Author Archive

Low Basis versus Estate Taxes

Written by Michael Baron on . Posted in Equalization

Hi Michael: I have a question for you. We have quite a bit of land with little or no basis in the property. Our tax person told us if we pass this to our children they will receive a stepped-up basis in the land – if they farm it for three years. Would an irrevocable trust be the way to go? How does the new estate tax proposal change how we should be planning? – Low Basis.

Dear Low Basis: Estate taxes have always been based on the fair market value or appraised value of the assets held within your estate. The current amount you can pass without estate taxes is $5,490,000 Unified Credit per person or almost eleven million dollars per couple.

Upon your death(s), your estate will be appraised and all added up to come to a total. If your estate(s) are less than the Unified Credit, your children will receive a stepped-up basis in the property and there is no condition they farm for three years or, for that matter, have to farm at all. If they sell the assets later on for the same amount as the FMV at the time of death, they could do so without paying any capital gains taxes.

Some people have been told the children receive a stepped-up basis if they use a trust. This depends on if it is a revocable or irrevocable trust. A revocable trust – as you retain power over the assets until your death and is included in your estate at FMV – will receive stepped-up basis – the same as a will.

An irrevocable trust set up during your lifetime and receiving assets prior to your death has two tax considerations. One, as you ‘gift’ the assets to this irrevocable trust, you cannot exceed the Unified Credit amount of $5,490,000 per person or the gift taxes will equal the estate taxes.

The assets themselves – as they were a lifetime gift and no death occurred – are valued within the trust at your original basis. Not what they are worth today, not what you used for a ‘gift’ to move the assets, but the actual amount your originally paid for these assets. Upon your death, the assets pass to your children at your original basis and if they sell these assets, they will have very high capital gains.

There is a new idea sweeping around called a Delaware Trust. This involves finding someone who’s estate would not have estate tax issues and is relatively the same age as you – making them the beneficiary of your trust – and upon their death, the children would receive a stepped-up basis. In other words, you’re using someone who has no estate tax issues and using their Unified Credit. These transactions are all protected within different trusts moving around.

Estate taxes are always one side of the coin in estate planning, however. What happens if this person you’ve borrowed the Unified Credit from ends up in a long-term care facility and is owing hundreds of thousands of dollars in care costs when suddenly them become the beneficiary of your trust? Sure, when they die, the kids will get a stepped-up basis without paying estate taxes – of what’s left over if this person had health issues.

These type of ‘ideas’ get passed around every few years as one side tries to find a way to dodge taxes while IRS waits them out for a few years and, under current law, can disallow them upon your death. You may think you have hit on the perfect solution (LLC’s, LLP’s, Delaware trust, etc.) but IRS doesn’t have to accept your tax plan when you die – they can disallow it.

The new tax plan proposed states there would be no more estate taxes and family farms and small business would receive an exemption of up to $10,000,000 per family on capital gains.

Of course, the devil is in the details and would a farmer who sold his farm qualify for this exemption when he’s not going to be a farmer anymore by selling his farm? How long do I have to be a farmer to qualify? When I die and my children receive the land and they sell, do they get the $10,000,000 exemption because I farmed? Wouldn’t my family have been better off getting a stepped-up basis rather than having to pay estate taxes over and above $11,000,000? Long-term, could my capital gains be more than my estate taxes?

The answer is: We don’t know. Washington has been full of new ideas painted in broad strokes so we’ll see when they get it all figured out!

Operating Costs

Written by Michael Baron on . Posted in Equalization

Dear Michael: We have been trying to get our estate organized so that our farming son can keep on operating and our daughter, who does not farm, gets an equitable inheritance from our estate. Sadly, we weren’t able to put aside much into retirement funds and savings to provide some benefit to her. We also have quite a bit of grain in storage – or we did before the planting season began. Now it’s been sold and used to purchase fuel, seed, and all the things we’ll need for the year. Is grain a good thing to leave to our daughter in lieu of cash? It’s a sizeable amount but doesn’t our son need that to farm? – Grain Dilemma.

Dear Grain Dilemma – An important side benefit of the past decade of good prices is that many farmers now keep enough grain to pay for upcoming expenses in the following season.

Prior to this time, farmers routinely went in to the bank in the spring, got an operating line of credit, and used what they needed throughout the year. They would pay it back in the fall or winter when they sold their grain. However, many farmers found it hard to effectively market their grain when they knew they had interest adding on to their operating loan and had this incentive to sell their grain. Having grain in the bins, not having to borrow money, and being able to market grain timely has been a great expense saver.

In cases like this, we have to remember two things. One, you have to determine the cost of having to borrow the operating loan if your son didn’t have the grain to use as you do. What would it cost annually to borrow your operating costs?

If the annual cost of having to borrow this amount of money for the months he’ll need operating capital is more than the cost of buying term insurance or second to die life insurance for the two of you, then buy the life insurance to cover the amount of the grain. Your daughter is assured to receive a cash benefit and your son will receive the grain to continue operating as is.

Normally, the interest cost of borrowing today’s operating budgets – even for just half the year – can add up to tens of thousands of dollars in costs. You two can buy a lot of term or second to die insurance to guarantee your daughter’s inheritance for a lot cheaper than that.

Second, you are looking at the here and now when you are thinking about your estate plan – what you have now, what your situation is now, how best to do things with the assets you have today.

In estate planning, you have to take two views of your life. Of course, you have to consider the here and now. But you also need to consider where you will be in ten years, fifteen years and twenty years? Who will own the assets then?

By then, your son should have acquired these assets from you – such things as machinery, grain, etc. You’ll be in your seventies and your son will be approaching his fifties. Your son should have slowly purchased these assets. This should have created a larger savings account for you by then.

Or maybe, in the typical transition of assets, you really didn’t add anything to your savings as your son stepped in without actually paying cash for these assets.

However, you’ve just passed from one risk area of life to another. Now things like becoming ill, needing long-term care, or needing more income can cause serious doubts as to whether your daughter will receive any savings from your estate while your son, in essence, already has his.

If you had been really, really smart when you were young and purchased enough second to die life insurance to fill in the holes for the grain on hand, the ‘future you’ could sit back knowing your daughter is guaranteed her inheritance – even if you do need long-term care and/or burn up all of your savings. And the premiums would be so low because you bought young, they’d be an afterthought in your expenses.

Estate planning is a short-term and long-term planning process – one view as it is today and another of how it will be in the future. Plan for both when you do your estate planning. No one likes life insurance premiums – unless you’ve had it for a while and now realize what a bargain it was at the time.

To Gift or Not to Gift

Written by Michael Baron on . Posted in Equalization

Dear Michael: We have been fortunate to put aside some money as well as pay for our farm operation. None of our children are farming and we are getting close to retirement. With no children farming, we probably don’t have the same problems other people do. However, my husband and I disagree on whether or not we can gift anything – of our savings – to our children. How do we know what we’ll need in years to come? – Have Saved.

Dear Have Saved: In every single client case I work on with people, I help them answer three questions:

What happens if I die tomorrow?

What happens if I live too long and don’t have enough income?

What about my long-term health needs and costs as I get older?

If you think about it, if you can get an answer to these three questions, it helps you answer a lot of other questions such as:

How much can we gift to our children without risking our own financial security if we live for twenty, thirty or more years?

What can we spend today on our retirement – such as homes, vacations, etc. without having to worry we won’t have enough income to live on in the future?

Being as money is made up of mathematical units, there is a way to set up the funds you have today into four categories: money you need to live on now, money you’ll need to live on later, what can be set aside for fun categories such as retirement plans, gifting, etc. and how do I make certain I have enough money to pay for long-term care costs should I become unhealthy?

By taking your current income taxes, I can see at a glance what the two of you live on for your day to day living expenses. It’s usually on the first page on the first major line (what they call above the line income) of your return before you start adding and subtracting expenses and credits.

Next, we determine how much income your current assets and Social Security will bring to you. We determine what rents and expenses will be on your farmland – expenses such as land taxes, insurances, etc. You may have other income – minerals, interest income, wind towers, teacher’s retirement, etc.

For most people, this is your base income to work off of.

Next you have your investments. For most people their idea of investing is I’m going to put this amount into CD’s or savings, give the rest to my stockbroker and hope that someday I’ll be rich.

My concept is different in that I can show you if you put a certain amount of money aside today, and depending on when you need it, show you a guaranteed income for life. Not only that, but each year you wait your income changes to meet inflation.

Now that you know how much you need to live the way you want and how much of your savings you can dedicate to this, you might look at ways to make certain your health doesn’t use up all of your money. Many people place a share of their savings – qualified or non-qualified – into a single premium nursing home policy with a death benefit. If you die, you spouse or kids get a death benefit higher than your deposit and if you need long-term care, it comes of this higher death benefit rather than directly out of your checking, savings, or brokerage account.

When we’ve answered all of these questions to your satisfaction, we then determine if there is any money left over for gifting.

I’m a firm believer it’s not how much you leave your children when you die, it’s how much you can help them during critical times during their lifetimes. My parents helped with a down payment on my first home, which then rolled into my next home and my next home. That little gift built more equity than you can imagine over my life. So, once you know how of your savings you can use to help your children without being afraid of the what the future might hold for you, your free to gift or live the way you want.

Should Have Listened…

Written by Michael Baron on . Posted in Transferring Ownership

Dear Michael: I wanted to write and tell you a story about what happens when you don’t get things done. We had come and talked to you about twenty years ago when I first started farming with Dad and Mom on the family farm.

At the time, all of us children were young and we got along so well. I was working with my parents on the farm and my brother decided he wanted to pursue a different career. My sister was young at the time, sixteen, and didn’t seem to have any interest in farming.

When we talked to you, you told my parents not to treat us as we are now but to envision our family in the future. I remember you asked my dad “Do you have any siblings of your own?” Dad answered “I do – six of them – three brothers and three sisters”.

I remember you asked him “How would you like to be partners with ANY of your brothers or sisters right now??” My dad laughed. He said “I love my brothers and sisters but I know too much about them to be partners with them in my business. Two of them are divorced and need money. One, if he had a nickel he’d spend a dime. The rest of them are okay, but I don’t want to be partners with them”.

You told him and Mom that day “If that’s the way you feel, then don’t make your children partners in this farm operation”. Well, Mom took great offense to that telling Dad that us kids were different – that we (her kids) would never end up like Dad’s brothers and sisters. We were ‘good’ kids and we’d never argue like they had.

So, in spite of your advice, Dad and Mom kept their same will that divided everything three ways and told us to ‘work things out’. They told me I could buy the land at a cheap rate when they died.

I bought a lot of machinery together with Dad. I worked many years side by side with him, keeping the farm going through some mighty tough times. I tried to buy some of the land from Mom and Dad, but Dad always said ‘Why buy when you’ll end up with it anyway. You can buy it at two hundred an acre”.

My sister, who was young at the time did get married. She got married to the son of a nearby farmer. His father is very, very well-to-do and is a very aggressive farmer in our area. Whenever land comes up for sale, he’s sitting in the front row and very seldom leaves without what he wants.

Now, I’m fifty-four and Dad and Mom both passed away in the past two years. When it came time to read the wills and I was expecting to hear that I could buy the land from my siblings for two-hundred per acre, like my Dad had told me, I found I could buy it for the County Average. When I asked the attorney about the two hundred per acre, he said “Well, that’s what it was selling for at the time he did the will”! All these years I had put in working side by side with him and now I had to come up with close to fifteen hundred dollars per acre. You would think that was a bargain – and it is compared to what land really sells for.

However, when I went to my lender, they were not in the same mood as they were in past years. I now had to borrow over a million dollars – at age fifty-four – and my last two years I was just able to cover my operating debt. My little sister and her husband have come in with a more substantial offer because he’s backed by his dad’s money. My other brother – pushed by his wife – wants to take their offer because it gives them a lot more money than I can pay.

I know, in my heart of hearts, Dad and Mom wanted me, their oldest son, to keep the family’s name on the family farm. I have a son farming with me, but he’ll never get the chance to farm.

Tell all your readers this could happen to them! Don’t depend on your kids to ‘do the right thing’ twenty years later. Don’t believe they will always get along fine like they do today. Get things put into your will that make economic sense for the future of your family farm because sometimes things that ‘sound good’ aren’t good.

“Keeping the Family Farm in the Family”
Great Plains Diversified Services, Inc.
1424 W. Century Ave., Suite 208
Bismarck, ND 58503-0917
Telephone: 701-255-4079
Toll Free: 1-800-373-4078
Fax: 701-255-6106

New Leadership – New Estate Solutions

Written by Michael Baron on . Posted in General Estate Planning

Dear Michael: We have been watching the election – like everyone else – and think maybe now would be a good time to see what President Trump does before we complete our estate planning. We have heard there are not going to be anymore estate taxes so we needn’t worry about this in the future. What other good things have we got coming under the new administration? – Looking Forward.

Dear Looking Forward: I think there are many great proposals that were put on the table during the election process. Promises of lower income taxes, repeal of Obamacare, estate taxes being not eliminated, but changed, etc.

We’ll start with the proposed estate tax changes. During his campaign, Mr. Trump proposed that estate taxes are not fair because taxes had already been paid upon the assets – with the exception of capital gains. He thought that if children or other heirs received property and they then sold the property, then capital gains would come into play on the amount the property had increased in value since the time the original owners had purchased the property.

This change from passing ten million six hundred thousand dollars estate tax free to a capital gains tax upon sale by the heirs has been introduced many, many times over the past decade. Perhaps there will be enough partisanship to pass this style of taxation now.

It is going to create an issue for people as they’ll need to keep track of what they paid for property so their children don’t have to pay capital gains if they sell – or at least use this as their basis and only have to pay upon the increased value.

If you sell grandpa’s property, finding out what he paid for it might be a bit of a trick. If it’s not in his papers, you’ll have to check the abstracts. A common method of listing these in abstracts – to make certain the neighbors couldn’t find out what you paid was to state “One dollar and other considerations”. Even in the latest generation, very few people kept real proof of what value they paid for property.

In any case, President Trump has stated he wants to look at changing the tax from one type of taxation to another type of taxation. If you have a taxable estate now, it’s likely you’ll have different, but similar, issues in the future. Your best bet is not to count on the government and do what you have to do to protect your property.

President Trump has already made good on promises to get out of trade alliances by signing bills to negate NAFTA and other international trade agreements. He promises to bring manufacturing back to the United States. How this will affect values on crops grown is anybody’s guess, as exports of our crops to these countries has been the trading chip most commonly used.

There’s also a great deal of talk about lowering the top tax bracket from thirty-nine percent to thirty-three percent. Currently, you would have to be married filing jointly and earning more than $413,000 net to exceed the thirty-three percent tax bracket. If you’ve been saving up grain or have an auction sale, such a reduction might be to your benefit and you might be able to wait until these changes occur.

There’s been a lot of talk and based on the first days of his presidency, President Trump is going to focus on trade talks.

President Trump may also go after Obamacare, as promised during the election process. This is a tricky issue as government mandates during Obama’s time frame forced people to drop their normal insurance and pick up an Obamacare policy. In North Dakota, many of the smaller health care companies up and left the state as they didn’t want to meet these mandates.

For people with pre-existing conditions, the Obama healthcare plan allowed you to enter and buy regardless of health conditions. It’s estimated that forty percent of the people who had healthcare insurance before Obamacare now have healthcare conditions most insurance carriers either would not accept or put riders upon. One hopes that before Obamacare is thrown into the scrap heap that an alternative plan would be offered to those who had to give up their prior health insurance.

All in all, people probably should not depend on the government to solve their estate planning problems. The old adage ‘I’m from the government and I’m here to help you’ should always be taken for what it is. Keep making your own individual plans and if somewhere in the future things do get better, then you only gain more.

“Keeping the Family Farm in the Family”

Great Plains Diversified Services, Inc.
1424 W. Century Ave., Suite 208
Bismarck, ND 58503-0917
Telephone 701-255-4079
Toll Free 1-800-373-4078
Fax 701-255-6106

Life and Estate Planning for Success

Written by Michael Baron on . Posted in General Estate Planning

Dear Michael: We are in between parents in that we have some older children – not interested in farming – and we have some younger children of which one or two might be interested in farming. They are still in middle school, however, so it’s hard to say what direction they may go. We don’t have a will, at this point in time, as we kind of thought we knew how life was going to go, but the older children surprised us by not farming. The younger children are much more involved in FFA and other agriculture pursuits than the older ones ever were. Where do we go from here when we have such young children? – Not Quite Old Enough

Dear Not Quite Old Enough: You have a situation that’s been repeating in cycles over and over again since farming began. If times were bad in farming as your children reached their formative years – ages twelve through sixteen – then these children were exposed to a less than positive attitude in your household, they tend to grow out of farming. If things were positive in your home regarding farming during these years, children of those ages tend to have a more positive outlook on being involved in farming. That’s just life.

In any case, you, as parents, have to determine if you want your younger children raised in the same area as your farm. As such, when you are writing your will for the first time, you’ll have to give much thought to ‘who’ will be the right person or persons to be the physical guardians of your children – if both of you should die.

Ideally, you’d like to name someone who lives close by, who has an agricultural background, and who not only loves kids, but wants to keep your children involved in your own farm – if possible – or in farming as a way of life even though they may not be close to your own farm.

The second part is to put into your will a financial guardian for your children. You’re going to name someone whom you trust implicitly in all financial affairs, as likely this person or persons will have carte blanche access to your assets after your death. I think it’s a good idea to name two people as financial administrators (guardians) for your estate and for your children to provide checks and balances. There are no ‘trust police’ running around making certain trustees, guardians, etc. are spending the money the way they are supposed to.

Speaking of trusts, as long as you have minor children, you’re going to put a testamentary trust in your will to hold assets in the event of both of your deaths. A testamentary trust is a trust created by your will upon your death. It does not exist until you die. Upon your death, your personal representatives will have two things to deal with – your estates (which are a non-human entity subject to taxes, debts, etc. much like a corporation) and setting up this trust. This is simply done by applying for a tax ID number, setting up a checking account for the trust and waiting for the assets to arrive from the estate as they are settled.

You may have the same trustees as you do personal representatives, or they may be different people, if you so like. Some people are closer to the situation in helping settle an estate (P.R’s), but not people you’d like to handle assets long-term (trustees).

Now comes the interesting part – classifying your assets and deciding which are going to be sold (converted to money) and which assets you’d like to hold long-term. If you have young children interested in farming, then likely you’d like to hold your farmland in trust until they reach an age (perhaps 30) to determine whether one or more wants to farm.

If they do want to farm, we have to give instructions via your will to trustees and guardians about how this happens, when it happens, what the other non-farming children will receive vs. the farming child(ren), etc.

Some real time and thought goes into this process but this not only clarifies what your ‘estate plan’ is going to be, it oftentimes clarifies what your ‘life plan’ is going to be with your children. Without such planning, we know for certain your farm and your agri-business will not survive you. That’s too bad because you’ve done a pretty good job of growing it – it’d be a shame to see it go down.

“Keeping the Family Farm in the Family”

Great Plains Diversified Services, Inc. 1424 W. Century Ave., Suite 208, Bismarck, ND 58503-0917 Telephone: 701-255-4079
Toll Free: 1-800-373-4078
Fax: 701-255-6106 

Life is a Journey, Not a Destination

Written by Michael Baron on . Posted in Transferring Ownership

Dear Michael: We wanted to write and thank you for the article about ‘Don’t Complain About Farmers With Your Mouth Full’. It’s about time someone explained that subsidies aren’t making farmers rich – they’re to keep farmers in business to produce the most valuable commodity in the world – food. This benefits not just farmers but every time people go into a grocery store to buy food – having a willing and able workforce to provide low cost food items.

We’ve had four generations on our family farm – each one taking over from their father or their father’s father, in some cases. But now, it seems so much more complicated than it used to be when my husband’s father took over and my husband, in turn, after him. We don’t know where to begin? What was once simple now seems to complicated – we don’t know where to start? – Stuck in Neutral.

Dear Stuck in Neutral: Life used to be a lot simpler in oh so many ways, but too many people think transition planning has to be complicated.

For example, livestock producers can set up their herds so that they can do shares with the next generation. If the retiring producer will do shares on the calf sales, keep the income from the cull cows, and let the next generation slowly build their herd, in seven to ten years the herd will be transferred. To keep income at a steady rate, the charge for pasture and hay land can be continuously raised so the loss in calf income will be offset.

People with machinery debt need to sit down with the next gen and figure out how many acres Jr. is going to have to take over from Dad and Mom to pay off the debt on a single piece, or multiple pieces of machinery. If it’s owned land, the acres would be less and if it’s rented land, you’ll have to consider the costs of rent into the equation.

The same with land debt. If you are still working to pay off land debt, consider selling a piece of land to Jr. with him making payments to you equal to the amount of your payments.

Think about it – you work all year – you make money from your sales – you make a payment to the bank on your loan for another fifteen years when you’ll be eighty years old while your child gains no equity.

Why not set things up now where he can buy a piece of land from you on a contract for deed so while he’s paying you off, you’re paying your loan off at the same time?

You both win, as he gains equity over time and you can retire. If your income is low, in the zero to fifteen percent income tax rate, your capital gains tax will be zero. You need to charge an interest rate to him but right now rates between family members is very low at about 2.65%.

These are some simple ideas on how to get an estate plan into motion. A good estate plan is one where all the big decisions are handled should you die tomorrow or they are answered over time by simple, small progressive moves over your lifetime. You need to do both – have an emergency plan written out – and you need to have yearly targets you and the next generation are moving towards in tandem.

Too many people get caught up in “Mmmm….. I don’t know what to do!” and not doing anything. Suddenly thirty years passes them by and the small problems they had have become mountains of property to worry about, plan for, try to pass on to the next generation and you can’t comprehend what to do!

Work with an estate planner that understands estate planning is not something you complete once and move on from – it’s something you make a part of your life.

“Keeping the Family Farm in the Family”
Great Plains Diversified Services, Inc.
1424 W. Century Ave., Suite 208
Bismarck, ND 58503-0917
Telephone:  701-255-4079
Toll Free:  1-800-373-4078
Fax:  701-255-6106

Time to tie up loose ends

Written by Michael Baron on . Posted in General Estate Planning

Dear Michael: We have been farming for quite a few years now and just five years ago, our son came back to our family farm. Of course, these past five years have been pretty profitable and we bought some land for him to get him going. He did okay the first four years, but last year had a tough time making the payment and we had to pay his income expenses for him? We are relatively young (late fifties and in good health) but we don’t know what to do for sure in our will and our estate planning? Any suggestions? – Just Got Going.

Dear Just Got Going: Your question reminds me that estate planning isn’t just writing down something in a will and hoping it stands the test of time. Agriculture has always been a volatile business and any time you have volatility, you need to make certain your day to day estate plan, year to year estate plan and long-term estate plan are all in sync – especially when things get tough.

First of all, we have to be realistic about what is happening in today’s economy. As long as crops are plentiful and beef supplies are long, the chance of prices rising in the next few years are slim. China has decided to pull back on their imports of all kinds as they take a break from a ten-year record growth rate. The drought that struck the Midwest for the past eight years has broken and crops are plentiful across the country.

With all this in mind, if you have a son who isn’t able to make payments on land he purchased (which you co-signed for) you’re going to have to take a close look at incomes and expenses in the next three years based on today’s prices. If you can’t raise your income substantially to cover expenses, then you’ll have to look at cutting expenses.

People who bought new machinery are still stuck with the machinery payments and there’s nothing to be done there other than use it until times turn. However, if you bought overpriced land, you might have to consider selling the land you purchased in order to make ends meet. You need to have a heart-to-heart with your son about the ways of life and determine if this is your best course of action.

Paying for overpriced land during a downturn is like having a touch of gangrene. You can ignore it and hope that it goes away, but if you do, it can and will spread throughout your entire body of the farm. If you’re in tune with the banker and the banker sees enough equity in your farm operation (and income) then maybe you can take longer to react.

However, if you’ve had a couple tough years and now have to borrow against your equity (in addition to the high priced land payments) then maybe it’s time to think about cutting of the finger or toe before it infects the entire body.

You might also find with your son that he enjoyed farming when prices were good and he was riding high, but a true farmer loves the land and will love the land through good times and bad, sickness and health until death do you part.

If you feel like he’s not that in love with farming and the land, then perhaps it’s time to think about another career for him, and how that affects your overall farm operation.

Too many people wait too long to ‘have the talk’ about farming and its realities, and too often the entire farm go pear shaped by the time both generations finally face the reality of their situation. Be proactive – discuss pros and cons – look at every possibility and steel yourself to make the right decisions in the times to come.

Make sure your wills and other estate plans also reflect these possibilities as you come to terms with everything. Some of you never changed your wills when your child came back to farming or don’t have a will at all. That means your farm operation rests on a heartbeat from going down the drain. If there ever was a time to tie up loose ends, speak honestly and face reality, this would be it.

“Keeping the Family Farm in the Family”

Great Plains Diversified Services, Inc.
1424 W. Century Ave., Suite 208
Bismarck, ND 58503-0917
Telephone:  701-255-4079
Toll Free:  1-800-373-4078
Fax:  701-255-6106



Changing Perceptions, Continued

Written by Michael Baron on . Posted in Equalization, Farm versus Non-Farm, Transferring Ownership

Last week, we talked about the changing nature of farm families in relation to farming as a business and farming as a way of life. I talked about how each generation since the Great Depression – Baby Boomers, Gen X and Y, etc. – has different perspectives towards farming and towards their own lifestyle choices. We also talked about how mechanization (better machinery) made it easier for children not wanting to be involved in the family farm at a young age to avoid farm work whereas previous generations had no choice.

So, we reach today’s non-farming children and what their attitudes are towards the family farm and what they think is fair and equitable.

The last decade brought unprecedented income from farming and ranching never seen before. Along with this income, farmers and ranchers did a lot of updating of equipment, bought a lot of land, saw their own land soar in value and suddenly a million dollars was not the value of the farm but the operating note for the year. Inflation was rampant in the agri-sector as vendors took advantage of rising incomes to raise their own prices to the farmer/rancher. Costs of operating hit all-time highs.

During this time, the Breadbasket states plus Texas had one of the worst drought cycles since the Great Depression. This drought finally finished about two years ago and since then, as you well know, the value of commodities has dropped and dropped as reports of higher and higher commodities has increased.

We can expect that farmland values will decline in value – especially if the Fed should raise interest rates on loans – which effect seems to impact the agri-sector faster than any other area. We can expect that values of on-the-farm equipment to drop dramatically in the next five years as new replacement machinery will not be bought at anywhere near the rate it has been over the last ten.

In estate planning, we are at the same crossroads as the rest of the farm economy. We have a lot of non-farm heirs who have read about the widely chronicled increasing value of farmland over the past ten years. They have visited their homes and noticed new machinery, new buildings and a different lifestyle for their parents and/or for their sibling who stayed with the family farm. They have read about the advancements in machinery with auto-steer and other methods that have made farm life not quite so labor intensive.

With this in mind, as they are brought in on the estate planning process, there is a lot less empathy with their farming sibling from the non-farming heirs. They’ve seen and heard the difference in family farming over the past decade. More are demanding to know what the value of the family farm is today so that they know what their sibling is receiving in today’s values and, hence, what they will ultimately receive in the future in comparison.
When there is a difference in values of what the farming child will receive, there is a far greater outcry of ‘Foul’ as the numbers sink in. This generation wasn’t told ‘children are to be seen and not heard’ and they are loudly expressing themselves as to what they think is right and wrong in the estate plan.

However, we have to remember, we’ve been through these cycles before and the farmland isn’t worth the value it shows on paper unless it is sold. Mom and Dad have no plans on selling it and the next generation family farmers have no interest in selling it either. If the farming heir does sell it for any reason or transfer it to someone not in the family, we can make certain in our estate planning that all heirs will then share in the value of the family farm and its net value.

We continue to put the estate plans together that keep the family farm business intact for the next generation to use, and if their lives change and if the farm heirs choose not to farm need to sell, then all of the heirs will benefit. But until all of the heirs wish to come back and work on the family farm, take the same risks involved in farming and are willing to take lesser incomes when commodity prices fall like family farmers are, then it’s still imperative the farming child has enough to survive during good times and bad.

“Keeping the Family Farm in the Family”
Great Plains Diversified Services, Inc.
1424 W. Century Ave., Suite 208
Bismarck, ND 58503-0917
Telephone: 701-255-4079
Fax: 701-255-6106
Toll Free: 1-800-373-4078

Changing Perceptions on Farm Families

Written by Michael Baron on . Posted in Equalization

Dear Michael: We have two sons who have been farming with us for the past twenty-five plus years and we have three children who left as soon as they could to go on to successful careers. We are approaching our seventies and wanted to set up our estate so the boys on the farm got the farm – via a life estate to protect it from long-term care costs – and the kids off the farm received the other assets as well as a cash payment from the two boys on the farm.

We brought up our plans to all five of our children on the Fourth of July and within minutes the debate was raging over the value of the land today, what the non-farming children were entitled to receive based on current market values, etc. etc. The three non-farming children thought it was unfair the boys on the farm received ‘millions of dollars in real estate’ while they received considerably less than that in non-farm assets as well as a million dollars in life insurance benefits from a life insurance policy the two sons on the farm bought to be ‘fair’ to their siblings. How do you explain to non-farming children that the boys on the farm aren’t receiving ‘millions of dollars’ and their share should be commensurate? – Exasperated Parents.

Dear Exasperated: I’ve had more contentious discussions with non-farm heirs in the past five years than I’ve had in the last thirty regarding ‘what they are owed versus the children who stayed on the farm.’

The history is an evolution of time periods from the Great Depressionists to now the X and Y generations. There’s a reason each generation is given a name because each of these ‘generations’ has its own unique characteristics, lifestyle choices, views on life and the world around them, and how they feel about themselves and what the world either offers or owes them by their having been born into it.

I, like many of my clients, am a Baby Boomer and Baby Boomers were raised by the post-Depression generation. When we were young, prior generations labeled us as the most ‘self-absorbed and selfish’ generation ever seen. Looking at it now, when you talk to Gen X’s and Y’s, you realize Baby Boomers may have been self-absorbed and selfish, but they still believed in the American standard of ‘you get what you earn out of life by hard work.’ You may not have shared as much as prior generations of your wealth, but your wealth was determined by your lifetime body of work.

Gen X and Y’s do not believe that you get what you ‘earn.’ Their viewpoint is ‘Hey, you had me as a child – I didn’t ask to be born and you brought me here – but now that I’m here I want to live the same lifestyle now that took Dad and Mom years to reach regardless of my efforts in my life.’ These children like to buy the brand new house upon marriage, buy the two Cadillac Escalades (one for him and one for her) and, if they get close to losing everything because of mismanagement, Dad and Mom should bail them out. Why? ‘Because we deserve it! You raised me to believe I could have anything I wanted when I was young – with no strings attached (like having to muck out the manure in the barn before you got to go into town for the night) and that’s the lifestyle you taught us – so we’re here to cash that check.’

Everything goes along good as long as the money keeps rolling in and, for the most part, the Gen X and Y’s are paying their own way. That’s good!
What’s bad is when you come to explain to them they won’t be getting an equal share as the children who stayed on the farm and it goes against everything they perceive to be correct in life. They never had to contribute in order to get the things they wanted when they grew up – what does ‘contribution’ have to do with anything when it comes to dividing up the estate?

Granted, a lot of things changed in farming when mechanization took over for hands on labor and farm kids weren’t expected to do as much as they used to because now a machine was doing the work in half the time over the past three decades. But, the non-farm kids don’t see the person running the machine (farming children) to be working as hard as Dad and Mom did when they were young – mostly because Dad didn’t have a Bobcat.
With mechanization, it was a lot easier to let the kids who wanted to be outside, involved in farm work, come out and help and gave the children who didn’t want to be outside so much the opportunity to stay in the house. A job that used to require four or five bodies helping only required one or two. Having more than that – with the machinery involved – actually kind of hindered the process.

In any case, that’s been the evolution for the past thirty years – from post-Depressionists to Baby Boomers to Gen X and Y – each generation has seen modernization and mechanization change the very fabric of day to day life on the family farm.

However, as perceptions have changed, the very nature of the farming industry has not. It’s still about two major inputs – land and labor – just like any business. The perception from the outside, however, from the non-farming children as that farming children do not have to work as hard as their parents – ‘Look, they sit in an air-conditioned cab in a nice tractor all day.’ Therefore, the farming kids are not entitled to as much as they used to be – in the non-farming children’s mind’s eye.

Next article we’ll talk about why that’s true to some extent, but just because the numbers have gotten bigger doesn’t necessarily make the farming children’s life any easier. I’ll give you some ‘suggestions’ for your non-farming children to consider after they tell you what they are owed.

“Keeping the Family Farm in the Family”
Great Plains Diversified Services, Inc.
1424 W. Century Ave., Suite 208
Bismarck, ND 58503-0917
Telephone: 701-255-4079
Fax: 701-255-6106
Toll Free: 1-800-373-4078

Michael Baron is not an attorney. Information given through written, verbal, or electronic means by Michael Baron or Great Plains Diversified Services, Inc. is not to be construed as legal advice. An attorney, tax advisor, or other registered advisor is needed for the completion of the estate planning process. An attorney must be consulted for legal advice and the drafting of legal documents.