Dear Michael: We have farmed our whole lives and are now fast approaching retirement. Unlike most of your clients, we have no children and no close relatives who are farming. We don’t feel the usual need to make certain our farm stays together for a next generation. We also have been lucky enough – without the expenses of a family – to put quite a bit of money into savings through traditional SEP’s and savings accounts. What are the things we should be worried about in our estate planning? – No Kids
Dear No Kids: Because you never had any children and because you don’t have any heirs that you want to enrich upon your deaths, you need to plan your last years on this planet for yourselves. Of course, everyone is on their ‘last years’ – we just don’t know when that will be.
In your case, you are approaching retirement. This typically means there will be an equipment sale and or a year or two or more of grain sales to deal with. The first year when you don’t have fall inputs to offset the year’s income is IRS painful, to say the least. No deductions, all the income, etc. etc.
To soften the blow, you might consider leasing equipment rather than replacing equipment. Your payments are deductible and when you’re done with the equipment, it goes back to the dealer. Your costs are lower – short-term – than purchasing. If you feel the need to replace something right now, look into leasing equipment short-term rather than buying machinery you’ll have to resell in a few years anyway.
Second, you might talk to your elevator and find out what kind of programs they have for doing deferred payments to you. Many elevators are more than happy to keep your money and pay you a little interest on the amount payable to you until you are ready to take the payments.
For tax reasons, you might talk to your CPA and decide what tax bracket you will be in when you retire. As the income goes up, the tax brackets get wider. For example, the twenty-five percent net income tax bracket is $74,900 to $151,100. If the future average minimum net income you have is higher than $74,900 and less than $151,100, that’s the number you use for taking money from your elevator. You might as well fill up your 25% bracket – especially considering it’s the least you will ever pay and anything over $118,000 is Social Security tax free. If you are already bordering on the SSI cap, it’ll save you an additional 17% by taking the $33,000 difference.
Remember to factor in your Social Security earnings, as well, because if you earn more than $34,500, forty percent of your SSI earnings are taxable as well. For the most part, you have a five year period where you need to play your cards right for maximum return for the five years prior to taking SSI income.
Secondly, you need to take a look at what your savings and retirement funds are invested in. It’s fun to play in the markets when you’re earning money – it’s not so fun to lose money when your income is now based upon it. You might start trending your savings and retirement funds towards more secure investments – such as guaranteed index annuities – where your principal is no longer at risk. These annuities offer income riders guaranteeing higher and higher annual income every year you wait to take the income. Guaranteed income vs. market insecurity?
Last but not least, if you have sufficient money to live on from your farm assets and don’t feel like you’ll need much from either your savings or your retirement funds, you can start transferring some of the taxable investments (again with an eye towards the tax brackets) to either non-taxable (Roth) or to other non-taxable avenues that provide lifetime income, a death benefits to your spouse and long-term care benefits for both of you.
Many people do standard roll outs of their taxable money each year to provide for long-term care benefits, non-taxable savings and a non-taxable death benefit from their taxable accounts.
Without heirs, consider your life ahead and what you would consider luxuries – an income without worry, perhaps guaranteed health and long-term care, if you need it, delivered in the way you would prefer, and peace of mind knowing you’ve taken care of the future you – the one who will now be age seventy, eighty, and beyond.
“Keeping the Family Farm in the Family”
Great Plains Diversified Services, Inc.
1424 W. Century Ave., Suite 208
Bismarck, ND 58503-0917
Toll Free: 1-800-373-4078