Brown: LLCs work best for estate transfer
According to Laramie attorney Kermit Brown, many who are involved in agriculture in Wyoming have an estate before they are even conceived, and thus the importance of sound estate planning.
“I leave my ranch to my grandchildren, who aren’t even here yet, and they’ll have it clear through childhood and adulthood and through their declining years, and that estate exists after they die, until it’s settled,” says Brown, giving an example. “The timeline of an estate begins before you’re conceived and ends after you’re dead.”
“What you’re trying to do with estate planning is work your way down through the generations, and if you do it correctly in Wyoming you can form a trust that lasts 1,000 years,” he says. “It’s like a river that flows along, and you’re just one part of it.”
Tax code influences property transfer
Speaking on how to move things from generation to generation, Brown says the instruments and legal problems are largely a function of the federal tax code. As part of that, Brown lists the Applicable Exclusion Amount, or AEA, which is currently at $5 million per person that can be passed on tax-free.
“Another aspect in the AEA is a concept called portability, which came in the last tax code and says that a husband and wife can pass $10 million in assets together. The first to die can leave all their assets to the survivor in a tax-free exchange, and they can also leave their $5 million exclusion to the survivor,” he explains.
In addition to the AEA, a property owner can also utilize the annual gift limit of $13,000 per year.
“If you do that with a spouse in a split gift, you can give $26,000 per year, per donee. If you have five kids and split gifting, you can give away five times $26,000 per year, or $130,000 per year,” explains Brown. “You can start chewing a hole at that rate, and that’s the one thing that’s really important – you can’t get time back. Time is your friend in this thing, and the less time we have, the less flexibility we have.”
Brown says that, if a family wants to skip a generation and gift to the grandchildren instead of children, there’s a $1 million exemption, but after that there’s a healthy tax on generation-skipping transfers of property.
$5M exclusion could
He also explains that the U.S. tax situation will be good until Dec. 31, 2012, but he predicts that if Congress does nothing, late 2012 will be frantic.
“The dilemma will be this – we’re sitting in December 2012, and Congress is doing what they do best – nothing,” he says. “The $5 million exclusion will expire at the end of 2012, so the dilemma is whether to make a gift now and move the assets, or take the chance that Congress will do the right thing.”
“There will be a lot of concern, and some will make the gift and get the assets moved right away, while others will say they think Congress will do something, and they’ll take the chance,” he adds.
Corporations no longer recommended
The family planning tools that are available for property transfer are family limited partnerships, a limited partnership, a family limited liability company, corporations and partnerships.
“We used to put ranches in corporations, and that became a big disadvantage when the IRS repealed a section of the code and said you can’t get out of a corporation tax-free anymore,” states Brown. “If the ranch is worth $100,000 when you put it in, and a million when you take it out, you have to pay tax on the $900,000 of gain to get it out of the corporation.”
“If anyone has a ranch left in a C corporation and hasn’t done anything about it, you need to, because they’re a bad deal. They were done for a good purpose, but then the IRS changed the rules,” says Brown, adding that the options are limited, but C corporations can be converted to S corporations, but it takes 10 years to do it.
“C corporations are double taxation – the corporation pays a 35 percent tax on the money it makes, and then to get the money out in a dividend you have to pay personal income tax on the dividend again,” he explains.
LLCs have least tax
Although S corporations are an option for C corporations, Brown says the best thing in Wyoming today is a family limited liability company.
“Most elect to be taxed as a partnership, and you can put things in, take them out, form and dissolve with no tax consequences,” he says. “The land is deeded into the company, and you can give out shares in the company. I do them with units of interest and treat them just like a corporation.”
Brown, who is also a Wyoming State Representative, says that the Wyoming Legislature just finished recodifying the law on limited liability companies in Wyoming.
“We have one of the greatest LLC statutes in the U.S., and when we did it we talked a lot about estate planning,” he notes.
Of partnerships or LLCs, Brown says that when the gifts are made control can still be retained by the older generation.
“The children are minority interests and get discounts, and you can move a lot of property that way and still not lose control of the company, but you still have to have a succession plan for the end,” he continues, adding that the children can still be confident, knowing that their stake in the ownership is building up.
Create two LLCs for an operation
“What I really like to do with a lot of ranches is create two LLCs – one that owns the real estate only, including the mineral rights and the rights to mineral royalties, and another that is the operating entity, with things like the cows, machinery, checking account, brands and horses.”
He says in that situation he sets up a 99-year lease between the land company and the operating company, and the gifting takes place on the land side, with share and share alike and the kids getting an even interest.
“The operating entity involves those who want to be involved in the ranch, and they get the cows and machinery but not more than their fair share of the land. Their wages convert back to equity in the operating company,” says Brown.
Brown says that he likes the fact that the land company returns something to the kids, but the bad part about that is that the kids have to show it on their financial statements, which can influence things like college scholarships.
In conclusion, Brown says, “Most of the time we want to get the family assets into some kind of an organization, and an LLC is the best but a limited partnership is almost as good. Once you get them in a family business organization, then you can devise fractional interest to different people and leave the title to the land and the assets to the operating entity.”
Kermit Brown presented his information to the Wyoming Stock Growers Association Estate Planning Seminar in December 2011. Christy Martinez is managing editor of the Wyoming Livestock Roundup and can be reached at firstname.lastname@example.org.