific thresholds. For 2020, if you have MAGI (Modified Adjusted Gross Income) above $200,000 ($250,000 for married couples filing jointly), you will have to pay NIIT. This is one that most people do not know about, and can add up quickly, especially if you have great market returns and realized gains.

With good planning, you may be able to replace 100% or more of your pre-retirement income. In many cases, it may mean paying about the same amount in taxes as you did while working. If you do a good job of saving and have a large income during retirement, you will most likely end up paying at least some taxes on retirement income. It is a good problem to have, but still a problem.

All of these retirement taxes add up to quite a nice tax bite, if you are not prepared for them. This is another example of how advance tax planning can make a big difference in the quality of your retirement.

Reference: Forbes (Feb. 23, 2020) “What Taxes Will I Owe In Retirement?”

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Should You Move Your 401(k) to A Roth? – Annapolis and Towson Estate Planning

Overhauling the retirement savings system is the subject of considerable talk in Washington these days, with the focus on how to give an immediate boost to government tax revenues. With retirement fund accounts being measured in the trillions, it is no surprise that they are being eyed.

One of the ideas being discussed, according to the article “What ‘Rothifying’ 401(k)s Would Mean for Retirees” from The Wall Street Journal, is to repeal the current structure of pretax contributions to retirement accounts and adopt a system where contributions would come only from after-tax contributions, just as Roth IRAs do now. It also has a name, “Rothification.” It could become very popular in the not too distant future.

However, behind this need to plug the gaps in the national budget could be a dismal scenario for workers saving for retirement.

Those U.S. savers who do save money for retirement now contribute to their IRA, SEP, and other tax-deferred accounts with money that is deducted from their taxable income. They only pay taxes on this money when they take Required Minimum Distributions (RMDs) during retirement, or after age 72. The tax deferral provides a powerful incentive to save. The Investment Company Institute reports that defined contribution plans and IRAs were valued at $18.3 trillion as of the third quarter of 2019.

With a federal deficit now at more than $1 trillion and the federal debt at $23 trillion (according to the U.S. Treasury), the money has to come from somewhere. The Treasury also estimates that it will forgo $2.4 trillion in tax revenue from the nation’s tax-deferred retirement savings over the next ten years.

With Social Security having an additional $43 trillion in underfunding, according to the 2019 report of the Social Security and Medicare trustees, government funds are going to have to come from somewhere.

Under “Rothification,” savers would make their retirement fund contributions with after-tax income, and the Treasury would get its money now, rather than waiting for current workers to retire or die.

The challenge is that people do not save as much as they need to for retirement. Many of them are depending upon Social Security to cover the lion’s share of their retirement income. Removing the tax incentive for retirement saving will discourage retirement saving.

What will that mean for estate planning? Adjusting to the changes from the SECURE Act already has estate planning lawyers reviewing estate plans for the new ten-year withdrawal requirements for IRA beneficiaries. Once the “Rothification” discussions move from talk to legislation, expect large push-back from the financial services industry, which runs these accounts, now worth $18.3 trillion.

Reference: The Wall Street Journal (February 17, 2020) “What ‘Rothifying’ 401(k)s Would Mean for Retirees”

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What Exactly Is the Estate Tax? – Annapolis and Towson Estate Planning

In the U.S., we treat the estate tax and gift tax as a single tax system with unified limits and tax rates—but it is not very well understood by many people. The Motley Fool’s recent article entitled “What Is the Estate Tax in the United States?” gives us an overview of the U.S. estate and gift tax, including what assets are included, tax rates and exemptions in 2020.

The U.S. estate tax only impacts the wealthiest households. Let us look at why that is the case. Americans can exempt a certain amount of assets from their taxable estate—the lifetime exemption. This amount is modified every year to keep pace with inflation and according to policy modifications. This year, the lifetime exemption is $11.58 million per person. Therefore, if you are married, you and your spouse can collectively exclude twice this amount from taxation ($23.16 million). To say it another way, if you are single and die in 2020 with assets worth a total of $13 million, just $1.42 million of your estate would be taxable.

However, most Americans don’t have more than $11.58 million worth of assets when they pass away. This is why the estate tax only impacts the wealthiest households in the country. It is estimated that less than 0.1% of all estates are taxable. Therefore, 99.9% of us do not owe any federal estate taxes whatsoever at death. You should also be aware that the lifetime exemption includes taxable gifts as well. If you give $1 million to your children, for example, that counts toward your lifetime exemption. As a result, the amount of assets that could be excluded from estate taxes would be then decreased by this amount at your death.

You do not have to pay any estate or gift tax until after your death, or until you have used up your entire lifetime exemption. However, if you give any major gifts throughout the year, you might have to file a gift tax return with the IRS to monitor your giving. There is also an annual gift exclusion that lets you give up to $15,000 in gifts each year without touching your lifetime exemption. There are two key points to remember:

  • The exclusion amount is per recipient. Therefore, you can give $15,000 to as many people as you want every year, and they do not even need to be a relative; and
  • The exclusion is per donor. This means that you and your spouse (if applicable) can give $15,000 apiece to as many people as you want. If you give $30,000 to your child to help her buy their first home and you’re married, you can consider half of the gift from each spouse.

The annual gift exclusion is an effective way for you to reduce or even eliminate estate tax liability. The estate tax rate is effectively 40% on all taxable estate assets.

Finally, the following kinds of assets aren’t considered part of your taxable estate:

  • Anything left to a surviving spouse, called “the unlimited marital deduction”;
  • Any amount of money or property you leave to a charity;
  • Gifts you have given that are less than the annual exclusion for the year in which they were given; and
  • Some types of trust assets.

Reference: The Motley Fool (Jan. 25, 2020) “What Is the Estate Tax in the United States?”

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Am I Better Off Investing Earlier in My IRA? – Annapolis and Towson Estate Planning

Remember that you are able to make an IRA contribution for a given year anytime between January 1 and the tax-filing deadline of the following year (usually April 15). That means that you can make a 2020 IRA contribution between Jan’ 1, 2020, and April 15, 2021. However, do not wait. Why not?

Vanguard’s recent article entitled “IRA contributions: The earlier, the better” notes that you invest to earn money, and the amount of money you earn depends primarily on three factors—two you can control.

  1. Investment performance. There is no way to control investment performance and all investing involves risk. The main cause of risk is market movement, which impacts your investment earnings.
  2. The amount you invest. You earn your money with compounding, when your investment earnings make their own earnings. If you contribute more, you have more money to generate earnings. That means you have more earnings to generate additional earnings. You can control the amount you invest, provided you keep within the annual IRA contribution limit.
  3. Your investment timing. If you wait until April to make an IRA contribution, you have missed 15 months of compounding, so if you have the financial flexibility to decide when you contribute to your IRA, do it ASAP.

As an illustration, let us imagine that you invest $5,500 in your IRA each year for 30 years, and your average annual return is 4%. In Situation A, you make a lump-sum investment every January, and your end balance is $323,967. That includes $158,967 in earnings. In Situation B, you make a lump-sum investment every April and your end balance is $308,467. That includes $143,467 in earnings, which is $15,500 less than you would earn in the first scenario. In each situation, you are contributing a total of $165,000 to your IRA over the span of 30 years.

This illustration shows some what-if scenarios that are not always possible to do in real life. For instance, you may not be able to invest the same amount each year or have to skip a few years. However, you should make small steps toward saving 12%–15% of your gross income (including employer contributions) every year. If you do not have the financial flexibility to make a lump-sum investment in your IRA—in January or April (or in any other month as a matter of fact), try to set up recurring automatic bank transfers. If you make bi-weekly contributions over the course of 30 years (for a total contribution of $165,000) and earn a 4% average annual return, the end balance is smaller than Situation A but larger than Situation B.

However, remember that you can’t contribute more than you’ve earned for the year.

Reference: Vanguard (Jan. 21, 2020) “IRA contributions: The earlier, the better”

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How Do I Incorporate My Business into My Estate Planning? – Annapolis and Towson Estate Planning

When people think about estate planning, many just think about their personal property and their children’s future. If you have a successful business, you may want to think about having it continue after you retire or pass away.

Forbes’ recent article entitled “Why Business Owners Should Think About Estate Planning Sooner Than Later” says that many business owners believe that estate planning and getting their affairs in order happens when they are older. While that’s true for the most part, it is only because that is the stage of life when many people begin pondering their mortality and worrying about what will happen next or what will happen when they are gone. The day-to-day concerns and running of a business is also more than enough to worry about, let alone adding one’s mortality to the worry list at the earlier stages in your life.

Business continuity is the biggest concern for entrepreneurs. This can be a touchy subject, both personally and professionally, so it is better to have this addressed while you are in charge, rather than leaving the company’s future in the hands of others who are emotionally invested in you or in your work. One option is to create a living trust and will to put in place parameters that a trustee can carry out. With these names and decisions in place, you will avoid a lot of stress and conflict for those you leave behind.

Let them be upset with you, rather than with each other. This will give them a higher probability of working things out amicably at your death. The smart move is to create a business succession plan that names successor trustees to be in charge of operating the business, if you become incapacitated or die.

A power of attorney document will nominate a fiduciary agent to act on your behalf, if you become incapacitated, but you should also ask your estate planning attorney about creating a trust to provide for the seamless transition of your business at your death to your successor trustees. The transfer of the company to your trust will avoid the hassle of probate and will ensure that your business assets are passed on to your chosen beneficiaries. Timely planning will also preserve your business assets, as advanced tax planning strategies might be implemented to establish specific trusts to minimize the estate tax.

Estate planning may not be on tomorrow’s to do list for young entrepreneurs and business owners. Nonetheless, it is vital to plan for all that life may bring.

Reference: Forbes (Dec. 30, 2019) “Why Business Owners Should Think About Estate Planning Sooner Than Later”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

How Do I Plan for My Incapacity? – Annapolis and Towson Estate Planning

The Post-Searchlight’s recent article, “How to go about planning for incapacity,” advises that planning ahead can make certain that your health-care wishes will be carried out, and that your finances will continue to be competently managed.

Incapacity can strike at any time. Advancing age can bring dementia and Alzheimer’s disease, and a serious illness or accident can happen suddenly. Therefore, it’s a real possibility that you or your spouse could become unable to handle your own medical or financial affairs.

If you become incapacitated without the proper plans and documentation in place, a relative or friend will have to petition the court to appoint a guardian for you. This is a public procedure that can be stressful, time consuming and costly. In addition, without your directions, a guardian might not make the decisions you would have made.

Advance medical directives. Without any legal documents that state your wishes, healthcare providers are obligated to prolong your life using artificial means, if necessary, even if you really don’t want this. To avoid this happening to you, sign an advance medical directive. There are three types of advance medical directives: a living will, a durable power of attorney for health care (or health-care proxy) and a Do Not Resuscitate order (DNR). Each of these documents has its own purpose, benefits and drawbacks, and may not be effective in some states. Employ an experienced estate planning attorney to prepare your medical directives to make certain that you have the ones you’ll need and that all documents are consistent.

Living will. This document lets you stipulate the types of medical care you want to receive, despite the fact that you will die as a result of the choice. Check with an estate planning attorney about how living wills are used in your state.

Durable power of attorney for health care. Also called a “health-care proxy,” this document lets you designate a representative to make medical decisions on your behalf.

Do Not Resuscitate order (DNR). This is a physician’s order that tells all other medical staff not to perform CPR, if you go into cardiac arrest. There are two types of DNRs: (i) a DNR that’s only effective while you are hospitalized; and (ii) and DNR that’s used while you’re outside the hospital.

Durable power of attorney (DPOA). This document lets you to name an individual to act on your behalf. There are two types of DPOA: (i) an immediate DPOA. This document is effective immediately; and (ii) a springing DPOA, which isn’t effective until you’ve become incapacitated. Both types end at your death. Note that a springing DPOA isn’t legal in some states, so check with an estate planning attorney.

Incapacity can be determined by (i) physician certification where you can include a provision in a durable power of attorney naming one or more doctors to make the determination, or you can state that your incapacity will be determined by your attending physician at the relevant time; and (ii) judicial finding where a judge is petitioned to determine incapacity where a hearing is held where medical and other testimony will be heard.

Reference: The Post-Searchlight (December 13, 2019) “How to go about planning for incapacity”

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How to Spot Problems at Nursing Homes – Annapolis and Towson Estate Planning

The best time to shop for a nursing home, is when you do not need one. If you wait until you can no longer safely or comfortably live on your own, you probably will not be in a position to do a lot of legwork to investigate facilities. Do your research well ahead of time, so you know the nursing homes in your area that provide high-quality care and, more importantly, the ones that have significant problems.

As you evaluate and compare facilities, you need to know how to spot problems at nursing homes. The marketing brochure, website and lobby might be lovely, but you should base your decision about a long-term care facility on much more data than those things. Here are some tips on how to dig for possible problems at nursing homes:

  • Online search. Check out the nursing home’s website to get an overview of the services it offers and the industry affiliations or certifications it has. Look at the daily menus to see if the meals are nutritious and have enough variety. Most people would not enjoy eating the same main course two or three times a week. Look at the activities calendar to see if you would be happy with the planned social events. On some websites, you can view the floor plans of the resident rooms.
  • Ask your primary care doctor to name a few facilities he would recommend for his parents, and those where he would not want them to live.
  • Local Office on Aging location. Every state has an Office on Aging. Contact them to get as much information as you can about safety records, injuries, deaths, regulation violations and complaints about local nursing homes.
  • Your state’s Long-term Care Ombudsman (LCO). Every state also has an Ombudsman who investigates allegations against nursing homes and advocates for the residents. Your state LCO should have a wealth of information about the facilities in your area.
  • State Online Database or Reporting System. Some states have online databases or collect reports about nursing homes.
  • Medicare’s Nursing Home Compare website. Medicare maintains an online tool, Nursing Home Compare, that provides detailed information on nursing homes. Every nursing home that gets any funding from Medicare or Medicaid is in this database. You can enter the name of a specific nursing home or search for all the facilities in a city or zip code. The tool includes information about abuse at long-term care facilities. On the webpage, you can explore the Special Focus Facility section to find nursing homes with a history of problems.
  • Word of mouth. Ask your friends, relatives and neighbors to recommend a quality nursing home. Personal experience can be extremely valuable.
  • Make a short list of the top candidates. After you collect as much information as you reasonably can, narrow your options down to four or five facilities that best meet your needs and preferences.
  • Visit your top choices. There is no substitute for going to a nursing home and checking it out in person. Pay attention to the cleanliness of the place throughout, not just in the lobby. Give the facility the “sniff” test. Determine whether they use products to mask unpleasant odors, instead of cleaning thoroughly. See whether the residents are well-groomed and wearing fresh, clean clothes. Observe the interaction of the staff with the residents. Notice whether people who need assistance at mealtime, get the help they need without having to wait.
  • Take online reviews with a grain of salt. Fake reviews are all over the internet. If you see a nursing home with only a few reviews, and they are all five stars, be skeptical.

Once you gather this information, you will be ready in the event you need to stay in a nursing home for a short recuperation from surgery or longer term.

References:

AARP. “Finding a Nursing Home: Don’t Wait Until You Need One to Do the Research.” (accessed December 5, 2019) https://www.aarp.org/caregiving/basics/info-2019/finding-a-nursing-home.html

CMS. “Find a nursing home.” (accessed December 5, 2019) https://www.medicare.gov/nursinghomecompare/search.html

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

How is My Retirement Income Taxed? – Annapolis and Towson Estate Planning

Based on the state in which you retire, state income taxes could vary by thousands of dollars. However, as a recent Kiplinger article, “State Taxes on Retirees Differ by Types of Retirement Income,” tells us, it’s not just a state’s tax rate that matters. The type of income you get in retirement frequently has a bigger impact on your state taxes than your tax rate, because each state has its own method of taxing specific types of retirement income.

Let’s look at the taxes on Social Security benefits. The federal government can tax up to 85% of Social Security benefits, but most states don’t tax Social Security benefits. There are seven states—Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming—that don’t tax Social Security benefits because they don’t have any income tax. New Hampshire and Tennessee only tax interest and dividends. Social Security benefits are exempt from tax in DC and 28 states: Alabama, Arizona, Arkansas, California, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Virginia, and Wisconsin.

That leaves 13 states where part of Social Security benefits may be taxable. New Mexico, Utah, and West Virginia currently tax Social Security benefits to the same extent they are taxed on federal returns, but West Virginia plans to phase out its tax on Social Security benefits in 2020. Taxation of Social Security benefits in the rest of the states—Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, North Dakota, Rhode Island, and Vermont—is based on your income and, in many instances, on your filing status. Some of these states may also exempt Social Security for taxpayers under certain income thresholds.

As far as retirement plan payouts, state taxation of payouts from retirement plans, such as pensions, IRAs, and 401(k)s, can be more complicated. States without an income tax or that just tax interest and dividends don’t tax retirement plan payouts. However, with the other states, it’s all over the board. Mississippi and Pennsylvania are the most generous—they typically don’t tax any retirement income. However, California, D.C., Nebraska, and Vermont offer few or no tax breaks for retirement plan payouts. In some cases, the type of retirement plan involved makes a difference.

Reference: Kiplinger (October 28, 2019) “State Taxes on Retirees Differ by Types of Retirement Income”

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How Do I Decide to Retire or Keep Working? – Annapolis and Towson Estate Planning

Fed Week’s article, “Many Factors Affect Choice of Retiring or Continuing to Work,” says that the Congressional Budget Office found that after declining for decades, the share of those ages 55 to 79 who were employed began to go up in the mid-1990s. In 1995, 33% of those in that age range worked, but by 2018, 44% did. The Congressional Budget Office pinpointed some factors that are motivating people to work longer. Let’s look at some of these:

  • Those with a college degree are more apt to be employed at any age than those without one. The percentage of individuals with degrees has been increasing over time, especially among women.
  • From the mid-1990s to 2018, the health of people ages 55 to 79 improved significantly. This shows the gains in self-reported measures and longevity. Improvements in health impact employment, both because healthier people are physically able to work longer and because increased life expectancy may motivate people to spend more years working, in order to pay for their retirement.
  • Job Characteristics. Over time, fewer people worked in blue-collar jobs. Due to the fact that blue-collar jobs typically have greater physical demands than other jobs—and workers in those jobs tend to retire earlier—that decrease impacts some of the rise in employment of people 55 to 79.
  • Increased Employment of Women. Research has shown that the increased employment and delayed retirement of married women over the period, might have contributed to the increased employment of married men because many couples retire at the same time.
  • Employer Policies. The move from defined benefit to defined contribution retirement plans lowers the incentive to retire at a particular age. The added burden for workers to save on their own also creates more motivation to work longer. Private sector companies have also cut back on health insurance coverage for their retirees. Only 37% of workers now have employer-based health insurance that covers retirees between 55 and 64, compared with 69% in 1992. As a result, workers have an incentive to work at least until 65, when they become eligible for Medicare.

Reference: Fed Week (November 7, 2019) “Many Factors Affect Choice of Retiring or Continuing to Work”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys