The Smith family has owned a farm in California’s Central Valley since the 1930s. At the present time, John and Jane run the farm and are in their mid to late 60s. They have three children; a son and two daughters. However, only the youngest daughter and her husband are involved in farming.
The Smiths would like to keep the farm in the family, but there are already questions and misunderstandings among the siblings as to what will happen when their parents retire or die:
- Will the farm be given to younger sister?
- Shouldn’t younger sister manage the farm, receiving her 1/3 of the profits as compensation?
- Should younger sister receive a salary before profits and, if so, how much?
Attorneys from Acuña ❖ Regli examined a number of options with the Smiths.
If the farm is to be kept intact for the benefit of all three children, a salary must be created which compensates younger sister for her time and efforts. What remains after salary and all other farming costs is the true profit which can be divided three ways. However, as with most farms and small businesses, there is often very little left over to divide as profits.
Instead of three owners for the farm, the family decided to value the farm and to purchase insurance which will equalize the inheritance for the three siblings, without adding to estate taxes!
- An Irrevocable Life Insurance Trust (“ILIT”) would be created.
- The ILIT would buy “second-to-die” life insurance on the parents. Because such policies do not pay until both spouses have died, they are much cheaper to buy.
- Each year, tax free gifts would be made by the parents to the ILIT, and the gifts would be used to pay the insurance premiums.
- When the parents have both died, younger sister will receive the farm and her two siblings will receive the cash proceeds from the ILIT, equalizing their inheritance.
After the plan was discussed, the family was much calmer. All three children feel as if they are being treated fairly. They also feel as if there is an incentive for younger sister to take care of the farm and their parents as they age.
Acuña ❖ Regli provides expert services within the four corners of family wealth transfers: Estate Planning, Probate and Trust Administration; Conservatorship and Special Needs Planning; and, Inheritance Litigation. We are also available to counsel our clients and to refer them to competent, qualified attorneys who can help if they need further, specialized help. ContactUs@AcunaRegli.com or call (925) 906-1880.