Author Archive

Thank You, Country Women

Written by Michael Baron on . Posted in General Estate Planning

Recently, I attended the Country Woman of the Year awards luncheon in Bismarck as one of the sponsors. As I sat through the luncheon and listened to what these rural women do during their days and nights out in these rural areas, it made me tired just to think about doing half of the activities they are doing!

These women – Marie Ackerman – Elgin, Terri Haberstroh – Sarles, Katie Kassian – Regan, Katherine Plesner – Verona, Leann Schafer – New Rockford, and Diane Swenson – Lakota were nominated by family, friends and people in their community for all of the activities they do to make a community a community.

I think the biggest compliment they could receive was to be nominated and recognized for their work ethic by people who actually know them quite well and, obviously, recognize they do things daily to make life better for their family and for their communities. All of them were well represented by family and people from their cities and communities there to give them their support. I felt like I had been wasting half of my time in my life on stuff like sleep and relaxing after I listened to the on-going list of activities these women do every day.

The key-note speaker, Dr. Barbara Handy-Marchello, wrote a book about the early days of North Dakota and the roles women played in making certain small communities were healthy, vibrant and growing. She expressed that many things these early pioneer women did that were heroic and vital to the people around them.

I would say that what country women do today is no less heroic and vital to our rural communities. They are the glue that holds together society. They are the role models for new or beginning country women. They forge a path through times today that are every bit as difficult and stressful as the women of yesteryear.

Sure, these ladies probably never fought a bear or a wolf but the ladies of yesteryear didn’t have any options – it was survive by any means possible or die on the plains. But the ladies of yesteryear never walked out into their yard one morning to discover their husband had just purchased machinery that meant she would have to continue working off the farm for another ten years.

The ladies today do have options and they’ve chosen the option of making the lives of their families and of their family farm productive and healthy. What struck me – as we listened to the bio’s of each nominee – was how in the world the judges could pick just one person out of these six! As I contemplated this, it also struck me that these were only six out of thousands of country women who do what they do without being recognized.

In my line of work – helping with estate planning – I know without country women pushing their husbands to think about the future, estate planning would never be accomplished and family farms would have died by the droves over the past few generations.

I also know that many times, when a couple first arrives at my office, the man can go on and on about things he believes to be correct (usually so far from correct you can’t even see correct from there!). However, with some educational guidance and some information by me, these ladies will go home with their husbands and get them nudged in the right direction. The change from the first to the second to the third appointment with me shows the influence these women have on their spouses. By the third appointment we can see what correct is for this family farm and all the family situations that are unique in their own family farm dynamics. Then we can plan.

To all of the women who were nominated, congratulations. But I know from my experience that rural women are the fuel and the glue that keeps the rural agri-economy going. You all deserve a huge banquet and recognition for all that you do to keeping it all together and moving in the right direction!

“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

Wake Up

Written by Michael Baron on . Posted in Asset Protection, Ownership

Dear Michael: My husband passed away seven years ago. In his will he said our son is able to farm the land until age sixty-five and he could pay the average land rent in our county.  I had a farm contract with him every year, up until two years ago when he made all sorts of excuses not to sign one. For the past four years he has not been honoring the contracts and paying whatever he wants, whenever he wants and this puts me in a financial bind and having to borrow money.  I have a daughter and she, also, feels this is not right, but my son and his wife don’t feel that there is a problem and keep saying, “We are family and we help each other out.”  If I get an attorney, it will make things worse.  This is tearing our family apart.  What do I do?  And how do I make this fair with my estate planning? I would appreciate hearing from you. A taken advantage of mother.

Dear Taken Advantage Of: You stated “in your husband’s will, your son was given the right to farm the land by paying the county average for like land up until age sixty-five.” How was the property owned prior to your husband’s death? If it was in joint tenancy with right of survivor, then all the land went to you and the need to meet the terms of his will would only be in honorarium at best.

Even so, most people do want to honor these terms – legal or otherwise – until someone doesn’t meet these terms – namely your son. I would have an easier time understanding this situation if it had popped up in the last year with the sudden change in prices. But four years ago, paying county average should have led to some tremendous profits in farming – which obviously went to other places than paying Mom her rent. When you have to borrow money to live, then it’s gotten way over the line.

Never the less, a deal is a deal and your son isn’t living up to his end of the deal. However, without bringing a suit against him (hiring an attorney to defend your rights), you only have a few options.

Option one is to explain to your son if he doesn’t want to pay the rent, you’ll advertise the land for rent to the general public. If he doesn’t want to sign a contract, I’m sure there will be many people who will and they’ll make certain, once they have the contract in hand, the rent is paid on time.

Option number two is to pass the land on to your daughter and leave it in her hands to make certain the rent is paid. I don’t think she’d have the same qualms as you do about hiring an attorney to make things right. If your son asks, just say “It’s out of my hands.”

Option three is to put the land up for sale. If the land passed to you via will or by deed, the land is yours to do with what you want. If you put it up for sale, it might wake up Sonny and make him realize he’d better meet his end of the deal. If he gives you a hard time, move away.

The last option is to take the land to your banker, borrow enough money off of it to meet the shortage in rent every year, and when the banker says ‘We have to sell the land” then that’s what will happen – if you live that long.

As far as not burning any bridges, your son, for whatever reason, lit his end of the bridge on fire four years ago when he refused to sign a contract. For some reason, he feels it’s okay for his Mamma to have to go out and borrow money to live. Paying you what he wants or when he wants was never part of the deal and Poppa would come out of his grave if he knew this is what is going on.

Everyone wakes up every morning facing choices. Some choices lead to your betterment in life and some lead to your detriment. But when the choice to do something for your betterment comes at the cost of someone else’s detriment – to the extent your referring to – then it’s time to make the right choices for yourself.

It seems like society has changed. “It’s all good as long as it’s all good for ME – then it’s okay to do whatever you want” seems to be the new mantra. I’m here to tell you that is not right. This country is going the path of many fallen countries when individuals feel like whatever they feel is right for everyone and the heck with what someone else feels. I’m tired of it, the country is tired of it, and the voting recently shows the voters are tired of it. Sorry about your son, but it’s time he woke up and smelled the coffee!

“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

Various Types of Ownership

Written by Michael Baron on . Posted in Long-Term Care, Ownership, Transferring Ownership, Trusts

Dear Michael: We’ve been farming for many years. We were talking to friends and they mentioned they have a living trust to handle their estate planning. We’ve checked into various trusts – is this the one that protects our estate from long-term care costs? – Living Trust.

Dear Living Trust: In its simplest terms, a living trust is another way for you and your husband to own property together. You have sole ownership – if one of you owns the property. You are allowed to pass your property to whomever you desire during your lifetime. However, if you are married, your spouse may have ‘spousal rights’ to the property upon your death – even if you direct it to someone else. Each state has their own laws regarding ‘spousal rights.’

You have joint tenancy with right of survivorship as another option. This type of ownership means there are two owners and the ‘survivor’ will automatically inherit the property from the first owner’s death. It doesn’t matter what your will states to the contrary, the property is now owned by the survivor. Why? Because joint tenancy WROS states there are two owners and upon death, the one who died is removed from the deed.

People use this type of ownership all the time to pass property between spouses so they don’t incur probate costs. It is, however, a terrible way to own property between non-spouses as the ‘with right of survivor’ means the property will pass to the last owner standing. I’ve come across a few cases were siblings owned property JTWROS and their shocked to find out if one of them dies, their name is just removed from the deed….and so on, and so on until the last person standing owns the property.

Next is tenants in common, and undivided half interest in the property. Undivided means you can’t draw a line down the middle of the property and claim this is your half. However, you can sell, gift or give your tenant in common interest to someone else – even upon your death – again subject to the ‘spousal rights’ in your state. Just because your spouse would automatically get her half of the tenant in common property doesn’t mean she has no right to claim on your estate.

This is the most common way for non-married people to own property. Siblings, business partners, non-related people normally have tenants in common. Now we get into trusts. Trust are either revocable or irrevocable. Revocable trusts (or living trusts) are, as the name states, revocable, changeable, and are merely another method for owning property. Irrevocable trusts cannot be changed once property is deeded to the trust without the consent of the trustee. If you make yourself the trustee, then you have a revocable trust – not an irrevocable one.

An irrevocable trust is a carefully planned ownership designation naming someone as trustee and what rights and duties this trustee will perform as long as the trust owns property. You decide what these rights and duties of the trustee are as a part of the trust. Many irrevocable trusts are found in wills when someone does not want property to go directly to heirs or beneficiaries who must meet the conditions give to the trustee before they receive the assets. Common conditions might be a certain age, a certain life milestone, or an eventual event in their beneficiary’s life. These are testamentary irrevocable trusts.

Other people set up irrevocable trusts to avoid having their assets go to long-term care. These assets must be transferred and free of any ownership rights of the grantors for at least five years before they are not included for Medicaid purposes. Revocable trusts have no protection from long-term care as you can revoke or change them. Medicaid states if you have this right, then you can revoke your trust and pay for your care.

Revocable trusts are also promoted so people tend to believe they will avoid probate, however, in of themselves, they are a tremendously difficult documents to read. Most people name their children as secondary trustees, but not many children are close to being able to handle the fiduciary responsibilities of a trust upon their death. This leads them to hiring an attorney anyway upon death negating all probate savings.

“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

Too Good to be True

Written by Michael Baron on . Posted in Asset Protection, LLC's & LLP's, Long-Term Care

Dear Michael: We went to a few meetings sponsored by our lender about estate planning. We agreed to meet with their estate planning specialist from this meeting afterwards. She recommended that we consider doing a Limited Liability Partnership. We farm together with my husband’s brother as joint tenants in the land and equipment etc. and she thought this would protect our land from long-term care costs in the future. We thought we should get your opinion on it. – LLP For Us?

Dear LLP For Us: There seems to be a growing trend of people buying in to things again because this is the only option for ‘estate planners’ to get paid. Vendors are out there selling living trusts (another form of ownership similar to joint tenancy), Limited Liability Partnerships, and Limited Liability Companies as solutions to such things as long-term care issues, ease of transfer at death, probate avoidance, etc.

If Living Trusts avoid probate, then why do they come with a Pour-Over Will that says ‘upon my death, put everything I don’t have, that I either forgot or didn’t put into my trust’s name, back into my trust.’ Such things would be things I forgot or didn’t keep up with such as motor vehicles, savings accounts, etc. If they come with a Pour-Over Will, don’t I have to go through probate to put the stuff back into my trust? If Living Trusts were perfect, then why do they need a Pour-Over Will?

Avoiding probate on the rest of my assets, right?

Okay, so at my death I name successor trustees to act as my attorney in fact or trustee for me upon my death. Typically children are named as successor trustees.

Which one of your children feels confident enough to make changes to deeds, set up estate accounts to account for any outstanding bills and income, do the income and estate tax returns, etc. all the while knowing they have a fiduciary responsibility to do this the right way. If they don’t the other heirs (other children) can sue them for making mistakes or for not getting their money they thought they had coming, or just because they want to.

Which child is going to look at this and say “I’m not dealing with all this – I’m going to hire an attorney to do all of this so I can’t get sued by my siblings” And aren’t we right back where we started, paying legal fees – aka probate costs? Where’s my savings?

Other estate vendors are saying use an LLP or LLC – it’ll solve all your problems.

An LLP in its purest sense means this: The Limited Liability typically means any liabilities incurred in the future would be limited to the assets held by the LLP or LLC. If a person gets sued, goes broke or needs long-term care, isn’t it true that only the assets of the LLP or LLC can be taken? If you put all of your land into the LLP or LLC, isn’t the only thing creditors can take is all of your land – the very thing you were told to put in there to protect it?

If you want to try and protect your land, you might think about putting your farming business into an LLP or LLC. You might start a new company that does all of the business on your farm and it might include machinery, vehicles, livestock, etc. If any of the aforementioned liability occurs from the operation of your business, I think they can only go after these assets – not the land you personally own outside the LLP or LLC.

If you’re dealing with estate knowledge purveyors who don’t know the answers to these questions, you’re perhaps dealing with someone who is selling legal documents and not solving problems for you. They may be just like the old ElectroLux salesman standing outside your door just hoping for an opportunity to dump dirt on your floor!

These are the questions I would ask before I jump into anything that sounds too good to be true. I don’t have the answers because I’m not an attorney.

“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

It’s Better to Be Alone Than to Wish You Were!

Written by Michael Baron on . Posted in Partnership Splits, Partnerships

Dear Michael: We have two sons working on our farm operation. Originally, before they were married, they worked very well together. However, when they got married and started having children, the partnership on the farm has gotten considerably more tense and hard to deal with. Both of our sons bring different attributes to the farm – one is good with books and the automation of our farm machinery and the other does manual labor from sunup to sundown. We see it as a good marriage – but they fight more and more and drag us into these verbal – and sometimes physical – brawls. What should we do in our estate plan? We’d like to see them work together but they seem to be tearing the farm apart? – Torn Between.

Dear Torn Between: When you and your husband began this farm, you were partners in the operation. Being as both of you had the same goals, the same spouse – albeit vice versa – and the same children, it was easier for you to survive the ups and downs of this industry. You were married to one another across many spectrums – goals, children, finances, etc.

Even with all of this going for today’s married partners, fifty-three percent of them still end in divorce. Now, you are expecting a ‘marriage’ or partnership to work, between your two sons, although they both have different spouses who bring in different opinions and needs to the partnership.

You don’t know if they have the same goals and it’s likely they do not. Some families are more ‘income’ orientated and willing to do whatever to make the income complete the lifestyle they’d like. Other couples are more ‘family’ orientated and desire a more quality family life than the income orientated families do.

If you sit down at the table with your sons and their spouses, you can discover what their goals are in their lives –whether income is more important for them or quality of family life in lieu of income is important. You can help them recognize their differences and appreciate what each brings to the table in this partnership or marriage. Then you might have a salvageable situation.

If you discover these two are from two different planets in their thinking and one cannot see or understand what the other wants, then you are dooming your farm operation by forcing these two to work together. They – even though they came from the same origin – are not meant to be together and forcing them to be together will lead to disaster.

Unfortunately, this delayed disaster happens after you’ve either retired and/or stepped out of the management (parenthood) role in the partnership or you’ve died and left it to them to sort it out. Then, watch out, because the gloves will come off and it’ll be bare knuckle fighting until one or both end up on the floor – physically, financially, and emotionally.

Do I think most parents are capable of having this conversation with their children and their in-laws? Maybe one in a thousand parents can have the objectivity to have this necessary conversation. I, on the other hand, get to mediate perhaps twenty to twenty-five of these a year. Of these mediations, less than two or three come to a successful solution – and even those require annual ‘check-ups’ as a reminder of why they are together.

The rest we recognize should not be partners, should not be working together, should not have businesses intertwined with their lives, and cannot survive continuing on together.

For these, we have to give them a time-line as to when they will separate – which might be a time from today like five years, for example, or perhaps at the time of your death or retirement. We then go through all the things necessary to separate these two. We have to split the lands, the machinery and/or livestock, the assets and debts, and who pays who if one wants more than the other, etc. until we arrive at an acceptable agreement. Then, we get them to sign it – in blood if necessary – to make certain someday they remember they agreed to the conditions of this split. Just saying it isn’t good enough – get it in writing.

So, find a good mediator, bring everyone to the table, decide if they can stay together or need to split and then get a business agreement signed by both them and their spouses to the terms of a split. Anything less won’t do.

“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

Child on the Edge

Written by Michael Baron on . Posted in Asset Protection, Trusts

Dear Michael: We want to transfer our assets to our children and protect the assets from long-term care. However, one of our children has had a bit of a troubled history with a bankruptcy and two marriages with children from both. How can we be sure if we transfer assets to him these assets won’t be lost? He’s a good kid but seems to make bad decisions. We have three other children and they seem to be financially stable, make good decisions with their lives and with their money and we don’t want to penalize them for one child’s different attitude towards life. What should we do? – One Black and White Sheep.

Dear One Black and White: In a lot of ways, we are all black and white sheep. We all make decisions that have turned out good or turned out bad. How many times do you look back and say ‘I could kick myself for having made THAT decision!” None of us is snow white when it comes to decision making throughout our life.

However, some people do tend to like to live life on the edge more than others. It’s an addiction of sorts – to tempt fate and see if you can come out the other side looking great and having everyone say “Wow, I wish I had seen that coming the way you did – that was awesome!” By believing they can elevate their self-worth by living so close to the edge and making this dream come true, it becomes a lifestyle rather than a once-in-awhile decision.

Fate, however, tends to say ‘If you want to mess with me, the bull, sooner or later you’re going to get the horns.’ Occasionally, the risk-taker is rewarded, but sooner or later the fall off the edge takes away any and all advantages gained in the past – and sometimes even mortgages their future.

Trying to get someone to change from this lifestyle is like banging your head against the wall. They’ve made a decision about this lifestyle and until they see that this lifestyle puts everything at risk – or more likely – this lifestyle has cost them everything and they need to change – they will not change.

In your case, you will have to provide for this type of behavior in your estate plan – not as a punishment but as a protection for the child himself. I once had someone tell me that if he left his estate to his children – both drug addicts – that it would literally kill them. They would then have the money to pay for drugs in the quantity they wanted – with his estate – and with that much money, they would be dead within the year. The only thing keeping them both alive was they were too poor to pay for the drugs in the quantity and amount they desired.

As such, sometimes you have to do what’s best for the child’s situation – and that may be very different than what the child wants.

In this case, you’ll want to segment your estate into shares for each of the four children.

For the child with the issues, you’ll need to plan his share to be handled in a specific way via a trust for these assets in his name and managed by an independent trustee. Putting another child in charge of this trust would be child abuse to the trustee child – who wants to put up with the problems you’ve been putting up with your whole life? A bank trustee doesn’t care if the beneficiary comes and kicks on the door at one o’clock in the morning or calls at all hours of the day or night. It’s better to pay them eight or nine percent of the income than lose one hundred percent of the assets.

Then you can leave instructions in your trust – you design the trust, by the way – so it provides for your child. Perhaps such things as directly purchasing a home – still owned by the trust – but providing shelter to the child. Perhaps income paid out from the assets over a long, long period of time. You can even give the trustee certain reward bonuses – such as no DWI’s for five years – as a reason for the child to receive more. It’s up to you because you design the trust.

You decide what the child will need, provide it in the verbiage of your trust, and then sleep well knowing you’ve done your best.

The other children can receive their assets outright and maybe he’ll kick and scream about that, but you’ll be dead and deep inside he’ll know why you did what you did.

“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

Good Times and Bad Times

Written by Michael Baron on . Posted in Asset Protection, General Estate Planning

Dear Michael: A few years ago, when times were good, our son came back to the farm operation. He had worked off the farm for some time now and got married, had two children and brought back his family to the farm. As part of the agreement for his wife to return to the farm from her city life, she wanted to get a new home built and even now is pressing him to build this new home. We’ve been around long enough to remember the eighties and nineties when times were more than tough and know it’s not a good investment at this time. However, if we bring it up to our son, he shuts us out and we feel like we’re doing something wrong. Any advice on how to handle the situation – Feeling In-Between.

Dear Feeling In-Between: If you keep bringing this up to your son, and he conversely brings it up to his wife, which then creates a weeks’ long battle about ‘what you said before we moved back here’, no one is going to win.

Ultimately, the final word on whether they build a new home or don’t build a new home is going to be based on what the ag lender says, not what you say. If he or she is going to be the bad guy, let them take the job. You don’t need it.

Let them go ahead and set up their plans, check on prices and then sit back when they head to the bank. Of course, in the meantime, you might have a little visit with the ag lender about what your dim views are on spending this amount of money during these times. Make certain your son understands he and his wife are free to do whatever they want with their money – as long as it doesn’t entail you either lending them money or putting your property up for collateral.

Let’s face it – there’s been a lot of kids coming back to farming when times were going good. Some have a level head on their shoulders and understand that like any business – digging for coal, selling oil from drilled land, car manufacturers, equipment dealers, etc. – everyone goes through cycles when they are in business.

For bigger businesses this might mean laying off employees, shutting down plants or other cost cutting measures. Our state, once rich, now has to decide how they want to handle the shortfall they didn’t anticipate by cutting here and there. Of course, making up a shortfall that’s bigger than our annual budget used to be just a few short years ago makes one wonder.

For smaller businesses, it’s as simple as getting lean. When you go to town, you eat at the café rather than the steakhouse. When the equipment would have been replaced, you’re now wrenching in the shop with parts.

You’ll have to determine what you need and what you want. Very seldom are they the same things. You do the things you absolutely need to do – and the things you want to do, you just got to let them go for now.

One thing good times and bad times have in common. Neither one last forever.

For those of you who weathered the eighties and the nineties and hung in there, the last fifteen years have been your reward. If you took that reward and handled it correctly, you’re in a comfortable position. Remember, back then you had to borrow your family living budget three out of ten years so you learned the true meaning of the word ‘budget’.

But just like the eighties and nineties, there are going to be those who fall because they couldn’t get lean enough fast enough. Worse, the ones who never learned how to budget will find out they just can’t live that way and decide farming is not the lifestyle by then. If that’s the case, then it’s better to learn it young and move on then live a frustrating, lean existence until this time passes. If that’s the case, then they weren’t cut out to be small business people – farmers and ranchers – because you know from experience what it takes. Now you’ll find out if your kids have what it takes.

“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

Life Insurance in Estate Planning

Written by Michael Baron on . Posted in Estate Taxes, General Estate Planning, Transferring Ownership

Dear Michael: We have been working with our local property and casualty agent purchasing insurance to cover our estate tax issues. He told us to buy another seventy hundred and fifty thousand dollars of insurance, so we paid him the premium and he returned the policy to us a week or so ago. Do you think it’s the right thing to do – buying life insurance to cover estate tax issues? – Not Sure We Did Right

Dear Not Sure: When you have estate tax issues, you need to follow a list of possible solutions. Life insurance is the medicine you drink when you’ve exhausted all other possibilities.

Estate taxes are based on having more assets than the current five million four hundred and thirty thousand dollars per spouse as of 2016.

Some remedies just take time – such as owning a lot of machinery or grain that you intend to dispose of, transfer, or move during your lifetime. Having these type of assets disappear gradually from your estate may lower your estate values.

Depending on how long you think it might take you to move these items out of your estate, you can take a look at term insurance options to cover the estate tax issues while these assets drop in value to your estate occurs naturally. Most people feel ten to fifteen years would be sufficient.

The other item you can look at is gifting. Gifting is still at $14,000 per person per year (you and your spouse) to any number of people you desire. These can be gifts of cash, machinery, grain, land, or any other farm assets you might have. If you don’t have a sufficient list of people to give to, I can supply you with one.

Charitable contributions upon your death also reduce your estate tax liability. You’ve heard of the Buffets, the Gates and all the wealthy families gifting their vast estates to charities. A couple sometimes needs to decide if they’d rather give to a good cause then give it to the Federal and State governments.

I have had some people who were willing to give so much away to their children or to other sources that they actually impact their standard of living by gifting so much. If this is the case, then this is the perfect situation to use life insurance.

If a couple is gifting so much away today that it’s going to dramatically affect them in the future, then think about gifting to an irrevocable life insurance trust. Just two or three gifts add up to $28,000 to $42,000. That kind of money buys a lot of life insurance for the average couple.

For example, I can give away land to my children but along with this gift goes the income from the land. Now my children have the income and the land but my standard of living has been reduced. If the gift to the life insurance trust was less than the income I gave away from the land, why wouldn’t I take the least expensive and most cost effective route?

Last but not least, you either have to have your children or an irrevocable life insurance trust own, pay for and be the beneficiaries of the life insurance. If you have any incidence of ownership, you are just adding fuel to the fire. Estate taxes are due upon the death benefits – not income taxes but estate taxes – if you have paid for, own, or have any incidence of ownership in the policy.

You can gift the premiums to your children, but as beneficiaries, your children might not be obligated to pay the estate taxes on your estate. One of them might say “Thanks for the money” and leave their siblings hanging with the estate tax debt. That’s when people use a trust.

If you’ve already applied for this insurance, you still have some recourse. You can contact the agent and ask to get your money back. In most cases, you can get all your money back up until thirty days after the receipt of the policy – not the policy date but the day you received it.

Then you can find a qualified estate planning professional who can help you. Obviously your P&C man isn’t up to snuff although this is estate planning 101.

“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

Stock Redemption Versus Stock Purchase

Written by Michael Baron on . Posted in Asset Protection, S or C Corp, Transferring Ownership, Wills

Dear Michael: We have a family farm corporation which has evolved over the years. We wanted a simple way of moving our estate to our children and farming son and our CPA suggested this would be the best. At this point, we have just our farming business – machinery, grain, etc. – but none of our land in the corporation, as we rent the land back to the corporation to avoid Social Security taxes on this income.

Recently, we were told by an insurance agent that if we wanted our stock to go to our son in the business, the corporation could buy life insurance on us and redeem our stock upon our death. The agent thought it would be easier for the corporation to come up with the payment than our son. Can we use this as a deductible expense to the corporation as the agent did not know? Tax Season Always

Dear Tax Season: There are two basic types of business purchase plans used by most corporations, that being the corporate ‘buy-sell’ agreement and the corporate ‘stock redemption’ agreement.

Under the ‘stock redemption’ agreement, the stock would be ‘redeemed’ by the corporation buying the stock from your estates upon your death. Ostensibly, this money would then flow from your estate to the heirs you name in your will.

If the life insurance premiums have been deducted from your expenses in any way, the death benefits will then come to the corporation as taxable income to the C Corp or as pass-through taxable income in an S Corp. This would greatly complicate any redemption of your stock as corporate or personal income taxes would have to be completed prior to the redemption of your stock.

The other item that occurs when you ‘redeem’ stock is that the stock is simply retired in the corporation no matter if it is a C or S corp. The corporation has money due to the death benefit and your stock is retired.

Because there was no exchange from outside the business by an individual, no one can claim any tax deduction for having made an additional investment into the business.

Had your farming son owned and been the beneficiary of the life insurance under a ‘stock purchase plan,’ he would have been able to ‘invest’ this money into the corporation to purchase the machinery, grain and other assets. Any assets purchased would be deductible to him for depreciation, etc. unlike the internal stock redemption plan that merely retires stock.

With your son as owner, payer and beneficiary of the death benefit, he can now purchase your stock from your estate – you’ll have received a stepped up basis in the stock on some portions of your stock – and the money will then flow to the beneficiaries of your will. Your son will get a tremendous income tax benefit from handling the funds this way versus the stock redemption.

By the way, if your agent doesn’t know these things, find one who does – yours is playing out of his field of expertise. You need better advice.

This also prevents shares of the business from going to ‘unintended beneficiaries’ if your will does not address these shares. Many people forget when they convert their farm business to a corporation, they have to mention the ‘shares’ in their wills so as to be distributed by the instruction of these wills.

Too many people forget to change their wills and then the ‘shares’ become part of the ‘residue of your estate’ – commonly known as everything I didn’t mention by name in my will – which is typically split evenly between all the children.

Last, but not least, if your son can’t afford the premium, raise his wages or 1099 him for the income needed to pay this premium. Its better he pays a little tax now to reap the huge benefits of having him own the insurance outside the corporation.

Happy Easter everyone – our annual rebirth is finally here!

“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

Plan Your Estate for the Future You

Written by Michael Baron on . Posted in Asset Protection, General Estate Planning

Dear Michael: We have farmed our whole lives and are now fast approaching retirement. Unlike most of your clients, we have no children and no close relatives who are farming. We don’t feel the usual need to make certain our farm stays together for a next generation. We also have been lucky enough – without the expenses of a family – to put quite a bit of money into savings through traditional SEP’s and savings accounts. What are the things we should be worried about in our estate planning? – No Kids

Dear No Kids: Because you never had any children and because you don’t have any heirs that you want to enrich upon your deaths, you need to plan your last years on this planet for yourselves. Of course, everyone is on their ‘last years’ – we just don’t know when that will be.

In your case, you are approaching retirement. This typically means there will be an equipment sale and or a year or two or more of grain sales to deal with. The first year when you don’t have fall inputs to offset the year’s income is IRS painful, to say the least. No deductions, all the income, etc. etc.

To soften the blow, you might consider leasing equipment rather than replacing equipment. Your payments are deductible and when you’re done with the equipment, it goes back to the dealer. Your costs are lower – short-term – than purchasing. If you feel the need to replace something right now, look into leasing equipment short-term rather than buying machinery you’ll have to resell in a few years anyway.

Second, you might talk to your elevator and find out what kind of programs they have for doing deferred payments to you. Many elevators are more than happy to keep your money and pay you a little interest on the amount payable to you until you are ready to take the payments.

For tax reasons, you might talk to your CPA and decide what tax bracket you will be in when you retire. As the income goes up, the tax brackets get wider. For example, the twenty-five percent net income tax bracket is $74,900 to $151,100. If the future average minimum net income you have is higher than $74,900 and less than $151,100, that’s the number you use for taking money from your elevator. You might as well fill up your 25% bracket – especially considering it’s the least you will ever pay and anything over $118,000 is Social Security tax free. If you are already bordering on the SSI cap, it’ll save you an additional 17% by taking the $33,000 difference.

Remember to factor in your Social Security earnings, as well, because if you earn more than $34,500, forty percent of your SSI earnings are taxable as well. For the most part, you have a five year period where you need to play your cards right for maximum return for the five years prior to taking SSI income.

Secondly, you need to take a look at what your savings and retirement funds are invested in. It’s fun to play in the markets when you’re earning money – it’s not so fun to lose money when your income is now based upon it. You might start trending your savings and retirement funds towards more secure investments – such as guaranteed index annuities – where your principal is no longer at risk. These annuities offer income riders guaranteeing higher and higher annual income every year you wait to take the income. Guaranteed income vs. market insecurity?

Last but not least, if you have sufficient money to live on from your farm assets and don’t feel like you’ll need much from either your savings or your retirement funds, you can start transferring some of the taxable investments (again with an eye towards the tax brackets) to either non-taxable (Roth) or to other non-taxable avenues that provide lifetime income, a death benefits to your spouse and long-term care benefits for both of you.

Many people do standard roll outs of their taxable money each year to provide for long-term care benefits, non-taxable savings and a non-taxable death benefit from their taxable accounts.

Without heirs, consider your life ahead and what you would consider luxuries – an income without worry, perhaps guaranteed health and long-term care, if you need it, delivered in the way you would prefer, and peace of mind knowing you’ve taken care of the future you – the one who will now be age seventy, eighty, and beyond.

“Keeping the Family Farm in the Family”
Great Plains Diversified Services, Inc.
1424 W. Century Ave., Suite 208
Bismarck, ND 58503-0917
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.