There has been controversy with most of the management techniques used by horse owners over the years, and the topic of creep feeding continues to generate heated debate in many circles. In horses and other livestock, birth and weaning weights are only somewhat to moderately heritable. However, environment plays a major role in raising healthy foals, and breeders like those big foals. So what can we do to enhance the production of larger foals? First off, the products of a typical pregnancy (fetus, fluids and placental membranes) account for about 10% of a healthy mare’s weight, or for a 1,200 pound mare, about 120 pounds. Any foal weighing a lot less than this 10% estimate is likely to have problems with survival and performance. While we can’t do too much about the foaling weights, except select for larger sires and dams, we can enhance the foal’s weaning weight through the judicious use of a creep feeder.
The purpose of the creep feeder is to provide for increased energy (calorie) consumption by the foal, while still nursing on its dam. The important point to remember is – it is the energy which must be initially provided, as mare’s milk contains a good source of digestible protein, which the creep is not likely to replace. Additionally a creep feeder will provide for some increased management aids for most farms:
As the foal is consuming more of its requirements from the creep, the mare will cut back on her milk production in order to match consumption of the foal. This will provide for lessened stress on the lactating mare and may allow her to begin to show estrous cycle activity earlier. Many mares will go into a lactational diestrus and will not show any signs of heat or may not settle (become pregnant) if bred. This often is seen in “every other year breeders”, as they may lack the nutritional resources or the hormonal stimulation to attempt to start another pregnancy while they are having such trouble maintaining their own body weight with a demanding foal at side.
The lactation curve for most females is an interesting study. Peak milk production in mares occurs between three and eight weeks after foaling. It should be obvious that as the growing foal’s requirements continue to increase, the mare’s ability to produce the nutritional support for that growth becomes more limited. The creep feeder encourages the foal to increase consumption as its dam loses the ability to nourish it properly. Too many horse owners provide the mare huge quantities of feed during pregnancy with the ill conceived notion that they are feeding two animals at that time. This is further complicated by the fact that they then turn the new foal and mare out to a “natural environment”, in a poorly managed pasture at a time when the nutritional stresses are greatest on the mare. Generally most pastures can not provide for proper supplementation of the mare’s requirements during peak lactation and the mare and foal suffer in this circumstance. As a result, we stress the mare unnecessarily.
By encouraging the foal to consume solid feed as early as possible, it makes the transition during the weaning process much less traumatic. Foals get used to eating on their own and eventually become more independent, and this makes separation from the mare easier and less fretful.
Many mares are a little marginal in their maternal instinct or ability to provide adequate milk for their foal, and if this was to occur early in the foal’s development it might permanently stunt its growth. By providing a creep ration, the risk of this malnutrition is minimized. Sometimes it’s better to feed the foals directly, rather than to feed the mare and hope that she will produce enough milk to maintain normal growth. Remember that the mare takes her “cut” of the feed as a “handling charge” in order to manufacture that milk. By removing her as an unneeded “middle man” we may be more efficient at providing the foal with the nutrients needed for proper growth.
Early weaning provides for increased efficiency and may prevent some foals from acquiring the bad habits of their mothers. Numerous horse owners have noticed that their early weaned foals didn’t have enough time to learn to bully their peers as their mothers did. (much of an animal’s behavior is learned) This makes for a more uniform group of foals to train and condition.
Don’t count on the foal being able to steal enough feed from its dam to make much of an impact on its growth rate. Some mares are defensive about their feed and may not let a foal near the feeder, even if it could reach it. Other mares in a group setting are prone to chase foals away from their feed. This expression of a “pecking order” may result in the foal being hurt by one of these overly aggressive mares and that’s not usually worth the risk. There’s nothing wrong with feeding mares and foals in a group, provided you match the condition, temperament and status carefully. Since the foal learns to eat by watching others do the same, it provides good stimulus to consume the grain ration. This competitive nature of foals can be exploited to get foals to eat earlier, provided that the foals are about the same size and background so that the “pecking” order does not create further problems for us. Foals which are raised in a box stall may utilize a feeder with spacer bars designed to keep the mare out of the foal’s feed, provided the mare does not mind the foal eating while she can not.
A creep may easily be built out of portable panels, fencing material etc. in a pasture near the waterer so that the foals will have the occasion to be near it and use it often. In a dry lot arrangement, the corner of the lot is as good a place as any to set up a temporary creep feeder. When building the creep feeder, remember that its purpose is to provide easy and safe access to the foal, while at the same time limiting the mare’s ability to get in and eat too. In that vein, make the creep strong and of substantial construction so as to prevent the mare from breaking into it. When I design a creep structure, it may be a permanent part of the pasture improvements or I build them on pipe skids for portability. Then they can be moved with the horses as pastures are rotated and horses shifted to accommodate breeding or weaning schedules. Whether temporary or permanent, provide at least two entrances, so the foal doesn’t feel trapped by other foals or mares and can get out without a major panic attack. There are a number of creeps which provide shade and shelter for the foals, this has advantages in that it will protect the feedstuffs from the elements and prevent spoilage. Additionally it seems that the average foal doesn’t mind being away from its dam for a short time. As a reflection of that comfort, they may even feel secure enough to take a nap in a well protected creep and that beats being under foot in a herd of milling mares. Since most foals have to be taught to use the creep, push a foal into the creep and handle it there daily, letting it in through one entrance and out another. Many farms take rectal temperatures and vitals daily, doing this in the creep offers a chance to acquaint the foal in a fairly non-threatening way to the advantages of being in that creep, while checking the health of the foal at the same time.
For convenience, horse owners often like to feed their horses by volume (quarts, scoops or gallons) while the directions found on most feed products and in nutrition texts measures feed by weight. I personally prefer to feed by weight, as my employees can be consistent in their ration mixing and feeding. The average owner will heap the coffee can full one time and take a quick swipe through the grain bin the next; also, your employees may define a scoop of feed differently (heaping or level). That does nothing for the horse except promote more opportunities for colics and misfeeding. Since most horses’ requirements are based on body weight and activity, I would suggest that the horses, both young and old, be weighed or measured around the girth with a weight tape to keep current on the rate of gain and changing feed requirements. After all, a pound is a pound and feeding by weight will prove to be a more cost effective way to control your expensive grain and hay consumption, as there will be less waste. Additionally, you will be more likely to spot changes with a scale or girth measurement than you would with your eye. When you see the horse every day, little changes aren’t very noticeable.
As a rule, I start my creep feed at no more than 0.5% of the foal’s body weight. This provides me with an easy introduction to the ration and won’t let the foal overeat. Small quantities of fresh feed should be available at all times if the creep is to function as intended. Avoid low quality, high fiber rations for the creep, as the foal lacks the adult’s more efficient cecal digestive function necessary to break down roughage. I have had good results with most grains (whole or rolled oats, cracked or flaked corn, rolled or whole barley) and I prefer to feed very little long stem grass hay to foals. Although they will pick at a flake of hay, most young foals wind up wasting a lot of it. To counter the high phosphorus content of the grain, I will use alfalfa pellets in the creep feed. It seems that the pellets are easier to consume, contain enough bulk to prevent overeating, control dust in the feed and presents foals with a well balanced ration. While pellets do not produce the “gutty” appearance seen on so many of the weanlings as they first start eating hay, a poor quality pellet is still a poor choice for foals. Once the foals are consuming between 2.2 and 2.5% of their body weight in creep feed, then I can wean them with very little stress anywhere between two and four months of age. If you do not want to wean quite as early, that’s acceptable provided you are willing to supplement any deficiencies found in your pastures.
A common developmental problem encountered in growing foals is getting them gaining weight faster than their legs can handle the strain. Fat foals, carrying a lot of weight, will be prone to bone development problems like epiphysitis, and this may require that excessive grain consumption be curtailed. Predisposing calcium-phosphorus imbalances are common in many areas, so the National Research Council recommends that rations with less than a 1.4:1 (Calcium:Phosphorus) ratio for most foals be a place to watch for problems. Since most grains and protein supplements are high in phosphorus and low in calcium, there exists a strong probability of mineral imbalances occurring if there is not a legume roughage (alfalfa, clover etc.) included. If it is determined that a calcium supplement should be added to the grain ration, calcium carbonate is commonly used as a primary source of this mineral.
As a diagnostic tool, unfortunately, blood tests on horses are not very effective as a means to determine whether mineral imbalances have occurred. Hormonal controls in the horse’s thyroid and parathyroids will attempt to balance the deficiencies, and may make these tests less reliable. Since the endocrine system is interfering with normal levels of minerals in the bloodstream, there exists no easy test to determine whether or not a horse is utilizing a well balanced ration. A number of private and university laboratories will analyze your feedstuffs to determine whether or not a problem is likely to exist, and corrections can then be made. Consult your state horse extension specialist at your state land-grant university for further information on these tests and recommendations.
As we approach weaning time, there are small changes made in the ration to increase the protein content of this feed. Some farms use dried skim milk as a protein source, but many commercial feed companies are turning to soybean meal (SBM) as the protein supplement of choice. It’s easily obtained and mixed into the feed, and SBM provides a good supply of the essential amino acids which make up the protein necessary for proper growth. Trace mineralized salt should also be provided free choice to the young foal, as there are minerals which are not found in adequate quantities in either the milk or many grain products. Unless the ration is of poor quality or imbalanced, there usually is not a vitamin deficiency which would require any significant supplementation. Proper care of your foals will result in a healthier and better developed mature horse, so the effort while they are young is worth the extra feed now.
Spending Too Much Money on Horse Feeds? – Henry & Associates
Spending Too Much Money on Horse Feeds?
How to Avoid Wasting Your Bucks
Vaughn W. Henry, Henry & Associates
Breeding Farm Management Consulting
To paraphrase the old beef council ads, this article is about real food for real horses. With all the emphasis on human nutrition today, it’s become much easier to discuss horse feeding questions because the terms and problems are nearly interchangeable. Horses have similar requirements to people and since there are only six nutrient classifications, let’s quickly see what’s available. Don’t skip this next section, there are a few important points which need to be made before we get into the money angle. If you have access to reputable nutritionists, have them analyze your ration and make recommendations based on individual horse’s needs or groups of horses with similar needs. In the U.S., often the local state land-grant university or Cooperative Extension Service has a specialist responsible for answering questions about horse nutrition needs. As a rule, nutrition “armchair experts” at the local feed store or coffee shop lack the required background to answer technical questions, so it makes sense to look beyond the advertising hype and “old wives’ tales” and get to the real basics of nutrition for solutions to your feeding problems.
Water – probably the single most overlooked and cheapest nutrient, an adult horse will consume 10-20 gallons of water per day. Consumption is influenced by the environment (mostly temperature and humidity), work, lactation, stress, illness, dryness and texture of feed, mineral content of the feed and availability. Some areas of the country have such poor water quality that animals will not drink adequate water because of odor, mineral content (hardness) or contamination. Since your animal’s health depends on receiving adequate water, do not under supply this important nutrient. In the winter, many digestive upsets could be avoided if horses had more free access to water. There is nothing magical about this nutrient, but sometimes common sense management is often overlooked. Occasionally water consumption will be reduced in the winter because poorly grounded electrically heated waterers shock the horse enough to discourage drinking. Good managers take extra effort to assure ice-free water sources and avoid unnecessary colics. Horse owners who frequently travel with horses occasionally are often faced with horses refusing water in trailers or vans, so they will flavor the water prior to a trip and continue adding mint or similar extracts to disguise regional differences in water quality. While it’s rare that a healthy horse will over consume water, be extra careful if it has been withheld for a long time or the horse is overheated.
Energy is provided in the ration by only three of the six nutrients: carbohydrates, proteins and fats. After water, energy sources are the next most important requirements to be met. Energy is needed for all metabolic activities, especially for performances for which horses are best known, like work and sport. The ability for feed sources to provide energy to horses is measured in calories and it’s important to remember that rapidly growing horses expected to work expend great quantities of energy. Sometimes it’s physically impossible for these horses to consume enough feed to meet the needs of both work and growth, so one or the other suffers.
Since carbohydrates are usually the cheapest source of calories for the horse, this article will emphasize their use. As a plant eating non ruminant, the horse breaks down carbohydrates from two primary sources, grains and roughages. Since the horse has not evolved with an efficient means of digesting roughage with high cellulose (fiber) content, roughage quality is very important. On the other hand, cattle, sheep and other ruminants are able to utilize lower quality roughage because the digestive fermenting processes effectively use micro-organisms. These symbiotic organisms, which have a beneficial partnership arrangement with their host, predigest roughage which then can be absorbed readily in the intestine. While it’s true that the horse has significant microbial action; this activity is found in the colon and the cecum which are anatomically located after the small intestine, the primary site of nutrient absorption. With such an “after-burner” arrangement, equines are going to be less efficient in digesting fiber, and horse owners need to keep that in mind when purchasing feed products. Short change the horse in the feed department, and you diminish potential growth, work and performance, so in many cases, it’s false economy to buy poor quality feed products and then try to provide the required nutrients in the form of expensive supplements.
Proteins, composed of amino acids, are building blocks for muscle and tissue, making up about 20% of the mature horse’s weight. Protein requirements depend on the stage of the horse’s growth or production, as growing foals and lactating mares need more protein than mature working horses. Protein use is based on the quality and balance of amino acids which make up protein structure and digestibility for the horse. Although leather scraps are superficially as much a protein source as soybean meal, leather isn’t very digestible, so these scraps aren’t useful as protein supplements. So it’s more important to know what goes into a feed product making up the reported crude protein (% C.P.) content, as not all proteins are used by the horse equally. A few feed manufacturers promote their products by marketing crude protein evaluations, but C.P. is actually only a measure of nitrogen content, not nutrient utilization by the horse. Smart horse owners learn to look at feed sources, digestible protein levels and amino acid balance instead of just crude protein numbers on feed tags. Overfeeding protein is economically a serious problem on many farms, and feeding excess protein for energy is a real waste. When meeting the horse’s requirements with a good quality feed, protein provided above individual requirements will not enhance your horse’s performance and may actually cause harm. Besides, in a poorly ventilated barn, you can always smell the ammonia associated with farms feeding excessive protein supplements, and that’s not healthy either.
Fats are concentrated sources of energy and are well tolerated by horses. Often they are added to rations to increase energy content, palatability, reduce dust, keep supplements well mixed in the ration, improve hair coat and provide a source of fat soluble vitamins and the building blocks for natural steroid hormones. Fats may be subject to spoilage in warm weather and should be limited to about 5-8% of the ration in most cases.
Minerals (ash) form the basis for the skeletal system, many hormones and enzymes, and are necessary for normal metabolic functions. As a rule, minerals are supplied in varying quantities by feed products and will depend on the soil and growing conditions, maturity of the plant when harvested, digestibility and availability of minerals and their interactions within the ration. Most of the emphasis will be on macrominerals (calcium, phosphorus, sodium, chloride, potassium, sulfur and magnesium) and microminerals, those needed in smaller quantities (zinc, selenium, copper, iron, cobalt, iodine, fluorine, manganese). Generally a calcium-phosphorus source and trace mineral salt will satisfy most horse’s mineral requirements if they receive a well balanced ration of good quality feedstuffs. However, there are areas of the country that have serious deficiencies of some minerals and excesses of others, so consult your local nutritionist about potential shortages or toxic influences. The calcium:phosphorus ratio is one of the best known of mineral inter-actions, but there many others which make a mineral “team” work within a good feed product. Mineral imbalances are much more common and usually more severe than vitamin problems, so pay attention to those numbers on your feed tag.
Owners typically focus on vitamin supplementation to solve problems, whether the problem is nutritional or not. Unfortunately vitamin requirements are not as well understood in the horse as in other species, but supplementation may be needed if the ration is of poor quality or if the horse is under stress from excessive training or illness. By themselves vitamins will not provide energy to a horse, but they are necessary for the horse to properly utilize feed products. Generally a high quality ration or good pasture will supply the vitamins needed by most horses, the fat soluble A,D,E,K and water soluble B and C vitamins. Fat soluble vitamins can be fed to excess, and these often cause toxicity problems and impair growth, so keep in mind that “more is not better”. Excessive water soluble vitamins are generally excreted in the urine and feces, making it a expensive waste product, so don’t overfeed vitamin supplements, as it’s more efficient to just pour them down the drain rather than pass them through the horse.
Feed By Weight, Not Volume!
For convenience, horse owners like to feed their horses by volume (quarts, scoops or gallons) while the directions found on most products calls for feeding by weight. If you feed by volume you will be inconsistent in ration mixing and feeding. The average owner will heap the coffee can full one time and take a quick swipe through the grain the next. Your employees may define the scoop of grain and flake of hay directions you left on the stall door differently from your intentions and that does nothing for the horse except promote more colics. Inconsistency is really hard on horses, and well managed farms learn to avoid it by establishing programs that everyone can follow. Feed requirements are based on body weight and activity, so both young and old horses should be weighed or weight taped to keep current on their rate of gain or loss. After all, a pound is a pound and feeding by weight will be a more cost effective way to control your expensive grain and hay consumption, resulting in less waste. You will be more likely to spot changes with a scale or girth measurement than with your eye. When you see a horse every day, little incremental changes aren’t very noticeable.
Temper this advice with good sense, if a horse weaves in his stall or is particularly fretful, then it will use more calories than the placid nag standing under the shade tree. Caloric recommendations are just that, you have to tailor the numbers to fit the individual. On one occasion I calculated a ration for a weaned foal owned by a novice. Through the whole routine explanation about protein, mineral and energy needs for this transitional foal I eventually developed a nice easy ration which would work satisfactorily. A year later she told me the foal wasn’t growing well at all. I asked what she was feeding and she said, “exactly what you told me to – 6 lbs. of grain and roughage as calculated last Spring”. Silly me, I assumed that she understood all of my comments and would boost the ration proportionally as the foal grew and its requirements increased accordingly. Accordingly, I have found out that the word assume must evolve from a phrase about making an “ass of u and me”. So try to be even more explicit when asking for advice, even to the point of presuming nothing about nutrition when talking to your advisor.
How Much Does My Horse Weigh?
Commercial weight tapes are usually within 5% accuracy, which is better than an eyeball guesstimate and are cheaper to buy than livestock scales. Plus it is easier to use a tape than try to get the horse to hold still on your bathroom scales. As you haul your horse to shows or the veterinarian, many feed elevators have scales that will accommodate your horse, stop and ask to weigh. Remember that knowing the horse’s weight is also important in the use of many medications, so invest in an inexpensive weight tape and quit guessing.
Focus on energy needs
Since energy is the most expensive component of your horse’s diet and the one many horse owners neglect, you must emphasize its importance. Too many times an owner will shortchange the diet in calories and the horse will perform poorly. To solve the problem, the owner or trainer will turn to vitamin supplements, tonics, blood builders and other gimmicks. When equine nutritionist, Dr. Steve Jackson, was at the University of Kentucky, he often mentioned, in jest, using powdered bat wings as a feed supplement. It sums up nicely the mystique that surrounds ration formulation. Someone will develop a secret feed formula that is supposed to do everything necessary to make a horse win, then everybody tries to jump on the bandwagon and feed the same product. Many horse owners and trainers are the world’s best mimics, always looking for some new scheme and neglecting the basics. There are no secrets, just pay attention to basic details.
Not every calorie is efficiently converted into useful work. Just as a car engine wastes some fuel through friction, exhaust and heat, a horse will lose efficiency through waste products, methane, body heat, etc. However, calories are calories, and there are four kilocalories (kcal) produced from each gram of protein or carbohydrate and nine kcal. from each gram of fat. In theory you could meet a 1,000 pound horse’s caloric requirements with 64 Mars® candy bars. However, just as with people, this is not the preferred ration because other critical nutrients are neglected. But to prove a point, look at the following ration provided by just 7 pounds of candy (please note, theobromine in chocolate is probably toxic to horses; I only used the candy as an example of empty calories):
63.58 candy bars provides these nutrients per bar
Nutrients per day supplied just by candy bars
Daily nutritional requirements of a 1000 lb. idle horse
15,259 Calories (kcal.)
4 gm. Protein
254.3 gm. Protein
600 gm. Protein
85 mg. Sodium
5,404.3 mg. Sodium
7,500 mg. Sodium
On evaluation, this limited ration is short on protein, sodium and other important nutrients, but the candy bars did meet the energy needs of an idle mature horse. So you see the whole picture is important and balance is the key.
Cheaper isn’t always better, different feed mills have varying standards for storage, feed quality, ethics, professional advice, standardization and so on. Sometimes a more expensive feed is cheaper in the long run rather than paying for colics and crooked legs on youngsters. One concern that should always be addressed deals with molds or toxins in grains and roughages. Your feed supplier should know that the feed is used for horses, as there are additives used for other species that are toxic to horses. Equines have less tolerance for poor feed quality than many other animals, so consistency and quality are important factors in selecting your feed dealers. On an operation of any size, feed cost is also a significant factor. For example a horse farm paying 19.5 cents for each pound of their commercially bagged feed considered a number of changes for the following reasons:
The feed suppliers were 70-100 miles from the farm and when the employees took the farm truck to get feed, it always turned into an all day adventure. Besides the cost of the feed, labor and a vehicle had to be paid for as well.
The commercial ration was a good one, but a 16+% Crude Protein (CP) formulation for this farm that had mostly overweight and aged broodmares was excessive. Already they fed a predominantly high quality alfalfa hay ration, so why pay for the extra and unneeded protein in the commercial product?
Although the ration was calculated to serve the highest nutritional need for weanling foals, it was fed to all of the animals. There was no ability to customize the ration for different groups of horses and their various needs. Even if you didn’t count the waste of feed and money, which was prohibitive, it still couldn’t effectively meet the needs of all the horses.
The farm staff was mostly self taught about nutrition and followed the confused horse owners’ rule, “if a little is good, then more is better”. By purchasing lots of exotic vitamin supplements to add to this already over-rich feed product, several young horses were crippled due to vitamin and mineral imbalances.
Simple solutions about storage, smart buying, appropriate feeding to individuals or similar groups and types of horses cut the feed bill significantly. What’s significant? In a group of 100 horses consuming an average of 8 lbs. of grain per day, feed grain costs at this farm averaged $56,940 per year, not counting labor and vehicle costs for transportation. After a review of procedures and needs, the grain and supplement expenses were dropped to less than $15,000 and all of the labor and vehicle costs were removed by smarter bidding and buying procedures. Additionally rations were tailored to meet the specific needs of each group of horses, and that reduced the number leg problems in their growing horses. It pays to shop wisely, but you should look at the whole picture with professional advice. Many recommendations from your state horse specialist, many professional nutrition experts or the Cooperative Extension Service are free, so use those resources wisely.
Make decisions based on: cost, ease of use, safety, availability, etc.
Let’s see how one would calculate the nutrients for two common rations typically used for an idle, mature horse using just alfalfa hay and corn and compare it to a common timothy hay and oats ration. To meet this “maintenance” ration, I used just two ingredients only for simplicity, as most rations would add an inexpensive vitamin-mineral supplement to fill in the gaps as needed. A column after each ration’s analysis shows either a (+) that indicates the ration meets or exceeds the requirement or a (-) that indicates there is a shortage in the ration for that particular nutrient, as defined by the N.R.C. Even though the weight of the two rations is equal, the actual nutrients provided to the horse are much different.
NUTRIENTS REQUIRED FOR MAINTENANCE
6.5 lbs. Oats and 11 lbs. of Timothy Hay Provides Nutrients
6.5 lbs. Corn and 11 lbs. of Alfalfa Hay Provides Nutrients
A quick look at the two ration options shows how just two ingredients may supply most of the requirements of a mature horse for maintenance. The quantities may be adjusted upward to accommodate increased needs for work, but there may still be deficiencies and imbalances and that’s why feed companies pay nutritionists “big money” to solve these problems. Keep in mind that excesses can be a serious problem for some nutrients, so moderation is important.
Buying Feed on Volume Measurements
A practical quiz on your feed buying abilities. As you go into the local feed store or elevator and note that the price of oats posted at $2.20 per bushel and corn at $2.60 per bushel. You immediately decide that oats is the better buy, right?
Cash price per bushel (volume)
1 Bushel weighs
Cost per pound in cents
1 pound yields these calories
Kilo Calories purchased for 1 cent
Who’d a thought it? You get 75% more calories with corn for the same penny. Remember that energy (calorie) costs to support your horse typically run somewhere around 70-80% of your feed budget, so counting calories has more than one meaning in the business. There are three major grains used in horse feeds in the U.S.: oats, corn and barley. Corn has taken a lot of abuse as a horse feed because it is packed with calories, compared to the more fibrous oats, and horse owners typically insist on feeding by volume and not weight. Corn can be safely used and is a great horse feed, if and only if you substitute the calories supplied from oats or barley with corn, CALORIE for CALORIE. If you insist on feeding by scoop or coffee can (imprecise volumes at best), then you’re going to dump significantly more energy, nearly twice the calories, into your horse’s feed bucket. Colic, founder and excessive weight gains probably will result from this mistake. Make your feed transitions slowly to allow the horse’s digestive system time to accommodate the change in your new feed source and there usually shouldn’t be any problems. There are a lot of myths associated with grain feeding in horses, and corn has a big share of them. The same basic analysis should be performed on all of your feed sources, in order to get the most value for your dollar. Tougher economic times require the horse owner to look at all of the costs associated with keeping their animals. Don’t be afraid to ask questions and examine the ways you’ve been budgeting your farm’s feed expenses. Too often, we spend money by habit, rather than because there is a specific need. A good plan will allow you to reach your goals and still control your costs.
The National Research Council (N.R.C.) has the services of the most respected nutritionists in the U.S on developing equine requirements and feed use. For those interested, the NRC Nutrient Requirements of Horses publication is available from the National Academy Press, Washington, D.C. 20418 for about $20. It’s a technical publication filled with tables, so it’s not something to read for pure enjoyment. It has information on topics of concern to all horse owners and should be a part of your library. For computer users, an accompanying diskette is easy to install and use, offering recommendations for your ration development. The diskette is a little limited in its application, if you plan to mix types of horses in your planning, but it offers you a good starting point. For the computer spreadsheet aficionado, it’s a snap to develop a ration calculation template that uses the most common feed and hay products for your area. You can customize it with actual feed evaluation numbers, rather than the estimates, if your feeds are routinely analyzed.
There are two ways to calculate energy requirements, use a calculator /computer and a complicated scientific calculation or use the Total Digestible Nutrients (TDN) system. The old worksheet distributed by Purina Mills uses the older and simpler TDN system based on the horse’s weight x 0.8 lbs. TDN per 100 lbs. of horse weight as an estimate of energy needs. Based on the assumption that the heavier the horse, the more energy was needed and this system was used for many years. The old TDN rules of thumb generally worked well, but it presumed the energy needs were directly related to weight. In reality, the larger horse’s needs are less than projected, because the relationship is not a straight line math function (for example a 1000 lb. horse does not require 10 times the calories of a 100 lb. foal). The more complicated metabolic weight calculation is considered to be more accurate, but it’s hard to do in your head. In 1989 the NRC recommended a third and more detailed means of calculations to estimate energy needs, but I still typically use the previous system because I’ve had good results with it and it works well for me in the field. Energy calculations are only estimates after all, because the individual horse’s activities and quirks do affect calorie use and it’s impossible to keep a horse in a metabolic crate like many lab animals and still expect them to be athletes.
Disclaimer – The practice of formulating equine rations is a complex one, and you should consult with your professional advisors before making significant changes to your horse rations. This article is not designed to replace competent professional advisors, instead it should be used as a means to encourage owners to ask questions and seek competent advice.
Sample Farm Breeding and Teasing Worksheet #4 – the Sterile Mare
Henry & Associates – Sample Farm Breeding and Teasing Worksheet #4
Date of Birth
Small star, LH sock
Sire of Foal
– Teased (*, 1, 2, 3, 4) status of estrus with * at no heat signs and 4 as strong estrus
– Pregnancy check
– Ultrasound pregnancy check
This is an example of a “supposedly” barren mare showing nearly continuous, but faint estrus after she arrived at the breeding farm. The owner of the mare indicated that he had purchased her from a breeder after she lost a foal and had been unsuccessful in getting her to cycle and settle. She was reasonably well bred and the owner had her shipped to the farm to be placed under a 16 hour light regime to encourage early cycling. Although faint heats in some mares are not unusual, this mare’s ovaries upon rectal examination continued to stay small, nonfunctional and hard. Even when the mare showed a “quasi-heat”, her ovaries remained more like those of a mare in deep seasonal anestrus. After an extended period of time under lights, the mare was still acyclic and the owner was called again. Upon further questioning, he indicated that he had not actually seen this mare’s foal, but had only taken the previous owner’s history when he purchased the mare. With no confirmed history of a previous pregnancy, that opened up other avenues of investigation to explain this lack of cycling behavior. First on the list to be eliminated was a genetic condition called Turner’s Syndrome. These mares are externally normal in appearance, but lack both X sex chromosomes. A normal male would typically have sex chromosomes from both parents comprised of an X and a Y, while a normal female is XX, but a Turner’s Syndrome mare is XO (X and a nothing). Blood samples were drawn from the mare and the results were positive for Turner’s. Based on the exam of the chromosomes the mare was diagnosed as genetically sterile and further efforts to breed her ceased. The major lessons learned from this experience were to not completely believe all mare owners in their recitation of breeding history.
A little healthy skepticism is not a bad thing for a breeding manager to possess.
Comments on Foaling, Breeding, Reproductive Exams, Cultures, Etc.
Stallion Management – Semen Collection and Evaluation
Stallion Management – Semen Collection and Evaluation
Vaughn W. Henry
The most effective process of semen collection requires the stallion use an artificial vagina to collect a representative semen sample for either fertility evaluations or insemination. The training process can be somewhat involved, but consistency is a major part of a successful collection program. While some farms will mount the stallion on a receptive mare, most commercial farms have increasingly made use of a “dummy” or “phantom mare”. Why?
The “phantom” is always “receptive”; there’s no need for a mare to be mounted. In early training usually a mare in heat is nearby or positioned in front of the phantom to encourage the stallion to express interest. After successfully mounting and ejaculating, the stallion soon associates the phantom with breeding shed activity and may no longer need a mare to be in the same area. This consistency is critical to success
The phantom is safe. A well-padded phantom with a durable and washable cover is sanitary and comfortable for the stallion’s use. The phantom should be designed to withstand a lot abuse, and the padding should be high density foam so the stallion can slide off without getting stuck in a too soft mattress type pad.
The phantom removes one unnecessary horse and one or two extra people from the area. This reduces the risk of injury to both the stallion and the handlers.
Once the stallion has attained an erection and is brought to the phantom to mount, the handler and collector need to coordinate their actions. Some breeders like both individuals on the left side, but my preference is to have the handler on the left shoulder of the horse and the collector near the horse’s right hip. In this way, they can “funnel” the horse to the phantom and help position him so the artificial vagina (AV) can be easily worked. As the horse approaches the phantom the handler “checks” the horse’s progress so he doesn’t rush up and the collector simultaneously moves in from the side to deflect the penis into the AV. The handler needs to avoid the forefeet of the horse as he mounts and still maintain contact with the horse’s shoulder to steady and stabilize him once mounted on the phantom. The collector rotates to keep pressure against the horse’s flank and allows the stallion to thrust into the AV as it’s rested against the side of the phantom. Let the phantom take most of the weight and step in closely to keep the horse secure. Although any work with an animal weighing 1,000 to 1,500 lbs. is risky; generally it’s best to stay close and take a “push” instead of trying to be a little farther away and take a full strike from one of the stallion’s legs. To avoid a damaging blow to the handler’s head, a lot of farms require a helmet and as a prudent measure to keep injuries down, it’s a pretty good idea to use one. This is one time that being very close to the work makes sense from a safety viewpoint, as there is a better sense of what’s happening and more control of the situation.
Once the horse starts to ejaculate, lower the back end of the AV to ensure the sample runs into the bottle instead of onto the floor. The stallion’s penis will soften and the horse will start to back off of the phantom, so the collector needs keep the AV in place and help drive the horse back by keeping body contact with the horse’s flank and abdomen. Meanwhile the handler on the left side makes sure the horse doesn’t rear or twist during the dismount or suddenly pivot and try to kick the collector. Again, this is another reason to have staff working on both sides of the horse to prevent the handler from pulling the horse inadvertently over on top of the person collecting. Once the horse is backed off from the phantom, the AV and the semen sample is taken to the lab for processing and evaluation. In the meantime, the horse’s genitals are rinsed and he’s returned to his stall, a day’s work done in the breeding shed for him. Different horses respond to different stimuli, and no one system works for every horse on every farm, so expect a little trial and error to find the right response. Since horses never read any of the “books” that purport to explain horse behavior, be prepared to adapt.
Calm, quiet and consistent handling is the primary rule and selecting a site free of obstructions and suitable for this work is important. The flooring should provide traction, but keep dust and contamination minimized. The walls should be smooth, as there is ample opportunity for wrecks in this business of collecting horses. A lot of horses don’t necessarily feel there’s a need for people to be involved and object to the best organized plans of the breeding crew, so safety is always a concern. Qualified personnel are important if the stallion is to have a positive response to all of these efforts to control every aspect of the breeding process. If you collect and breed indoors, then a ceiling of ample height and lined walls to protect the building are required. Besides having laboratory space with room to store needed equipment and supplies, some farms go so far as to provide observation areas and video cameras to satisfy owners who want to view the process from a safe vantage point.
Once the semen arrives in the laboratory, it should be immediately processed and protected. Generally the filter is removed with the trapped gel fraction and is discarded. The gel-free portion of the semen sample is measured for volume and a small portion is set aside for motility and concentration studies. The rest is placed in a pre-warmed water bath or incubator, the temperature of which should be set at body temperature or slightly below 38 degrees Centigrade. To avoid the risk of heat damaging the semen sample, set the temperature controls to 32 – 34 degrees Centigrade, rather than risk higher temperature shocks. Any heat stress on sperm cells is extremely damaging and should be avoided. By keeping the sample at the same temperature of the testes, that is 5-7 degrees lower than body temperature, the incubator mimics the effect of scrotal cooling mechanisms. The small semen sample outside the incubator is quickly evaluated microscopically for motility and progressive (quality of movement) motility. This procedure is done at 100X – 400X power setting on a decent quality microscope. Rather than look at a swarm of moving sperm cells, it’s generally easier to dilute them slightly and look at two or three sperm at a time in different areas of the slide. If you consistently see 1 of 2 sperm moving in a straight line, but don’t always see 2 of 3 sperm cells so inclined to movement, then you can note the motility is between 50% and 66%. Likewise, if 2 of 3 sperm are always moving but 3 of 4 aren’t, then the motility rating is between 66% and 75%. After much practice, it becomes easier to be consistent in this evaluation process. As for concentration studies, a microscope and grid-like hemocytometer can be used, but most farms opt for a machine that measures light transmission through a diluted semen sample and compares it to a known standard. The primary advantage is that it’s fast and accurate, but the machines can be a little expensive for those breeders who don’t do a lot of semen evaluation or artificial insemination work. Why go through all of these gyrations? The motile and normal sperm output is one of the deciding factors on the stallion’s ability to impregnate mares. If the stallion produces enough semen to impregnate only 3 mares and there are 10 to breed, then priorities can be assessed and management decisions will need to be made. Without the information to make good decisions, it becomes difficult to improve reproductive efficiency on the breeding farm.
Other studies may include morphology (cell structure) to determine the proportion of normal vs. abnormal cell types, cell cultures for bacterial organisms causing infertility, procedures to identify blood or urine in the sample and longevity studies, especially important for those breeders who ship semen. All of these procedures should be logged and monitored for each stallion. Very often a drop in motility is an early warning to either look to contamination in the equipment or for the possibility that the stallion has experienced an illness that increased body temperature enough to affect sperm development. Remember that it takes 45 days to manufacture a sperm cell, so any illness today may impact on the fertility of the working stallion for six weeks or more.
The design and use of an artificial vagina is covered in part I of this series.
The following discussion regarding irrevocable life insurance trusts is meant to review current literature, identify areas of professional uncertainty, and to provide certain new planning concepts for the experienced estate planner. While not all of the issues are mentioned, matters like incidents of ownership, transfer and income tax implications, and certain administrative items are addressed. An item which needs to be considered but is not mentioned in this study are the complications of transfer for value.
Internal Revenue Code Section (“Sec.”) 2042(1) provides for life insurance proceeds to be included in an insured’s gross estate if he designates his representative or estate as his policy’s beneficiary. Even if an estate does not receive or benefit from the proceeds of a life insurance policy, any “incidents of ownership” held within three years of death will be included in the computation of gross estate under Sec. 2042(2). Reeves, et.al. in Guide to Practical Estate Planning, based upon Treasury Regulation (“Reg.”) 2042-1(c)(2) define the term to mean “essentially the right of the insured or the insured’s estate to the economic benefits of the policy.” Per Commissioner v. Estate of Karagheusion, 56-1 USTC 11,605, 233 F2d 197 (2nd Cir. 1956), a retained right exercisable only in conjunction with another person will cause inclusion.
Sec. 2042 does not define incidents of ownership. A good summary of ownership rights that are and are not considered incidents of ownership can be found in Appendix 9F of Guide to Practical Estate Planning. Interestingly, in Revenue Ruling (“Rev. Rul.”) 84-179, fiduciary powers, conferred in an unrelated transaction by another person, which are not exercisable for the decedent’s benefit and for which the decedent did not transfer the policy or provide funds for maintenance by a trust were held to prevent inclusion.
Based upon Estate of Noel v. Commissioner, 380 US 678 (1965), possession of incidents of ownership without physical ability to make effective use of same (Noel was killed after signing the application) will lead to inclusion. However, illegal use of incidents of ownership will not cause inclusion per Estate of Bloch, Jr. v. Commissioner, 78 TC 850 (1982). On this issue, Estate of O’Daniel v. U.S., 6 F3d 321, 93-2 USTC 60,150 (5th Cir. 1993) cited Estate of Bartlett, 54 TC 1590 (1970) with the same result. Also, attempts to transfer incidents of ownership, which were prevented by an error of an insurance agent, were treated as if the transfer took place preventing inclusion in National Metropolitan Bank v U.S., 87 F. Supp. 773 (Ct. Cl. 1950), Schongalla v. Hickey, 149 F2d 687 (1945), and Watson v. Commissioner, 36 TCM 1084 (1977).
A more than 5% value reversionary interest, in addition to creating a grantor trust under Sec. 673, is considered by Reg. 2042-1(c)(3) to be an incident of ownership. The availability of the policy or proceeds to return to the decedent or his estate, and the power of disposition of the decedent or his estate are incidents of ownership.
Calculation of reversionary interest is done by multiplying the Table S (per Proposed Reg. 1.642(c)-6(e)(4) and listed in Publication 1457’s Alpha Volume) applicable remainder factor (for Section 7520 rate for the decedent’s month of death) by the face value of the policy. This reversionary interest calculation is then compared to the face value of the policy to test for the percentage of reversion.
Sec. 2035(d)(2)’s three-year rule includes powers under Sec. 2036, 2038, and 2042. This is an exception to the Sec. 2035(d) general repeal of the rule for estates of decedents dying after December 31, 1981. Should the three-year rule apply, payment of estate taxes will be determined by Sec. 2205 and 2206 unless the decedent’s will directs otherwise. These sections mandate:
Sec. 2205. “If the tax or any part thereof is paid by, or collected out of, that part of the estate passing to or in the possession of any person other than the executor in his capacity as such, such person shall be entitled to reimbursement out of any part of the estate still undistributed or by a just and equitable contribution by the persons whose interest in the estate of the decedent would have been reduced if the tax had been paid before the distribution of the estate or whose interest is subject to equal or prior liability for the payment of taxes, debts, or other charges against the estate, it being the purpose and intent of this chapter that so far as is practicable and unless otherwise directed by the will of the decedent the tax shall be paid out of the estate before its distribution.”
Sec. 2206. “Unless the decedent directs otherwise in his will, if any part of the gross estate on which tax has been paid consists of proceeds of policies of insurance on the life of the decedent receivable by a beneficiary other than the executor, the executor shall be entitled to recover from such beneficiary such portion of the total tax paid as the proceeds of such policies bear to the taxable estate. If there is more than one such beneficiary, the executor shall be entitled to recover from such beneficiaries in the same ratio. In the case of such proceeds receivable by the surviving spouse of the decedent for which a deduction is allowed under section 2056 (relating to marital deduction), this section shall not apply to such proceeds except as to the amount thereof in excess of the aggregate amount of the marital deductions allowed under such section.”
Failure of the executor to pay transfer taxes can lead to personal liability imposed upon the insurance’s beneficiaries under Sec. 6324(a)(2) and 6901(a)(1) and the several cases cited in the 1996 Cumulative Supplement No. 1 of Tax Planning with Life Insurance, pages S3-29 thru S3-32 by Howard M. Zaritsky and Stephan R. Leimberg.
Private Letter Ruling (“PLR”) 9533001 stated that the three-year gross estate inclusion rule does not alter the character of the initial transfer as a taxable gift. Accordingly, a credit will be available for gift taxes paid and will be indicated on line 25 of page one of Form 706 for “prior payments (explain in an attached statement).”
Properly structured and without three-year rule inclusion, an irrevocable life insurance trust will obviate the need to consider a reversion of the life insurance policy because the trust is irrevocably transferred. Should the beneficiaries die, then the next line of beneficiaries (often their children) or the beneficiaries’ estate will become the beneficiary of the trust and therefore the policy. Recently, the Service ruled in PLR 9602010 that insurance on the lives of beneficiaries of an irrevocable life insurance trust will not be included in their gross estates.
Should an “experienced policy” be transferred to an irrevocable life insurance trust, the insured will need to live for three years to prevent inclusion in the insured’s gross estate. Should the insured be in good health such that he is not “rated or uninsurable,” a life insurance family limited partnership may offer an alternative. Based upon Estate of Knipp v. Commissioner, 25 TC 153 (1955), acq. in result, 1959-1 C.B. 4, aff’d on another issue 244 F.2d 436 (4th Cir.), cert. denied, 355 US 827 (1957), no incidents of ownership will be present and only a percentage share (the insured’s partnership percentage) of the total policy proceeds will be included in the gross estate. Rev. Rul. 83-147 should also be reviewed.
Some commentators object to reliance upon Knipp because (1) a partnership formed for later distribution to objects of the general partner’s bounty is really a trust rather than a business, and (2) in Knipp, the life insurance policies were purchased for a partnership purpose. This author does not believe that the first argument is correct and that the second argument can be dealt with by considering the partnership an investment partnership. Whether other investments should be held by the partnership besides life insurance policies is of current discussion. PLR 9309021 permitted a partnership with only life insurance. However, word of mouth from commentators seems to indicate that the Service is backtracking from this position.
An excellent opportunity to use a life insurance partnership would be to purchase life insurance policies from a pension plan. The life insurance, and especially the first year administrative costs, had been paid for with pre-tax dollars. Should the insured die with the policy in the retirement plan or within three years of, purchase from the plan and placement in an irrevocable life insurance trust, the policy proceeds would be included within the insured’s estate.
Whether a technique popularized by Andrew J. Fair to permit creation of an irrevocable life insurance subtrust within a pension plan to prevent estate inclusion works, consider Louis A. Mezzullo’s concept in Integrating Retirement Benefits into the Estate Plan: Practical Planning and Forms, National Law Foundation, that this will violate Sec. 401(a)(13) which says a “trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that benefits provided under the plan may not be assigned or alienated.” Furthermore, he believes that a subtrust would disqualify the entire plan i.e. even for participants without a subtrust. For those who believe that Fair’s position will prevail, Maurice R. Kassimir and Melvin L. Maisel’s “The ‘Revocable-Irrevocable’ Life Insurance Trust, The CPA Journal (September 1995) provides interesting planning flexibility.
Regarding the use of life insurance partnerships, several good discussions exist in the literature including Margaret W. Brown and S. Stacy Eastland’s, The Use of Partnerships in Planning for Life Insurance, Trusts & Estates, April 1995, and Richard L. Chaney and Linda S. Fogarty’s, Family Limited Partnerships, General American which includes documents for various word processors.
For second-to-die (survivorship policies), Bernard Weinberg and Robert C. Shadur advocate “The Survivorship Life Stand-By Trust: A New Planning Alternative” in Estate Planning, October 1996 which delays the need for an irrevocable life insurance trust until the death of the first spouse. They provide for a “survivor life stand-by trust” which can be revocably established by the spouse with the longer life expectancy. They feel that spouse can pay the premiums directly. Upon the death of the first spouse, the trust becomes irrevocable. Weinberg and Shadur raised an issue which they did not resolve. Can a spouse be a beneficiary of a trust that holds a survivorship policy on that spouse’s life? “If the spouse is a beneficiary of the trust, is she considered a beneficial owner of the insurance policy, and is this an incident of ownership that would cause inclusion of the insurance proceeds in the spouse’s estate under Section 2042?”
Weinberg and Shadur refer to PLR 9451053 where the surviving spouse had a right to receive net income of the trust after payment of policy premiums. The Service ruled that there would not be incidents of ownership.
Georgiana L. Slade’s Bureau of National Affairs portfolio Personal Life Insurance Trusts says “the spouse should probably not be a discretionary beneficiary of a trust that holds a second-to-die policy, even if the spouse is not the grantor, did not initially acquire the policy, and the discretionary power over the trust distributions is held by an independent trustee. It is uncertain as to whether the possibility of the spouse receiving the policy as a distribution qualifies as ‘an economic right’ to the policy or its proceeds or is a ‘reversionary interest’ of more than 5%, both of which are Section 2042(2) incidents of ownership.” She adds “whether the spouse may be designated as trustee, the treatment of a limited power held in a fiduciary capacity (e.g. a power as trustee to make discretionary distributions to decedents) is more complex than the language of the regulation suggests. As discussed at III, B, 1, b, above, the issue has been litigated many times with contradictory results.”
To temporarily mitigate the effect of three-year rule inclusion, Zaritsky and Leimberg in Tax Planning with Life Insurance mention the use of a “self-destructing trust clause” to qualify for the estate tax marital deduction. The drafting technique that they least favor is to a qualified terminal interest property (“QTIP”) trust. They are particularly concerned whether the executor will take the position to elect QTIP treatment or denote the election with a contingent QTIP election.
A practitioner should be aware that by avoiding a QTIP trust, the technique of having the surviving spouse purchase the remainder interest of the QTIP to effectively lower overall transfer taxes will be obviated. To benefit from this technique which will change the marital deduction from a transfer tax deferral to partial reduction technique, Richard B. Covey in The Marital Deduction: Planning & Drafting, National Law Foundation suggests not providing any invasion powers into the trust which would reduce the value of the remainder interest. Should the surviving spouse have adequate funds for health and maintenance, the clause would not have material value. Consideration should be given as to whether a gift tax return should be filed, possibly with a zero value gift, and whether Sec. 2702(a) creates a gift by the children to the wife, or Sec. 2519 creates a gift by the wife to the children.
Should the marital deduction option not be available, Zaritsky and Leimberg refer to Section 2206 which “authorizes the personal representative of an insured’s estate to recover from the beneficiary any incremental estate taxes attributable to the inclusion of the proceeds in the insured’s taxable estate.”
A gift of an experienced life insurance policy, irrespective of which type of entity the policy is transferred to, is to be valued as it would be for estate tax purposes under Reg. 20.2031-8. Per Reg. 25.2512-6(a), Example 4, the value is determined by adding an interpolated value between the terminal value at the beginning and end of the policy year to the policy’s terminal reserve at the beginning of the policy year. Example 3 of this regulation requires that the value of any loans against the policy be subtracted from and accrued dividends added to this value. Consideration of income tax consequences should be given prior to transfer of a policy to an irrevocable life insurance trust where the policy loan exceeds basis.
Calculation is done by the insurance company and reported on Form 712 (Life Insurance Statement) [see Appendix] which should be requested well prior to the due date of a gift tax return. Should the insured have become rated or uninsurable, a different valuation technique is required under Reg. 25.2512-6(a). Terminal illness is addressed in PLR 9127007. Should there be a concern that the insured’s health may turn bad within the three-year period, Estate of Silverman v. Commissioner, 61 TC 338 (1973), aff’d, 521 F2d 574, 75-2 USTC 13,084 (2d Cir. 1975), acq. 1978-1 CB 2, Estate of Friedberg v. Commissioner, 63 TCM 3080 (1992), Reg. 20.2042-1(a)(1), and PLR 9128008 may lead to the suggestion that a high premium relative to death benefit be paid by the transferee of the policy to reduce estate tax inclusion. Some refer to this concept as the “Silverman Doctrine.”
In Estate Planning Law and Taxation, David Westfall and George P. Mair make the point that the three-year rule may not apply to a seasoned policy if the policy was initially acquired by someone else or if the decedent had transferred ownership of a policy on the life of another person.
In determining the amount of the trust subject to a Crummey power (to be discussed) in the year of transfer, the amount shown on Form 712 needs to be added to contributions to the trust for premium payments for the rest of the year. Should a Crummey power be exercised, the trustee must have access to sufficient liquidity. A potential diminution of liquidity would be a policy dividend reinvestment provision.
PLRs have sanctioned use of Crummey powers even in situations where policies did not have cash value. Consideration of having the trustee hold payment of premiums until after the demand period, or drafting a provision to allow payment of a fractional interest in a policy, should be given where a private ruling will not be sought and liquidity is not available.
Reg. 20.2042-1(b)(1) establishes that if an irrevocable life insurance trust’s governing instrument instructs the trustee to pay the insured’s estate taxes, then the policy proceeds are receivable for the benefit of and included in the estate. Duncan v. U.S., 66-2 USTC 12,434, 368 F2d 98 (5th Cir. 1966) and Illinois National Bank of Springfield v. U.S., 91-1 USTC 60,062 (C.D. Ill. 1991) held that the requirement for the trustee to “apply all available funds and assets of the trust towards the payment of any premiums due on life insurance policies now or hereafter comprising any portion of trust corpus” is not a “substantial restriction” of the trustees discretion and would not be an incident of ownership.
In Estate of Headrick, 918 F2d 1263 (CA-6, 1990) , aff’g 93 TC 171 (1989), Estate of Leder, 893 F2d 237 (CA-10, 1989), aff’g 89 TC 235 (1989), Estate of Perry v. Commissioner, 927 F2d 209 (5th Cir. 1991), and now Action on Decision (“AOD”) 1991-012 allows an insured to discuss the purchase of life insurance with the trustee and to pay personally for the insurance without having inclusion in his gross estate. Based upon PLR 9113027, this presumes no incidents of ownership by the insured. Still, a conservative approach would be to have the trust establish a bank account to pay insurance premiums.
John M. Beehler’s “IRS Action Makes it Easier to Keep Proceeds Out of an Insured’s Estate, The Journal of Taxation, November 1991 does an excellent job in addressing AOD 1991-012. What can be seen as an issue subsequent to reading the article is whether, after an experienced policy is transferred to an irrevocable life insurance trust, the insured can directly pay the premiums. Practically, many insureds will pay the premiums out of the funds of a closely-held business’ account. Will noninclusion still prevail?
However, should the assumptions of Estate of Headrick, Leder, and Perry as well as AOD 1991-012 exist, the Internal Revenue Service’s “beamed transfer” position in Bel v. U.S., 452 F2d 683 (CA-5, 1971), will no longer be an issue. The position of the Internal Revenue Service had been, if an insured initiated the purchase of a life insurance policy and paid the premiums, then he was using the trust as his agent and therefore would be imputed incidents of ownership.
The question regarding whether a policy application being made by the insured rather than the trustee cause estate inclusion was addressed in PLR 9323002. Based upon state law, the insurance contract did not become effective until the first premium payment. Section 2035(d)(2)’s requirement for inclusion that the insured have incidents of ownership, which he subsequently transferred, were not met. Accordingly, there should be no estate inclusion.
PLRs 9348009 and 9511046 together appear to indicate that a corporation’s split-dollar interest in a life insurance policy meeting the requirements of Rev. Rul. 64-328 will not be imputed to the corporation’s majority shareholder. These rulings follow some uncertainty that was created under the historical development of Rev. Rul. 76-274 (especially Example 3), Rev. Rul. 79-129, Rev. Rul. 82-145, PLR 9204041, and Reg. 20.2042-1(c)(6).
Lawrence Brody and Lucinda Althauser provide an interesting discussion on this topic in “Transfer Tax Issues Relating to Split-Dollar Life Insurance in the April 1995 issue of Trusts & Estates. They note that after Rev. Rul. 82-145, two drafting positions were taken. Specifically, the controlled corporation’s interest was established as either a secured creditor with limited policy rights collaterally assigned or, being more conservative, as an unsecured creditor. They feel that recent Internal Revenue Service rulings have only confused the issue. For instance, they feel that the request that PLR 9348009 responded to, asked a much narrower question: would an election by a surviving spouse (who owned 50% of a corporation) cause any incidents of ownership. Regarding the three-year rule, they mention Rev. Rul. 90-21 which says that if a corporation owns a policy on the life of its controlling shareholder and the shareholder reduces voting interest below 50%, then the rule applies. [If a non-heir now controls the corporation, where will the funds to pay the estate tax come from? What if stock is contributed to a charity and then the corporation redeems the stock so that the family remains in control, what happens in valuing the charitable gift?]
In terms of drafting for split-dollar situations, Brody and Althauser write for “policies subject to a split-dollar arrangement [which] are owned by a trust, special drafting of the Crummey power is required, because unless the arrangement is contributory, there is no contribution to the trust on which the Crummey powers can work; in those cases, the Crummey power must be broad enough to allow withdrawals of direct contributions to the trust and amounts equal to any indirect gifts to the trust (i.e. the implicit gift which results when a policy is subject to a third party owner split-dollar arrangement).” [Their italics were removed]
Recently, PLR 9636033 permitted a private reverse family split-dollar arrangement with an irrevocable trust without potential estate tax inclusion. Also, PLR 9639053 allowed a split-dollar arrangement between an irrevocable life insurance trust and a business partnership.
While a family split-dollar arrangement with an irrevocable trust provides flexibility (since a spouse can borrow against the cash surrender value without the entire policy proceeds being included in either spouse’s gross estate), use of a lifetime QTIP trust in place of spousal involvement can provide even more benefits considering Examples 10 and 11 of Reg. 25.2523(f)-1(d). This new regulation allows an income interest to be retained by a husband after his wife’s earlier death to be taxable in his wife’s estate. However, Slade writes “whether the transfer of assets by a grantor to a trust is a completed gift where the grantor retains an interest in the trust will depend upon the enforceability of the grantor’s interest under applicable state law. For example, where the grantor is the income beneficiary of a trust, the Internal Revenue Service ruled that under applicable state (New York) law, the grantor’s creditors could reach the trust assets and, therefore, the gift was not complete.”
Returning to Crummey powers which were mentioned earlier, the concept allows a gift of what would otherwise be a future interest into a present interest which can qualify for the $ 10,000 per donor annual gift exclusion under Sec. 2503(b) and Reg. 25.2503-3(c). The case which established this technique was D. Clifford Crummey v. Commissioner, 397 F2d 82 (9th Cir. 1968)(22 AFTR2d 6023, 68-2 USTC 12,541), aff’g and rev’g TC Memo 1966-144 and accepted by the Internal Revenue Service in Rev. Rul. 73-405. The Crummey power is an absolute and inviolate demand power that will last for only a short period of time. A realistic possibility to exercise must be given to the power holder in order that a meaningful present interest be deemed to exist.
In PLRs 8813019, 8134135, 8103074, 8024084, 8006048, and 8004172, a thirty day demand period was considered acceptable. Rev. Rul. 81-7 rejected a three day demand period. Should a demand period overlap two years (e.g. a December 15, 1996 transfer was subject to a thirty day demand period), Rev. Rul. 83-108 allows a present interest for the year the transfer was made (in the example, for 1996 rather than 1997).
Notice of withdrawal right must be made known to the power holder. Technical Advice Memorandum (“TAM”) 9532001 considered notice a fundamental requirement. “Because the grandchildren lacked current notice that subsequent gifts were being transferred to the trust, they did not have the real and immediate benefit of those gifts.” For a minor beneficiary, Zaritsky and Leimberg recommend drafting in the trust agreement, per Perkins v. Commissioner, 27 TC 601 (1956), a parent or guardian be allowed to exercise the demand power. A minor’s legal inability to exercise a demand power was a problem in Naumoff v. Commissioner, 46 TCM 852 (1983).
For multiple Crummey power holders, a governing instrument provision should be made for the possibility that demand powers exceed available funds. In such a situation, Rev. Rul. 80-261 required demand apportionment.
The concept of “naked Crummey powers” was tested in Estate of Maria Cristofani v. Commissioner, 97 TC 5 (1991), acq’d in result only, where grandchildren had the ability to share in the demand power only if their parent did not survive their grandfather for 120 days. The proper test according to the Tax Court is whether power holders have a legal right (rather than a likelihood) to obtain benefits. TAM 9628004 declares that a nominal beneficiary’s “non-exercise indicates that there was some kind of prearranged understanding with the donor that these rights were not meant to be exercised or that their exercise would result in undesirable consequences, or both.” Owen G. Fiore and John F. Ramsbacher in “IRS Takes a Tougher Position on Crummey Trusts in New TAM,” Estate Planning, November 1996 properly state that “if the donor does not place restrictions on the gift (the withdrawal power), the donee’s action or inaction is irrelevant.” They proceed to advocate that practitioners do due diligence audits of existing Crummey trusts and suggest occasional exercise of withdrawal rights.
Per Sec. 2514(e), “[t]he lapse of a power of appointment created after October 21, 1942, during the life of the individual possessing the power shall be considered a release of such power. The rule of the preceding sentence shall apply with respect to the lapse of powers during any calendar year only to the extent that the property which could have been appointed by exercise of such lapsed powers exceeds in value the greater of the following amounts: (1) $5,000, or (2) 5 percent of the aggregate value of the assets out of which, or the proceeds of which, the exercise of the lapsed powers could be satisfied.” Therefore, should one person have a Crummey power, the withdrawal right will be $ 5,000 until the transfer to the trust exceeds $ 100,000. A lapse of a Crummey demand power is therefore a release of a general power of appointment and a taxable gift to the trust. Should a beneficiary die with any trust power subject to a demand power, then the amount of the demand power is includible in the beneficiary’s gross estate under Sec. 2041. To mitigate inclusion, some draft a provision that in the year of death, the beneficiary must be alive on December 31 for the power to be effective.
For lapses exceeding the greater of $ 5,000 or 5% (“five and five rule”), Form 709 should indicate the trust as donee as well as the trust’s beneficiaries. Should a spouse allow a lapse in excess of the five and five rule, the unlimited gift tax marital deduction under Sec. 2523 should be available.
As an irrevocable life insurance trust’s existence continues over a number of years, yearly transfers in excess of the five and five rule can erode a beneficiary’s unified $600,000 transfer tax exemption. A technique known as a “hanging Crummey power” provides for the Crummey demand power to lapse only to the extent of the greater of $ 5,000 or 5% each year. Any excess is remains subject to an ongoing demand power to the extent of the greater of $ 5,000 or 5% of the trust funds each year. Upon cessation of contributions to the trust (for example, after a five year guaranteed premium period), or upon the trust fund (presumably trust corpus) exceeding $ 100,000, the hanging power amount will begin to decrease. For an excellent illustration, see Example 5-15 thru Example 5-18 in Zaritsky and Leimberg’s Tax Planning with Life Insurance
Slade mentions other techniques to deal with diminution of a beneficiary’s $ 600,000 lifetime transfer tax exclusion including a trust with a limited power of appointment (only one beneficiary who has a limited power of appointment), and a vested trust (only one beneficiary whose estate receives the trust property upon his death). Since there will only be one beneficiary, no gift is made upon the lapse of a Crummey power. She also mentions that the use of multiple trusts (a donor’s lapse in each trust would be within the five and five rule) appeared viable until Rev. Rul. 85-88 which looked to aggregate withdrawal powers of each donee. It is uncertain what may happen if the issue is litigated.
Jonathan G. Blattmachr and Georgiana J. Slade in “Life Insurance Trusts: How to Avoid Estate and GST Taxes,” Estate Planning, September/October 1995 develop the concept of a “cascading Crummey power” which provides that upon lapse of a demand power in excess of the five and five rule, a grandchild (a child of the power holder) has a right to demand the excess above the five and five amount. This gift by child to grandchild (1) will allow the child to claim a $ 10,000 annual exclusion, and (2) causes the child to become the transferor for generation skipping transfer purposes (to be discussed).
Generation skipping transfer tax planning opportunities regarding Crummey powers were offered by Robert J. Adler in “Beyond Leverage: Split-Dollar Funding of the GST-Exempt Trust,” Trusts & Estates, April 1996. Relying upon Internal Revenue Service pronouncements addressing split-dollar insurance (Rev. Rul. 64-328 and 78-420, as well as PLR 8003094), he states that “[a] strong technical argument can be made that, in the case of term insurance and in the limited context of split-dollar plans, a life insurance trust can remain exempt from generation skipping transfer tax without the need to allocate generation skipping transfer exemption to premium payments each year.” Adler adds “payment of premiums by the employer to the extent of the ‘current’ insurance protection [the lower of P.S. 58 costs or the insurer’s term rates], are deemed income to the employee and gifts from the employee to the trust or other third party insurance owner.” Should the insured die within the first policy year, (if still available) an after tax exemption allocation could be made to create a zero inclusion ratio. Since after the end of a policy year, prior employer-provided pure insurance coverage would have expired. Based upon the mechanics of Sec. 2642(d)(2)(B)(ii), the value of the inclusion ratio of the denominator is the value of current gifts plus the value of all property in the trust (now zero). Therefore, each year’s allocation would be the value of the P.S. 58 coverage.
Section 2642(c) provides that for an inclusion ratio to be zero for a direct skip [must have a skip person as beneficiary] which is a nontaxable gift “during the life of such individual [one skip person], no portion of the corpus or income of the trust may be distributed to (or for the benefit of [presumably including a general power of appointment]) any person other than such individual, and (B) if the trust does not terminate before the individual dies, the assets of such trust will be includible in the gross estate of such individual.”
Reg. 26.2601-1(b)(1)(ii)(C) provides that a fully funded irrevocable inter vivos insurance trust to which no additions or constructive additions are made after September 25, 1985 is not subject to the generation skipping transfer provisions contained in Chapter 13. A Chapter 11 or 12 taxable transfer, will be a constructive addition under Reg. 26.2601-1(b)(1)(i) that will cause a taint to this exception. The summary to PLR 9541029 implies that a lapse of a Crummey power in excess of the Sec. 2514(e) five and five rule, will be a constructive addition to the trust. As long as a non-general power of appointment does not postpone or suspend an interest in the trust in excess of the perpetuity period, Reg. 26.2601-1(b)(1)(B)(2) will not consider the trust subject to Chapter 13. To the extent that there are additions to the trust, the trust will be proportionately subject to Chapter 13. A method for calculation of the taxable portion of the trust is mandated in Reg. 26.2601-1(b)(1)(iv).
ADDITIONS TO IRREVOCABLE TRUSTS —
(A) IN GENERAL.
If an addition is made after September 25, 1985, to an irrevocable trust which is excluded from chapter 13 by reason of paragraph (b)(1) of this section, a pro rata portion of subsequent distributions from (and terminations of interests in property held in) the trust is subject to the provisions of chapter 13. If an addition is made, the trust is thereafter deemed to consist of two portions, a portion not subject to chapter 13 (the non-chapter 13 portion) and a portion subject to chapter 13 (the chapter 13 portion), each with a separate inclusion ratio (as defined in section 2642(a)). The non-chapter 13 portion represents the value of the assets of the trust as it existed on September 25, 1985. The applicable fraction (as defined in section 2642(a)(2)) for the non-chapter 13 portion is deemed to be 1 and the inclusion ratio for such portion is 0. The chapter 13 portion of the trust represents the value of all additions made to the trust after September 25, 1985. The inclusion ratio for the chapter 13 portion is determined under section 2642. This paragraph (b)(1)(iv)(A) requires separate portions of one trust only for purposes of determining inclusion ratios. For purposes of chapter 13, a constructive addition under paragraph (b)(1)(v) of this section is treated as an addition. See paragraph (b)(4) of this section for exceptions to the additions rule of this paragraph (b)(1)(iv). See section 26.2654-1(a)(2) for rules treating additions to a trust by an individual other than the initial transferor as a separate trust for purposes of chapter 13.
(B) TERMINATIONS OF INTERESTS IN AND DISTRIBUTIONS FROM TRUSTS.
Where a termination or distribution described in section 2612 occurs with respect to a trust to which an addition has been made, the portion of such termination or distribution allocable to the chapter 13 portion is determined by reference to the allocation fraction, as defined in paragraph (b)(1)(iv)(C) of this section. In the case of a termination described in section 2612(a) with respect to a trust, the portion of such termination that is subject to chapter 13 is the product of the allocation fraction and the value of the trust (to the extent of the terminated interest therein). In the case of a distribution described in section 2612(b) from a trust, the portion of such distribution that is subject to chapter 13 is the product of the allocation fraction and the value of the property distributed.
(C) ALLOCATION FRACTION —
(1) IN GENERAL.
The allocation fraction allocates appreciation and accumulated income between the chapter 13 and non-chapter 13 portions of a trust. The numerator of the allocation fraction is the amount of the addition (valued as of the date the addition is made), determined without regard to whether any part of the transfer is subject to tax under chapter 11 or chapter 12, but reduced by the amount of any Federal or state estate or gift tax imposed and subsequently paid by the recipient trust with respect to the addition. The denominator of the allocation fraction is the total value of the entire trust immediately after the addition. For purposes of this paragraph (b)(1)(iv)(C), the total value of the entire trust is the fair market value of the property held in trust (determined under the rules of section 2031), reduced by any amount attributable to or paid by the trust and attributable to the transfer to the trust that is similar to an amount that would be allowable as a deduction under section 2053 if the addition had occurred at the death of the transferor, and further reduced by the same amount that the numerator was reduced to reflect Federal or state estate or gift tax incurred by and subsequently paid by the recipient trust with respect to the addition. Where there is more than one addition to principal after September 25, 1985, the portion of the trust subject to chapter 13 after each such addition is determined pursuant to a revised fraction. In each case, the numerator of the revised fraction is the sum of the value of the chapter 13 portion of the trust immediately before the latest addition, and the amount of the latest addition. The denominator of the revised fraction is the total value of the entire trust immediately after the addition. If the transfer to the trust is a generation-skipping transfer, the numerator and denominator are reduced by the amount of the generation-skipping transfer tax, if any, that is imposed by chapter 13 on the transfer and actually recovered from the trust. The allocation fraction is rounded off to five decimal places (.00001).
The following examples illustrate the application of paragraph (b)(1)(iv) of this section. In each of the examples, assume that the recipient trust does not pay any Federal or state transfer tax by reason of the addition.
EXAMPLE 1. POST SEPTEMBER 25, 1985, ADDITION TO TRUST.
(I) On August 16, 1980, T established an irrevocable trust. Under the trust instrument, the trustee is required to distribute the entire income annually to T’s child, C, for life, then to T’s grandchild, GC, for life. Upon GC’s death, the remainder is to be paid to GC’s issue. On October 1, 1986, when the total value of the entire trust is $400,000, T transfers $100,000 to the trust. The allocation fraction is computed as follows:
Value of addition
$100,000 (divided by)
Total value of trust
$400,000 + $100,000
(ii) Thus, immediately after the transfer, 20 percent of the value of future generation-skipping transfers under the trust will be subject to chapter 13.
EXAMPLE 2. EFFECT OF EXPENSES.
Assume the same facts as in Example 1, except immediately prior to the transfer on October 1, 1986, the fair market value of the individual assets in the trust totaled $400,000. Also, assume that the trust had accrued and unpaid debts, expenses, and taxes totaling $300,000. Assume further that the entire $300,000 represented amounts that would be deductible under section 2053 if the trust were includible in the transferor’s gross estate. The numerator of the allocation fraction is $100,000 and the denominator of the allocation fraction is $200,000 (($400,000 – $300,000) + $100,000). Thus, the allocation fraction is .5 ($100,000/$200,000) and 50 percent of the value of future generation-skipping transfers will be subject to chapter 13.
EXAMPLE 3. MULTIPLE ADDITIONS.
(I) Assume the same facts as in Example 1, except on January 30, 1988, when the total value of the entire trust is $600,000, T transfers an additional $40,000 to the trust. Before the transfer, the value of the portion of the trust that was attributable to the prior addition was $120,000 ($600,000 x .2). The new allocation fraction is computed as follows:
Total value of additions
$120,000 + $40,000
Total value of trust
$600,000 + $40,000
New allocation fraction
(ii) Thus, immediately after the transfer, 25 percent of the value of future generation-skipping transfers under the trust will be subject to chapter 13.
EXAMPLE 4. ALLOCATION FRACTION AT TIME OF GENERATION – SKIPPING TRANSFER.
Assume the same facts as in Example 3, except on March 1, 1989, when the value of the trust is $800,000, C dies. A generation-skipping transfer occurs at C’s death because of the termination of C’s life estate. Therefore, $200,000 ($800,000 x .25) is subject to tax under chapter 13.
A key to understanding the impact of the generation skipping transfer tax regarding irrevocable life insurance trusts is the concept delineated in the examples contained in Reg. 26.2652-1(a)(6) that a transfer to a trust subject to a beneficiary’s right of withdrawal is treated as a transfer to the trust rather to the beneficiary. This position is the opposite of the Internal Revenue Service’s former position in TAM 8901004 that the transfer would be to the skip person rather than the trust.
For a transfer to an irrevocable life insurance trust, where some but not all of the beneficiaries are skip persons, the transfer is not a direct skip; the trust is not a skip person. Per Sec. 2612(a) and (b), a skip occurs upon a taxable distribution to a skip person or upon a taxable termination. Under Sec. 2623, a tax-inclusive rather than a tax-exclusive calculation per Sec. 2642(a) for a direct skip is needed.
Imposition of the generation skipping transfer tax is upon the transferor for a direct skip, the transferee for a taxable distribution, and the trustee for a taxable termination per Sec. 2603 subsections (a)(3), (a)(1), and (a)(2) respectively. Income tax deductions may be available for direct skips and taxable terminations under Sec. 691(c)(3) and taxable distributions based on Sec. 164(a)(4). While direct skips are reported by the transferor or his representative on a gift or estate tax return, taxable distributions are reported on Form 706GS(D) with trustee prepared Form 706GS(D-1) attached and taxable terminations are shown on Form 706GS(T). Sec. 2654(a)(1) allows a basis adjustment for the amount that fair market value exceeds the basis prior to the adjustment (including a Sec. 1015 basis adjustment).
Since Sec. 2642(c)(1) only allows a $ 10,000 annual exclusion for direct skips, the mechanics of allocation of the $ 1,000,000 lifetime generation skipping transfer tax lifetime exclusion (Sec. 2631(a) to a non-skip person trust become extremely important.
Furthermore Sec. 2642(c)(2)’s rule that no portion of the trust (whether corpus or income) be used for the benefit of any person other than the skip person, Reg. 26.2612-1(e)(2)(i) dealing with interests in trust provides that a fiduciary’s discretion or action pursuant to state law to satisfy the skip person’s parent’s support obligation will not mean that a non-skip person has an interest in the trust.
Sec. 2632(b) provides that a direct skip inter vivos transfer is automatically allocated generation skipping transfer tax exemption unless the transferor affirmatively elects out. A transfer that is not a direct skip must be allocated exemption on the transferor’s gift tax return per Sec. 2642(b)(1). Such allocation is revocable until the return’s due date. Accordingly, a late filed return’s allocation is irrevocable.
Since pure life insurance (separate from any investment portion in a whole, variable, or universal policy) expires on an annual basis, when to allocate generation skipping transfer tax exemption is subject to planning. Should the insured survive the year, a late allocation may be preferable. Due to the high administrative costs in the early years of a non-term policy, the fair market value of the policy (assuming no adverse health) will remain close to zero. Since Reg. 26.2632-1(b)(2)(ii)(A)(1) allocates exemption on a late filed return based upon the property’s fair market value on the deemed filing date, leverage of the lifetime exemption is available.
A wait and see position can delay decision regarding allocation until the gift tax return is filed on April 15 of the year following the transfer. Furthermore, the gift tax return can be extended until October 15. Should allocation not be made on a timely filed return, death or faltering health of the insured will adversely effect the leveraging of the exemption. Upon death of the insured, Reg. 26.2642-2(b)(1) will require allocation of exemption against the policy proceeds.
Should an experienced policy be transferred to an irrevocable life insurance trust, the amount of generation skipping transfer exemption needed to protect the trust on a timely filed gift tax return is the gift tax value previously discussed. For a late filed gift tax return, the value is the policy’s fair market value at time of allocation.
A question as to whether a parent who allows a Crummey power to lapse in excess of the five and five rule will become a transferor for generation skipping transfer purposes exists. [Please refer back to Blattmachr and Slade’s cascading Crummey power.] A second concern exists in a situation where a child of the insured predeceases his parent during the trust period and the child’s issue steps into the place of the child as a trust beneficiary. The Sec. 2612(c)(2) predeceased child exception only applies to direct skips after the child dies. The section specifically states that if “as of the time of the transfer, the parent of such individual who is a lineal descendant of the transferor (or the transferor’s spouse or former spouse) is dead, such individual shall be treated as if such individual were a child of the transferor and all of that grandchild’s children shall be treated as if they were grandchildren of the transferor.” A planning possibility in this scenario is to have the child’s interest pass to his estate. A second concept is to create separate trusts as permitted in First Agricultural Bank v. Coxe, 406 Massachusetts 879, 550 NE2d 875 (1990).
Since an irrevocable life insurance trust creates a need for Crummey withdrawal powers, the complexities of the grantor trust rules is required. Except for funded trusts (other assets besides insurance being in the trust and for which income tax returns may be required), the main importance of the grantor trust rules is after the insured’s death.
Under the grantor trust rules delineated in Sections 671-678 of the Internal Revenue Code, the grantor or sometimes a third party is considered the “owner” of a portion or all of the income and principal of a trust. The intent of Congress was to halt tax abuse by shifting income from high tax bracket grantors to low tax bracket beneficiaries. Compression of tax brackets have lessened the “issue” that Congress intended to correct.
The grantor trust rules create a dichotomy between the legal relationship between grantor and trust compared with income tax consequences where the trust may be wholly or partly considered as not existing as a separate entity. To the extent that the grantor is considered the owner of the trust, he is required to include in his income tax return all items of income, deduction, and credit (including capital gain).
Where a trust is a partial grantor trust or more than one person is considered an owner of the trust, reasonable apportionment must be made. For undivided fractional shares, a pro rata share of each item must be allocated. An example of a complication that can occur if a trust is not completely a grantor trust can be seen in Treas. Reg. 1.1361-1(k)(1) which permits a grantor QTIP trust to be a shareholder of an S corporation in item (i) but not in (ii) and (iii) where the trust is a partial grantor trust. Item (ii) in the regulations is correctable with a qualified subchapter S trust (“QSST”) election within 2 months and 15 days of the divorce that in the particular caused a grantor trust to become a partial grantor trust.
Generally, the trustees of a grantor trust must file Form 1041. However, the Form 1041 does not have to include any part taxable to a grantor. Rather, a statement is attached to the return indicating the name and information regarding the grantor as well as items taxable to him. Item A of Form 1041 should have the box for grantor type trust checked as well as have a statement citing and explaining application of Reg. 1.671-4. Should a trust be a partial grantor trust and partial complex trust, both boxes should be checked on Item A.
Ronald D. Aucutt has an excellent summary of “The New Grantor Trust Reporting Regulations” in the August 1996 edition of ALI-ABA Estate Planning Course Materials Journal. He raises an interesting question as to whether an owner of trust income but not corpus can use one of the two new methods: transparent or reporter. Based upon his reasoning and the analysis of trust ownership for Crummey trusts, it is questionable whether the new methods will be applicable for irrevocable life insurance trusts.
If a person is both grantor and trustee for the entire year and is treated as owner of all assets for the taxable year, then per Reg. 1.671-4(b)(1), Form 1041 is not required. Also, a separate employer identification number is not needed. Rather, all items are simply reported on the grantor’s Form 1040.
Under Section 677, grantors are taxable to the extent that trust income is used to discharge their or their spouse’s legal liability. A funded irrevocable life insurance trust that uses investment earnings to pay life insurance premiums had the dividends taxed to the grantor in Wadewitz Estate v. Commissioner, 32 T.C. 538 (1959). See also Weil v. Commissioner, 3 TC 679 (1944), acq. Rev. Rul. 66-313 which stated that a beneficiary’s written instructions to the trustee to use trust income to pay premiums creates a grantor trust. Sec. 677(a)(3) added that a trust’s payment of insurance premiums on the life of the grantor’s spouse is taxable to the grantor. Regarding this and related matters, Margaret Conway provides an excellent analysis of G.F. Moore, 39 BTA 808, Dec. 10, 672 (acq.), Corning v. Commissioner, 104 F2d 329 (6th Cir. 1939), Rand v. Helvering, 116 F2d 929 (8th Cir. 1941), Conner v. Gagne, 42 F. Supp. 231 (D. N.H. 1941), Iverson v. Commissioner, 3 TC 756 (1944), Rand v. Commissioner, 40 BTA 233 (1939), and Meyers v. Commissioner 3 TCM 468 (1941) in “Life Insurance Trusts” in the September 1994 issue of The CPA Journal
Section 678 established that a person other than the grantor who has a power (right not actual distribution is key per Koffman v. U.S. 300 F.2d 176) exercisable solely by himself to vest corpus or income of any portion of a trust in himself is considered the owner of that portion. Should he partially release or modify the power but retain control, so that if he were the grantor he would be considered the owner, then he (the power holder) will be treated as the owner. Rev. Rul. 81-6 applies this rule even if the person is a minor where state law requires appointment of a legal guardian. PLRs 9034004, 9226037 and 9335028 stated that upon lapse, if in the discretion of a nonadverse party income can be distributed to the person who allowed the lapse, the person who allowed the lapse will still be considered the owner.
Rev. Rul. 67-241 held that Crummey withdrawal rights make the beneficiaries taxable as owners of both their income and corpus portion of the trust. Abbin, et. al., Income Taxation of Fiduciaries and Beneficiaries, relying upon Sec. 2514 and 2041 believe that Sec. 678(a) requires an accumulative method to determine how much of a trust is subject to grantor trust treatment. This implies that a trust needs books and records. For $ 10,000 annual drawdown powers, they believe the calculation is made by dividing the aggregate drawdown opportunity (number of years times $ 10,000) by the fair market value of the trust at the end of the drawdown period. However, they admit that there is no specific guidance from the Service and that various commentators have opined for other treatment.
Zaritsky and Leimberg argue in Tax Planning with Life Insurance that “proper allocation of Section 678 should be based on both the percentage of the trust that the beneficiary could withdraw and the length of the demand right.” In doing so, they reference Reg. 1.671-3 and Krause v. Commissioner, 56 TC 1242 (1971). They note that Early’s article (which they agree with) “Income Taxation of Lapsed Powers of Withdrawal: Analysing Their Current Status,” in 62 Journal of Taxation 148 (1985) “suggests that the release referred to in Section 678(a)(2) must be an affirmative act and not a mere passive lapse.”
Zaritsky and Leimberg state that “Section 678(b) says that if the grantor holds a power under Sections 673 thru 677 and the beneficiary holds a Section 678 power over the income, the beneficiary’s power is disregarded, and the grantor is taxed as the owner of the trust income.” They further note that “Section 678(b), however, refers only to conflicting ownership of the trust’s income; it is silent with respect to conflicting ownership of the trust’s principal. If the grantor and beneficiary both hold powers that apparently create conflicting ownership over the trust’s principal, the most logical view would be to treat them as co-owners of the trust, with each of them taxable on a proportionate share of the items of income, deduction, gain, and loss allocated to trust principal.
David Westfall and George P. Mair in Estate Planning Law and Taxation mention that Simmons, “Drafting the Crummey Power,” 15 University of Miami Institute on Estate Planning 1701, 1713.4 (1981), Huff, “The ‘Five and Five’ Power and Lapsed Powers of Withdrawal,” ibid. 701, 706.2, and Mason, “An Analysis of Crummey and the Annual Exclusion,” 65 Marquette Law Review 573, 587 (1982) agree with Early’s position. They also mention the narrower view of J. Peschel and E. Spurgeon in Federal Taxation of Trusts, Grantors and Beneficiaries that Section 678 “is inapplicable to the lapse of a noncumulative, amount-limited power, such as the 5 and 5 power.” They then group these two opinions together as the “noncumulativists” as opposed to the “cumulativists” which could be viewed as the opinion of Abbin, et. al. cited above.
Westfall and Mair note that PLRs 8142061 (after analysis), 8521060, 8613054, 8707001, 8805032, 8809043, 9311021, and Mallinckrodt v. Nunan, 146 F2d 1, 45-1 USTC 9134 (8th Circuit 1945), cert. denied, 324 US 871 (1945) [sometimes now called “Mallinckrodt powers”] can be seen as support for the cumulativists and Ruth M. Oppenheimer, TC 515 (1951) is of limited support to the noncumulativists. Sprunt, et. al., Practitioners 1041 Deskbook, read PLRs 8142061 and 8809043 to make the Crummey power holders the owner of the trust for the period of the withdrawal power.
The above referenced Rev. Rul. 67-241 discussed being an owner of income and corpus of a trust. Reg. 1.671-3 discusses attribution should there be a grantor trust for just income or corpus portions of the trust. Section (C) of the regulation includes an interesting discussion of expense allocation. “If only income allocable to corpus is included in computing a grantor’s tax liability, he will take into account in that computation only those items of income, deductions, and credit which would not be included under Subparts A through D in the computation of the tax liability of the current income beneficiaries if all distributable net income had actually been distributed to those beneficiaries. On the other hand, if the grantor or another person is treated as an owner solely because of his interest in or power over ordinary income alone, he will take into account in computing his tax liability those items which would be included in computing the tax liability of a current income beneficiary, including expenses allocable to corpus which enter into the computation of distributable net income. If the grantor or other person is treated as an owner because of his power over or right to a dollar amount of ordinary income, he will first take into account a portion of those items of income and expense entering into the computation of ordinary income under the trust instrument or local law sufficient to produce income of the dollar amount required. There will then be attributable to him a pro rata portion of other items entering into the computation of distributable net income under Subparts A through D, such as expenses allocable to corpus, and a pro rata portion of credits of the trust. For examples of computations under this paragraph, see paragraph (g) of section 1.677(a)-1.”
While the establishment of an irrevocable life insurance trust should be done without the preconceived notion that the insured will borrow money, at times down the road, access to cash becomes a necessity. While a family split-dollar arrangement (trust owns the insurance and the insured’s wife owns the cash surrender value of the policy – see PLR 9636033 for one approach) may allow a couple access to cash surrender value without insurance inclusion in the insured’s estate. At times, especially when considering a second-to-die policy, this option is not available. Should borrowing from the trust be required, then a note with proper collateral should be drafted and executed. Such a loan should only be entered into if the trustee determines that making the loan is acceptable within the confines of his fiduciary responsibility to the trust’s beneficiaries.
Englebrecht, et. al.’s excellent article “Grantors Should Beware When Borrowing From a Trust” in the October 1996 issue of Trusts & Estates discusses the income tax implications of a direct or indirect loan of income or corpus not being completely repaid by the beginning of a taxable year. They cite Perrett v. Commissioner, 74 TC 111 as an indication that loans without a genuine debtor-creditor relationship will be seen as lacking economic substance. One can consider the article’s implications, both during the life of the insured and after his death. However, normally the trust will either loan money to the estate or purchase assets from the estate.
They end by discussing Estate of Wall, 101 TC 300 and the Service’s subsequent issuance of Rev. Rul. 95-5835 which revoked Rev. Rul. 79-353. This introduced the new flexibility available with irrevocable life insurance trusts.
Two interesting articles on creating flexibilty with irrevocable life insurance trusts are “Selection of Trustees: Tax and Other Issues, Including Sample Provisions” by Jonathan G. Blattmachr, Georgiana J.Slade and Madeline J. Rivlin in The Chase Review and “The Flexible Irrevocable Trust” by Stephen M. Margolin and Andrew M. Curtis in the January 1996 issue of the Journal of the American Society of CLU & ChFC
Since Blattmachr, et. al. were uncertain regarding the Internal Revenue Service’s opinion after the Wall decision as well as creditor rights of a beneficiary, they advocate the use of a “trust protector” more commonly seen with offshore trusts. The trust protector could name a successor trustee. They reference PLR 9332006 as support for this concept. They continue by saying that the key is the separation of the powers to remove and appoint a trustee. They feel that it would be “safe” to allow the trust protector to remove the old trustee and the beneficiaries to appoint a replacement, or vice versa without incidents of ownership. They conclude with a sample draft for a trust protector provision.
Margolin and Curtis discuss making the insured’s spouse a trust beneficiary upon divorce, allow the insured to remove a beneficiary while guaranteeing a sufficient number of donees, allowing the trustee to reduce the amount subject to a Crummey power, and allowing the trustee to terminate the trust. For an inflexible trust (depending upon the fact pattern), they discuss having the insured purchase the insurance policy from the trust and then selling it to a new trust for which he, the insured, will be considered the owner under the grantor trust provisions.
Among the less technical requirements of an irrevocable life insurance trust are sending out annual Crummey power notices, obtaining an employer identification number, determination of fiduciary accounting and calculation of trustee commissions.
Reg. 301.6109-1(a)(2) states “[i]f a trust does not have a taxpayer identification number and the trustee furnishes the name and taxpayer identification number of the grantor or other person treated as the owner of the trust and the address of the trust to all payors pursuant to section 1.671-4(b)(2)(i)(A) of this chapter, the trustee need not obtain a taxpayer identification number for the trust until either the first taxable year of the trust in which all of the trust is no longer owned by the grantor or another person, or until the first taxable year of the trust for which the trustee no longer reports pursuant to section 1.671-4(b)(2)(i)(A) of this chapter. If the trustee has not already obtained a taxpayer identification number for the trust, the trustee must obtain a taxpayer identification number for the trust as provided in paragraph (d)(2) of this section in order to report pursuant to section 1.671-4(a), (b)(2)(i)(B), or (b)(3)(i) of this chapter.” Due to the complexities of the grantor trust rules that are still subject to professional discussion, it appears that a trustee should submit Form SS-4 and obtain an employer identification number.
Many of the previously discussed issues bifurcated an irrevocable life insurance trust between principal and income. To the extent that the trust is not classified as a grantor trust, it will be a complex trust for which page two of Form 1041 requires a figure for accounting income. Therefore, a fiduciary accounting (or at least a yearly accounting income calculation) may be appropriate.
For certified public accountants, a professional issue is whether SSARS No. 1 applies. It seems that the American Institute of Certified Public Accountants has taken the position that preparation of a fiduciary accounting is the practice of public accounting and therefore an accountant’s letter is required.
Trustees of a life insurance trust are entitled to receive a commission. Sec. 2039 of New York’s Surrogate Court Procedures Act provides the trustee with one percent of all sums of money paid out to be allocated from trust corpus. Additionally, annual commissions of $ 10.50 per $ 1,000 of the first $ 400,000 of principal, $ 4.50 per $ 1,000 of the next $ 600,000, and for the remaining principal, $ 3.00 per $ 1,000. The annual commissions are to be allocated one-third from income and two-thirds from principal.
While not all of the issues were addressed, it is a hoped that this article provides a practitioner with a summary of the many interrelated issues that must be considered upon recommending and then instituting an irrevocable life insurance trust.
Co-Chair of the New York State Society of Certified Public Accountants’ 1997 Estate Administration Conference
Immediate Past President and Trustee of the Tax and Estate Planning Council of Rockland County
Member of the Estate Planning Committee of the New York State Society of Certified Public Accountants
Member of the Income of Estates and Trusts Committee of the New York State Society of Certified Public Accountants
Member of the Estate Planning Committee of the Westchester Chapter of the New York State Society of Certified Public Accountants
Member of the Marital Accounting Committee of the New Jersey Society of Certified Public Accountants
Member o f the Estate Planning Study Group of the United Jewish Appeal
Instructor for Farleigh Dickinson University for the Certified Employee Benefits Specialist program
Estate Planning for Divorcing and Remarrying Individuals, Irrevocable Life Insurance Trusts, Pension Distribution Planning, Income in Respect of a Decedent, Business Succession Planning, Selected Form 1041 Issues, Alternative Minimum Tax, Insolvency Taxation, S Corporation Taxation, Analysis of Income Tax Returns for Attorneys, Analysis of Income Tax Returns for Bankers, Alternative Minimum Taxes and Interplay with Financial Statements for Bankers, State Tax Update, Improving Cash Flow, Individual Tax Return Preparation.
Article and Memorandum Topics:
Irrevocable Life Insurance Trusts, Term Insurance and the “Three-Year Rule,” Medicaid versus Prenuptial Planning, Defective Grantor Retained Annuity Trusts, Is a “Simple” Trust Always “Simple”?, “Phantom Income” Created for Trusts, Business Succession Planning, Phantom Stock Arrangements, Tax Aspects of S Corporation Stock Transactions, Validity in Estate Planning of Multiple Valuations for Singular Closely-Held Businesses, Income in Respect of a Decedent, Pension Distribution Planning, QTIPs as Pension Distribution Designated Beneficiary, Spousal Waiver Requirements for Pension Plans, Excludable Gifts in Excess of $10,000 Per Year, Corporate Acquisitions via Employee Stock Ownership Trusts, Insolvency Taxation, Interest Deductions, Alternative Minimum Tax, and Corporate Charitable Deductions and the New York State Net Operating Loss.
Thanks to Larry Lipoff for allowing me to reproduce his seminar handout.
One of the problems owners experience is juggling complex rations for a wide variety of different horses and their needs. Just read any equine nutrition text and the advice is to feed lactating mares more protein than barren mares, provide higher quality protein for weanlings, pay attention to energy needs on endurance horses and so on. From a management perspective, having multiple rations and ingredients is an accident waiting to happen. Many farm employees have a hard enough time being consistent when feeding, but complicate it with a wide selection of prepared feed products, supplements and feeding directions for several different horses and it’s no wonder horses colic.
Animal scientists, veterinarians, feed store staff and owners often disagree about what’s really needed, and horses usually wind up either being under-fed or over-fed. Underfeed and the horse will not meet expectations for growth or performance, and overfeeding causes a slew of problems affecting performance and the owner’s budget. Unfortunately, horse owners are constantly seeking a panacea that solves problems and hope to find it on the vitamin shelf at the feed store. In reality, most horses are short on basic energy and protein nutrients and rarely lack vitamins. Although some areas of the country produce feedstuffs that lack all the necessary minerals, they can be easily replaced with commercial supplements. Trace mineral salt and a calcium-phosphorus supplement will generally solve most mineral deficiencies, but it takes a little work to make sure everything is in balance. Since there’s no “magic” feed that meets all needs, most owners are left with choices about using various grains, premixed commercial feeds, hays and pastures. Common energy grains used in the U.S. include oats, barley, corn and occasionally sorghum or wheat. With fluctuating prices for grain, sometimes substitution is necessary in order to meet the requirements for a balanced ration, so the “Pearson Square” is the basic quick fix for the non-computerized ration calculator. Used for any number nutrient classes, the procedure works well for simple rations. The “square” may be used to find what proportion of each ingredient would be needed to meet energy, protein, mineral and vitamin requirements. Use the NRC Nutrient Requirement of Horses for data on what horses needs are at various stages of growth and performance, then match them up to the feeds analyzed in the book’s tables. Once you know what the target is for calories, or protein and which feeds you plan to use, the process starts off pretty simply.
How to do it? Start by drawing a square on your pad of paper, place the desired number in the center. This will be the final ration’s content for whichever class of nutrient being analyzed. List the two ingredients to the left with their respective nutrient content (in the example above it’s the percent crude protein for one grain and one hay) and by subtracting the smaller number from the larger diagonally, you will determine the proportion of each ingredient. This is a simple way to balance a ration when using two ingredients or supplements and is a mainstay on many horse farms.
Success when feeding horses
be consistent, make changes gradually
weigh the feed provided to each horse
weigh the horse to monitor progress
feed horses at the same time of the day
feed in frequent smaller meals
if possible, feed horses individually according to needs
avoid unnecessary risks for digestive upset
keep feed free of molds and contaminants
provide free access to clean water
use clean, quality ingredients
pay attention to basics, there are no “magic” solutions
This form is typical of the daily semen evaluation report used on a horse breeding farm to monitor stallion seminal quality and performance. Each stallion is collected in an artificial vagina (AV), and because of individual preferences, the type and weight is recorded (the amount of water is generally responsible for the pressure needed to properly stimulate an ejaculatory response) to ensure consistency. It is important that positive responses to the collection process be encouraged, and a well constructed AV that produces the necessary temperature, pressure and friction stimuli is necessary. Proper lubrication with a water soluble non-spermicidal surgical lubricant is important avoid abrading the stallion’s genitals. A specially designed collection bottle, with a proper filter to remove seminal gel, avoids contamination and protects the semen sample from light and temperature fluctuations. See the articles on breeding farm management for additional information.
Suggested routines and management ideas for new foaling barn personnel. This program may be more useful for horse farms with large numbers of nonresident mares, or commercial breeding farms with numerous employees.
Check mares frequently and quietly (15 minute intervals)
Wrap the tail, wash the vulva and udder. Check for Caslicks. (Is the mare sutured?)
As allantois ruptures call management team. Call earlier if the mare is straining or rolling.
Provide assistance or traction as needed, but only if needed.
Make sure drug box, clean stainless steel bucket, disinfectant, sleeves, oxygen tank, OB chains and handles are available.
After foal is born, clear nasal passages, insure that foal is breathing. Use oxygen to assist foal’s respiration. Tank, mask and hose must be nearby.
Do not manually separate umbilical cord. Allow it to remain intact as long as possible. Do not excite mare or foal. Draw foal’s blood into vacutainer with EDTA (purple top) for compatibility check with maternal colostrum.
Take a clean 6 c.c. plastic syringe case filled with tincture of iodine, immerse the navel stump in syringe case, hold there momentarily.
If mare is drawing air into the vagina, clamp vulva closed.
It may be necessary to dry the foal and provide a heat source to reduce stress. Note the time of birth, sex, color and markings in the records. Photograph foal for owners’ files.
Do not upset the mare or foal at this time, allow each to remain undisturbed if possible. Observe the mare and foal for difficulties (rolling, bleeding, shock or unusual behavior).
As the mare stands, rewash underline and udder, and rinse.
Tie end of placenta to tail so it’s not stepped on, note time and weight, condition and shape of placenta as it’s expelled.
The foal should receive 5-6 c.c. penicillin (IM), the mare should receive 20 c.c. penicillin (IM). Tetanus antitoxin should be given to the foal, especially if the dam has not had a recent tetanus toxoid.
Note time of first successful nursing by foal.
Draw blood from foal at 24 hours for postnatal IgG test.
Monitor mare and foal closely for the first 48 hours, and then follow foal with regular rectal temperatures frequently. It may be necessary to check temperature and vitals at four hour intervals. Watch for diarrhea, straining, yellowish mucous membranes, change in temperature, increased heart and respiration rate, swollen joints or navel, loss of suck reflex, lethargy, diminished capillary refill time, dehydration or abdominal distension.
Check List for Foaling Barn Personnel
Dam’s name ___________________________ Sire _____________________
IgG test results ______________________________________________
ARVAC needed for mare? ______ given? ______
(These forms have been used successfully by many farms I have managed, partly to provide structure and repeatability for employees with limited reproductive management background. However, vaccinations or protocols used and recorded should be based on the recommendations of your veterinary consultants. It is important to remember individual horses and farm management systems have varying histories of success and failure. The needs for structure may be better addressed with other preventative health programs specifically designed for the region, breed and owner’s capabilities.)
Personal observations and notes follow:
When I used the foaling predictor kits and I saw there was a 20-40% chance that the mare was expected to foal I still had to stay up and watch. I didn’t hold it out as much real practical value, as we usually had several mares in the same stage of readiness. If there was any chance the mare would foal, I pretty much needed to have someone there. Since, there’s about a 5% probability of dystocia (difficult births) it makes sense to be around, out of sight but nearby as much as possible. For that reason, I liked to hang a video camera in the stall and cable it into the office or tack room where I could read or do paperwork and keep an eye on things at the same time. There’s some good videotapes on foaling that would be worthwhile so you can see the natural progression of things and get a sense of timing and normal presentations. Most owners feel the urge to get in there and tug on the foal, and that’s often not the right thing to do.
How many of you with foaling mares keep a kit with various items in it for emergencies? Care to provide a sample inventory? Ideas for: “must haves”, “nice to have”, “don’t do without”? Go back to my home page and add to my basic kit through my access and reporting form area. Just to “start off”, I had in the foaling barn a box with: lead shank, twitch, tincture of iodine, empty 6 cc syringe cases to dip navel with iodine (much neater); obstetrical hook, OB chain, wire snare, OB handle; stainless bucket, betadine scrub, roll cotton, tail wraps (actually eleastic ace bandages but clean athletic tube socks work too), 1″ white adhesive tape, scalpel, scissors, hemostats, clamps, vacutainers (purple and red top) for typing and isoerythrolysis testing, instant camera for markings and owner “feel-good” photograph, small oxygen tank and ventilator, towels, injectable antibiotics and tetanus antitoxin, syringes and needles, “whirlpaks” to freeze colostrum, rectal thermometer, stethoscope; I also had a wide range of drugs and surgical instruments normally not available, but occasionally useful, etc. There was actually a lot more, but I thought it would be helpful to throw it out and let you build a kit for your barn with your local vet’s help.
There are 4 basic conditions in newborn foals you need to worry about, briefly:
1. anatomic problems, e.g. ruptured bladders, deformities (seen immediately to 48 hours post foaling)
2. isoimmune hemolytic anemia, e.g. foal’s blood antigens causing the dam to produce colostrum with antibodies to foal (usually seen 24 – 72 hours post foaling) can be tested, prevented, and occasionally treated if you’re talented with transfusions
3. infectious agents e.g. E. coli, K. pneumoniae, S. equi, Salmonella, Shigella, Pseudomonas, Corynebacterium, several viral problems, etc. (seen 48 hours onward unless foal born already infected)
4. neonatal maladjustment syndrome = barker, wanderer, dummy foals, are usually caused by fetal stress (seen 12-48 hours post foaling)
Generally, we took heart rate, temperature, respiration rates every 4 hours for 1st day, then every 6-8 hours for next 3 days, then daily for next week. It was inconvenient, but foals were handled, it forced us to examine foals carefully and check the following:
color of eye (jaundiced?), capillary refill (pink gums pressed and return to color), pinch test on skin of neck for dehydration, swelling of navel, diarrhea, etc. I’d say paying attention to foal for deviations from normal is most important part of management. I saw more problems in barns where there was a lot of traffic and stall movement among horses. Typically, contaminated foaling stalls are a potential problem as the mare is thrust into an environment that she’s not acclimated to and her colostral antibodies were formed based on her environment in another barn or a pasture. Foal is born and may be less protected as a result. That’s one reason we saw more problems in the third and fourth batch of foaling mares unless were super sanitary. So problems like this are hardly flukes and bear watching.
Q – As a retired widower, I keep hearing new proposals for estate tax relief and am wondering how will my estate planning be affected by a remarriage?
. – Although there has been a lot of publicity about estate tax reform, the likelihood of meaningful change is remote. After all, the projected estates subject to tax over the next 25 years exceed $10 trillion, and with federal budget tightening, the odds of Congress walking away from that windfall are pretty slim. That said, do not wait for estate taxes to be eliminated, it’s not going to happen.
With divorce statistics on the rise, and the increasingly longer life span of many of our senior citizens, it’s very common for estate plans to be a consideration when contemplating a second or third marriage. Different states have specific laws concerning individual, joint and community property acquired during a marriage, so you should check with your legal advisor about how to best hold title to your property in each and every state. If you want property to go to your children and not to your new spouse’s family, then you need to be very specific about your intentions.
Generally there are five basic problems which should be addressed in replanning and organizing your estate.
Children of previous marriages will occasionally throw up roadblocks if they feel that an outsider threatens “their inheritance”. Whether or not this feeling is deserved, it is something that should be addressed as quickly as possible. Otherwise, the underlying tensions in a family may create messy legal battles down the road. If there is an eventual dispute about an inheritance, it’s a rare family that has as much harmony and good will after parents die as before.
Good communication is very important. You can be specific about explaining and setting up a plan that is equitable, but not always equal, while you’re still alive. It’s much harder to properly unravel the reasons behind complicated distributions through a will or trust after death. To provide the most control of assets and their eventual ownership, it’s often better to distribute proceeds during your lifetime. Then, there’s no question about your intentions. If the estate is sizeable, you may want to take advantage of the $10,000 annual gifting exclusion to avoid tax on the estate and the problems of uncontrolled growth of your assets’ value and subsequent taxation.
Prenuptial agreements are necessary if you want to preserve your assets for the original family. No longer a tool for the rich and famous, a well thought out agreement will avoid misunderstandings all around. Some clients avoid mentioning the subject of a premarital agreement because they don’t want to appear distrustful. However, it’s generally a better approach to go into a new marriage with a clear understanding of what’s mine, yours and ours.
Insurance policies, pension and retirement plan beneficiary designations will need to be re-evaluated. Is the beneficiary or ownership correct on your contract? Many policies, locked away in a safety deposit box, still list deceased or ex-spouses as beneficiaries, much to the dismay of the family when it comes time to settle an estate. An annual review of your all insurance and annuity contracts should be a part of your plan. Remember, owning an insurance policy on your life puts the proceeds back into your taxable estate, no matter who the beneficiary is.
Consider how powers of attorney should used. Generally, you will need someone to handle both medical and financial issues if you are disabled. Will it be better to have a child from a previous marriage or your new spouse making those critical decisions?
If you have retirement income, check with your pension representative about the rights to survivor income if you should pass away before your new spouse. The same thing can be said about social security benefits.
The basic role of the estate plan is to conserve and distribute assets, provide adequate liquidity for survivor income, avoid excessive tax and transfer costs, and maintain family control for any ongoing business. Unique circumstances like disabled dependents needing special care, or opportunities for charitable gifting or managing estate assets for minors are all issues that a well constructed estate plan will address. Increasingly common are plans that decide in advance what percentage of the estate will pass to children, charity and the IRS. When presented with a choice about disinheriting the IRS, almost everyone prefers charity and heirs to wasteful and unnecessary taxation. Since tax changes in 1969, anyone with appreciated assets might be well advised to look at a §664-CRT scenario for income, security, reduced taxes and improved control of family wealth. CRT planning is a highly specialized field and unfortunately, few professionals work with them. This isn’t a “do it yourself” project, since estate planning should encompass wealth preservation planning. A team approach with qualified advisors will present you with a number of flexible strategies that will help you meet your family goals