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Ask SCORE by Dean Swanson

This is my third column in a series on the topic of helping farm families to plan their future around the farm business. You’ve worked hard building your family farm. And now, you’ve decided it’s time to move on. As a farmer, you know how important it is to be prepared for any contingency. And you should approach your business exit with as much planning and preparation as you run your farm.

In my last column I wrote about developing a succession plan and I asserted that it is important to identify your exit options and to analyze each of them. In this column I will discuss “estate planning” as the last part of succession planning.

SCORE has partnered with Mass Mutual to develop some great resources for this topic and makes them available on its website. I will share some of that content in this column. It is important to note that the information provided is not written or intended as specific tax or legal advice. SCORE and MassMutual, its subsidiaries, employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.

First, what is “estate planning?”

In general, estate planning is the act of preparing for the maximum transfer of wealth and assets during life and at death in the most tax-efficient manner possible.

Specifically, your estate plan should address the issues that matter to you. Decide what you want to accomplish, not only after you pass away but while you are alive as well.

Your estate plan should:

• Determine who gets what, how, and when

• Maximize the size of the estate that will pass to your intended beneficiaries

• Minimize the estate taxes and administrative expenses required to settle your estate

• Provide liquidity to pay required taxes and expenses

A solid estate plan puts you in control of your future. It helps you maintain maximum control over your wealth, allowing you to pass the maximum inheritance on to your heirs with the most protection possible. And remember your biggest asset is your farm!

Creating your estate plan

No two farmers are exactly alike, so you have different needs and goals for your estates. But there are some documents everyone planning an estate needs, including:

1. Living will: A written statement explaining your desired medical treatment under circumstances in which you no longer can express informed consent.

2. Health care proxy: (also known as a durable power of attorney for health care, medical power of attorney, or appointment of a healthcare agent): This document appoints another person to make health care decisions for you if you cannot speak for yourself. Naming a health care proxy is one of the most important things you can do to ensure you get the health care you prefer. Health care proxy laws vary by state.

3. Power of attorney: Giving someone your power of attorney authorizes them to act on your behalf in a legal or business matter if you cannot do so. There are different types of POAs that give your attorney-in-fact (the person who will be making decisions for you) different levels of control.

4. Will: This legal document explains how you want your probate assets distributed after your death. As part of your will, you name an executor who ensures the estate taxes and other liabilities are paid and that the remaining assets are distributed according to the provisions of the will. If you die without a will, then intestacy laws will govern the distribution of your assets. (This means a court-appointed administrator will compile the assets, pay any liabilities, and distribute the remaining assets to those deemed as beneficiaries. The probate process also varies by state.)

5. Revocable living trust: You can avoid probate if you transfer assets to the trust prior to death. This can speed up the distribution of assets to your beneficiaries and minimize transfer costs. Trusts are not public documents. Even if you have a living trust, it’s recommended you have a “pour-over” will, which states that any assets not in the name of the trust at the time of death will be transferred to the living trust.

6. Buy-sell agreement: This document is a must-have for business owners. A buy- sell agreement is a contract between business owners that dictates what happens to the business in the event of the owner’s death, disability, or departure from the business. The agreement (you need an attorney to draft it) states who can buy the shares, what type of event triggers a sale, and what the purchase price is in total or per share.

Make sure you update all these periodically to reflect life changes.

My next column will be the last in this series. I will discuss the steps in gathering and documenting your assets and close with a discussion of the special challenges for farmers as they complete their estate plan.

Dean L. Swanson is a volunteer-certified SCORE mentor and former SCORE chapter chair, district director, and regional vice president for the northwest region.