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New Case Study: An Ag Family Succession Story

February 4, 2016

AG CASE STUDY:  Succession & Business Planning 
"The facts vary such that no two situations are ever the same."  - Jeff Bowman, CPA, Partner and Ag Team Lead

A first-generation farmer in Stanislaus County wanted to pass on his individually owned business to his adult children. The second generation planned to maintain and enlarge the operation, which included farming and ag processing. Important to note, not all of the farmer's children were employed on the ranch.
  • The farmer wanted to ensure the children inherited equitably.
  • All parties wanted to limit the liability exposure posed to the farmer as an individual owner and operator.
  • The father and his children wanted to limit taxable income and estate taxexposure for the older generation.
  • The operation needed to be positioned for future growth.
  • Limiting tax impact on contributing operations to new S Corp and Limited Partnerships
  • Considering the benefits and burdens of an IC-DISC entity
  • Determining how and through which entity owners should be compensated
  • Cash-basis methods available for farm activities 
  • Important factors for tax planning:
    • Farm income averaging and qualifying types of income
    • Net investment income tax
    • Active versus passive investor treatment
    • Maximizing the domestic production activity deduction
    • Optimizing income for IC-DISC commission purpose
Along with the farmer's attorney, we recommended forming a new operating entity and a separate entity for holding the real estate, reducing risk and providing flexibility. The new operating entity is used to maintain the business services, equipment ownership, and labor for the farming operation. By forming the realty entity, the father was able to conveniently introduce ownership to the second generation. In the end, our Ag team developed a fair, strong succession plan for our client by working with his attorney and taking into account the current and future needs of the operation.
Forming entities and limiting liability exposure require a high level of legal counsel. We worked closely with the client's attorney while analyzing succession options. The attorney's estate tax expertise ensured the plans were consistent with future gifting and estate transfer intentions, while mitigating risk. 
*FYI: The attorney filed state articles of formation, obtained a federal ID number for each entity, drafted the crop share lease and farm management services agreement, formed the IC-DISC, and drafted the commission agreement. The attorney also created a deed for transferring the land.

Top 5 Keys to Succession Planning

As Harvest Comes to a Close, Now is the Time to Focus on the Big Picture: Succession Planning
Jeff Bowman, Ag Team Leader
At some point, all family farming operations face the same challenge: "What do we do if something happens to Dad? Who gets what?"
Succession planning is never a favorite topic. It can be rife with emotion and conflict, but it also is a challenge and a reality that all family businesses need to prepare for. 
Is this the year that your family is going to tackle succession? For ag families, the alternative to proper succession planning oftentimes is grim and involves losing most or all of the family farm. Sadly, this is a fact. As families grow, so does the potential for conflict.
Let us help.
Jeff Bowman, Ag Team Leader, says the first step he takes when working with a family on its succession planning is to learn what the long-term goals are for the farm and the next generation. "It's an open conversation where I can learn their thoughts and big-picture goals," he says.
Here are five starter tips to help get the ball rolling*
  1. Don't avoid "The Talk" because it is a touchy or fight-triggering subject.  
  2. Obstacles like greed, family disharmony, control freaks, self-interest, and lack of contribution are tricky topics to air. Speak candidly and nip them in the bud with new solutions. 
  3. Write down both small and major goals that every person can agree on.  
  4. Schedule regular meetings with the entire family during the year and be sure that notes or recordings are taken at every meeting.  
  5. Commit and execute the plan!
Back in October of last year, we invited agriculture succession planning expert Kevin Spafford to join us for a luncheon presentation. He shared the helpful tips he has gleaned after working with hundreds of ag families. Click here to learn more.
Grimbleby Coleman is a trusted ally when it comes to assisting ag families with succession planning. We want each family member to accomplish his or her individual long-term financial goals. There's no time quite like the present when it comes to the matter of succession planning - make plans with your family today. We can help you navigate the conversation.
*These reminders are thanks to Kevin Spafford, Legacy-By-Design.


How to Let Your Money Live on With a Charitable Remainder Trust

If you would like your money to continue to help others after you pass, it's time to start thinking about your estate's philanthropic capacity - and planning for its future.  
Many of our clients proactively plan for the future by setting up a charitable remainder trust (CRT).  Charitable trusts allow you to make substantial gifts to a favorite charitable organization without giving up all rights over the property. Charitable trusts are an exception to the general rule that you can't claim a current tax deduction by making a limited or postponed gift. Through a charitable trust, you can make an irrevocable future gift to a charity and still claim a current income tax deduction.
"Making the decision to establish a CRT should not be taken lightly, due to the initial legal fees and required annual accounting fees, but there are plenty of benefits for the right person," Principal and CPA Colleen Meenk says. "I've seen clients with modest means as well as extremely wealthy clients benefit from establishing a CRT. Almost always, there is stock or another type of investment property involved in the trust."


Who is a good candidate for a CRT?
Consider establishing a CRT if you're charitably minded and have an asset that has appreciated significantly that would result in burdensome taxes if sold. For example, let's say you hold stock in a company and the value of the stock goes through the roof. If you sell that stock, there would be considerable  savings if contributed to a CRT first. A CRT would sell the stock and you would be taxed only on the income stream received.


If you're considering a CRT, think about your own life expectancy and your assets. Will they continue to grow? You'll be able to use the cash a CRT provides while you're living, but whatever amount remains in the trust after your death will go to charity.


"We caution our clients that a charitable trust does not work for everybody," Meenk says. "To be successful, this has to be the right person with an identifiable asset of significant value." 


Why a CRT instead of a standard philanthropic donation?
A CRT allows you to retain the right to an income stream. You won't pay capital gain taxes as you would if you took the earnings from the major asset's sale; rather, you'll be taxed a smaller percentage over the years, avoiding the immediate tax hit. The structure of a CRT also benefits the organization you want to support: It can lead to a larger donation, which will allow you to do more long-term, meaningful good.


How do you set up a CRT?
  1. Review the asset with your accountant as part of your estate and charitable giving plan.
  2. Your accountant will model and calculate your CRT based on your asset's long-term and current market value; this financial modeling will help you better understand the financial implications of a CRT.
  3. Your attorney will draft the trust agreement.
  4. Your asset must be funded, and then sold, by the end of the calendar year.
Interested in donating to your university or a small non-profit?

Most colleges or universities have a dedicated endowment staff that are well versed in CRT calculations and can help with advance planning. Of course, don't forget to run those projections by your accountant and financial advisor!
Smaller, local charities are typically less equipped to plan and implement a CRT. It's best to get a professional opinion early on in this situation.


How is the CRT filed with the IRS?
The CRT is filed on its own return each year, referred to as a Split Interest Trust, with its own K1 reporting the income stream distributed, which is then included in your individual return.


To learn more about the CRT guidelines, check out the IRS website. It would be our pleasure to help you set up your CRT. We're happy to explain the pros, cons, and long-term commitment. Please give Colleen or your CPA a call or email.  

Meet Grimbleby Coleman Team Member Cynthia Guerrero


Cynthia Guerrero, CPA and Manager, has been with Grimbleby Coleman since 2005 and utilizes her skills to help clients meet their present needs and future goals.  

"Knowing that we can bring clients peace of mind, even if in just one aspect of their lives, is what makes our work worthwhile," she says. 

Cynthia is an active member of the Stanislaus Estate Planning Council and is training to become an estate planning expert. Cynthia has served on the Board of Directors for the CalCPA San Joaquin Chapter and has participated in the Relay for Life.

Learn more about Cynthia here. 

Featured Article

How to Avoid Identity Theft This Tax Season
When it comes to identity fraud during tax season, we have good news and bad news. The good is that we can quickly identify and anticipate when it has happened and jump into “damage control” action. The bad news — well, it happens. Increasingly, clients are experiencing this devastating crime. During tax season, thieves will try to snatch your refund. And, unfortunately, it’s a long and rocky road to repair the problem.  How do you know if you’ve been hit with identity fraud?  We usually discover identity fraud when we try to file a return for a client. We’ll receive a message that alerts us that someone has already used the client’s Social Security Number to file; since only one social can be used per filing, this is a huge red flag.  “Unfortunately, identity fraud is discovered when we file tax returns,” says Linda Bossard. “In fact, several of our clients have had this challenge. It is difficult to work through, but we do it.”  Earned income credits that have been filed because of a fake W-2 are another tricky issue. If you file and can claim earned income that you didn’t actually earn, scammers have figured out how to reroute your refund. The IRS now requires employers to file W-2 information sooner so they can begin matching W-2 information with claims.  Tips to avoiding Identity Fraud: Protect your Social Security Number. Don’t give in to email phishing scams by email or phone. Remember that the IRS will never call you or email you! If you do receive a call or email, it’s most likely a scam, particularly if the person sounds hostile. Protect yourself! Lock your credit card, check your credit regularly, and use a Social Security protection site such as LifeLock.  Contact the three national credit bureaus (TransUnion, Equifax and Experian) to secure/lock your credit.  What to do if you are the victim of fraud:  Immediately contact the Identity Protection Specialized Unit (IPSU) of the IRS. If it has been a year or longer since you filed and you have not received your refund, the IPSU can help you. Our team can manage this if you grant us Power of Attorney (POA) privileges. Download the Identity Theft Affidavit (Form 14039) from the IRS and fill it out.  Contact credit reporting agencies. File by paper (otherwise the IRS will think you’re filing twice) and explain that you are a victim of identity theft.  (You will then be issued a PIN to use for the next year.)  The IRS is working to improve Electronic Fraud Detection Systems (EFDS) data to determine true social security number owners, eliminating time-consuming research and making the process more efficient. Also, rumors are circulating that the IRS may be thankfully starting a new program called “The Identity Theft Commission” to help avoid these fraudulent crimes.  If you are concerned you may be a victim of tax-related identity theft, Linda Bossard or one of our accounting team-members will be able to help out. Contact us at 209-527-4220. Stay safe this tax season!

Featured Events

Make Dreams Real Golf Tournament

We are proud to participate in the 27th Annual Make Dreams Real Tournament charity golf event that funds and supports youth programs in Modesto and the greater Stanislaus community.

Featured Staff

Kiran enjoys building trust with her clients and exceeding their expectations in tax matters. She joined the Grimbleby Coleman team in 2015 after two years with a Bay Area firm specializing in international taxation and planning. She currently holds a Bachelor of Science in Business Administration with concentration in accounting from University of the Pacific. 

Outside of the office, Kiran tutors students in elementary to college level math and English. She also spends a lot of free time enjoying the company of her friends and family, traveling, and hiking. 

An interesting aside about Kiran, she spent 5 years of her life choreographing and teaching bhangra routines! For those of you who don't know, bhangra is a traditional Pubjab folk dance style. Although she no longer teaches, Kiran does love attending bhangra competitions and cultural shows. 

Her favorite number? "11- for no particular reason, I've just always liked this number ever since I was a young girl."

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