Author Archive

Leaving the Nest

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

Dear Michael: We have one child who is farming and two others who are not. We’ve been gradually turning over rented land and machinery to our farming child while putting money in savings for our other children. We do have long-term care insurance that we bought it back in the nineties so we’re covered for long-term care. What other things should we be thinking about? – Got It Covered.

Dear Got It Covered – You’ve done a nice job on your transition with your farming child. Too many people wait and hold on to assets far too long not allowing the next generation to get a foothold in farming.

You now have to decide when you and you’re farming child switch caps – where s/he is the farming manager and you become the hired help or junior partner in the operation. For some people, this is an easy task to turn over the major decisions of the farm. For other people, control is a hard, hard thing to let go of.

Maybe it’s good to set a date, a year in the future when you decide this is the year to let this occur. Your farming child should be informed of your decision as to the date and what his or her responsibilities will be then. For example, who borrows the money to farm, what the plantings are going to be, how many head of livestock, etc. and then work towards this date together.

If it seems like your farming child is a little slow on the uptake, remember they’ve had years of practice listening to you and depending on you. But now it’s time to push them out of the nest and see if they can fly.

You also mentioned that you purchased long-term care in the nineties and that you are covered for long-term care. I’ve heard this many a time. “I’ve got long-term care insurance so we don’t need to worry about that!”

When someone says they bought insurance in the nineties, I would bet a hundred dollars that this is what you are insured for – one hundred dollars a day. Everyone bought insurance based on the costs at the time and during the eighties, people bought eighty dollar a day insurance, nineties one hundred dollar a day and in the last decade perhaps two hundred dollars per day.

To be sure you have sufficient coverage, use the average cost of care in North Dakota per North Dakotan receiving long-term care – that average being about eighty-six hundred dollars per month or just under three hundred dollars per day and just over one hundred thousand dollars per year.

If you’re insured for one hundred dollars per day, you have three thousand dollars per month. Add to this your income – Social Security, land rents, and any other income. Remember, if one of you requires care and the other doesn’t, the cost of living for the one out does not drop significantly. He or she will still need to pay for electricity, food, land taxes, etc.

Also, don’t assume Dad won’t end up needing care. With health care getting better, men are now living long enough to require care eventually. They used to only constitute twenty percent of people needing care – now they’ve jumped up to almost forty-three percent. People are just taking a lot longer to die – both male and female.

In your scenario, you’re about fifty thousand dollars per year short from hitting ‘average costs of care.’ You would then take the nest egg you’ve set aside for the other children and divide it by your annual shortage to determine how long your nest egg will last. That’s what you are truly insured for.

Of course, that does mean the kids off the farm will slowly watch their inheritance disappear if you take a long time in care status – whether that’s home care, long-term care or assisted care. That creates a big problem for your farming child someday when s/he has to explain how their inheritance got used while his is still intact – unless you didn’t have a cash sum sitting aside. Then the land would be used too!

“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

Use an LLP, Not an LLC

Written by Michael Baron on . Posted in Farm versus Non-Farm, LLC's & LLP's, Transferring Ownership

Michael: We read your article about using an LLC for ownership of land so if the farming child does not have any farming children themselves, then all of our children can share in the wealth. Like the other couple you talked about, we want our son to farm and enjoy the farm, but if he doesn’t have any children interested in farming, then why should his family enjoy all of our estate while our other children get nothing? Tell us more about how the LLC might work for us? No Grandchildren Farming

Dear No Grandchildren Farming: As happens sometimes, I should check my facts a little more closely before I go on about something.

This LLC might work in Montana, South Dakota, or Minnesota, but North Dakota has farming laws which do not allow land to be incorporated unless there is an active farm participant and at least sixty-five percent of the income derived comes from farming.

I was envisioning farmland ownership by children under an LLC where farm and non-farm children could own actual shares – paper shares – in the ownership of farmland and income would be derived from rents to the non-farming children. But I was wrong about the LLC being the vehicle to use – in this state, at least. I’m not certain of the laws in the other states mentioned.

However, the close cousin of the LLC is the Limited Liability Partnership or LLP – which is allowed for this purpose in North Dakota.

Rather than having shares issued – as in an LLC – the LLP would have partnership interests or fractional ownership. In other words, each of your children would own a percentage of the business rather than actual shares in the business.

This makes transferring interests a little more challenging than having shares, but it can be managed. With the shares, if a non-farming child needed cash for a short term need, s/he could cash in a few shares without giving up entire ownership of the land. We also dictated that only so many shares could be sold at any time so the farming child could purchase them without being overwhelmed if one or more of their siblings decided to cash out everything all at one time.

You can use the same terms and conditions under the LLP only you would use a percentage instead of actual shares. At any given time, a non-farm child could decide they want to sell their percentage of their percentage ownership – again limited by a maximum amount over any given period of time – to raise capital.

Or the farming child could use income to purchase percentages from his siblings over time if s/he wanted a large share of the farm business long-term – regardless if they have farming children or not.

They may end up over time with odd percentages – sometimes out beyond two or three decimal points – but as long as we can convert the farmland value to a dollar value (either by appraisal or another method) the percentages can be converted to dollars for sale purposes.

Again, you’d still want to have a will that directs this LLP be set up upon your death with your farmland assets and each child would have to sign on to the business agreement defined in your will as to how the LLP will do buy sells, transfers, loans, etc.

This is just one solution for people who have children farming but no grandchildren interested in farming who want to control how this wealth is handled in the third generation when no one farms. It’s not a great solution if you have a generational farm – where grandkids are involved – and you need to keep the family farm together.

Every solution has two sides to the coin and it’s important you understand – or have someone teach you – all the different options you have to choose from and which one suits your family situation the best.

“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

LLC’s for Unmarried Children

Written by Michael Baron on . Posted in Asset Protection, Equalization, Farm versus Non-Farm, LLC's & LLP's

Dear Michael: We have a unique problem, or maybe it’s not that unique. We have a farming son who is in his late thirties, never married and looks like he may never marry. If he does, we know he’ll find someone with children already – as there isn’t a large pool of eligible ladies in our rural area to choose from who don’t already have children. Besides, he’s expressed he isn’t interested in having children of his own at his age. We have two other daughters – one who is also farming and one who is not. The size of our estate is in excess of six million dollars. We know our farming son has earned the right to take on this family farm someday by staying with us, but we worry if we die and leave most of it to him, he won’t have grandchildren to pass this on to – if he ever marries at all! We don’t feel this is right he receive so much, our daughters so little when we know he’ll never pass this on to a farming heir. One of our daughters has farming children. – Not Waiting on Grandchildren.

Dear Not Waiting: You are certainly not alone here in having an unmarried farming son. When I speak at universities and colleges to ag education classes I tell them they have two priorities: Get a good education and find a good mate for life.

Let’s face it – if Jr. comes home to a rural population that has ten men for every eligible woman – where most of the girls raised in the area have married out of the area – there’s just not a whole lot of options for these boys once they leave college.

As the face of farming and the dynamics continue to change with this, as well as other problems, become more frequent, solutions have to reflect this change.

For some people using an LLC might be the answer. An LLC or Limited Liability Company is a business entity created to own property jointly. Normally, in farming, if you were alone, you would move your day to day farming operation into the LLC and the land would be owned outside the LLC to protect it. LLC’s are designed to limit any liability exposure to the assets held within the LLC. Hence, you might put things like machinery, farm buildings, etc. (the places where accidents happen) into the LLC and then keep the land on the outside so it is protected from exposure.

An LLC functions much like a corporation. It receives income, pays expenses and then pays out any remainder income to the shareholders based on their percentage of ownership.

However, there is nothing to say you can’t use an LLC as a land ownership entity and here are a few reasons why you might want to consider it.

Because your son needs so much of the land in order to succeed at farming, you might state in your will that the LLC Real Estate – established at the time of your death as a condition of your wills – will rent the land at a lesser value than market value to your son. Or you might state that your farming son receives his one-third of the rent paid back to him. You might state that he gets both so he’s assured of being able to cash flow the operation.

Putting in crop shares can be dangerous because a few bad years in a row and the other owners are going to want to sell their shares in the LLC because it’s not producing income and they want to cash in their shares.

Speaking of ‘cashing in shares’ we have to be aware that some of the shareholders – the other two daughters – may want to cash in their shares someday. To alleviate this you need to issue enough shares – say a million shares – which would equal six dollars per share, in your case. Now, you put a restriction into the LLC as to how much any owner can be sold per year, or per ten years, etc. This keeps Jr. from having to buy a third of the farm in one year.

If someone needs some quick cash, they don’t need to cash in their entire farm interest – they can just sell enough shares to your farming son to carry them over.

Now, when everyone reaches retirement age – including your unmarried son – everyone has an equal value to add to their retirement plan – less any exchanges that have occurred over time – and no one can complain they got less than the other.

 

“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

Phases of Life

Written by Michael Baron on . Posted in Asset Protection, General Estate Planning, Long-Term Care, Transferring Ownership

Dear Michael: We have a good family farm operation. Our son works with us and owns quite a bit of land on his own – although we still own the central properties. He should be able to buy out his siblings share. We’ve also put quite a bit aside into the stock market over the years to go to our non-farming children of which we have two. This sum has grown to a sizable amount – nothing like the farm – but a good amount. We are coming into our seventies now and wonder if the stock market is a good investment for us – and ultimately for our children. Is this a good place to get a good return? – In The Market

Dear In The Market: I can honestly answer you one thing about the stock market and it’s returns in the years to come – no one knows. That includes any expert you want to bring up from Warren Buffet to Jimmy Buffet.

Investment portfolios, over the years, were started by people who were concerned about their retirement income. It has been a good place to put money aside and ride out the ups and downs. The rate of return – for most people with good brokers – has been higher than CD rates – which isn’t saying too much lately.

I think what happens to many people as they go through their phases in life is they forget to change their investments thinking from ‘How much am I going to build up one day?’ to ‘How do I protect this and all of my other assets?’

Everyone should go through a checklist to make certain they are where they should be in their life at any given time.

For example, when I’m young and have debt, I need to check off the ‘If I die, how will this debt be paid off for my family?’

When you reach sixties and seventies, the questions you ask yourself have to shift from building an estate to protecting it. You would have an entirely different checklist to go through.

You might ask yourself ‘Does my farm produce enough income for me and my spouse that we needn’t worry about the future?’ If you can’t, you might think about the fact your lifespan is shortening each day and it might be wise to sell some of your land to your farming son to raise your level of income.

If you have sufficient income to meet your lifestyle, great. Check.

The next item on your checklist might be ‘If we die today or in the future, is their sufficient assets to provide for the non-farming children to give an equitable inheritance to them?’ If not, you and your son need to have a long conversation about what you expect from him to pay his siblings to equal out what you would consider an equitable settlement. Then, if you want to avoid future problems, bring the other children in on the conversation and tell them what you have decided. This keeps Jr. off the hook later when you die.

If you’ve got this handled, great. Check.

Last but not least is having funds like you have now. You’re worried about if they will be enough or continue to grow for your non-farming children? If I were you, I would be more worried if they are still going to be there when you die.

With life spans ever increasing, the percentage of people requiring some type of care – home care, assisted care, facility care – before their death is now up to seventy percent of all people. Many people say ‘Well, I bought nursing home insurance years ago – I’m good’ but what they bought is $100/day coverage when average costs are now at $275.00 per day and growing at 8%. This is like insuring your home for eighty thousand when it will take two hundred thousand to rebuild it. Only your home doesn’t have a seventy percent chance of burning down – but you do.

You should now start positioning your money – if you have sufficient income, got the farm transition handled with your son and other children, etc. – for maximum protection from getting old and the seventy percent chance of needing care. What good is a seven percent return on money that went to pay for long-term care?

As we go through the aging phases of life, we have to address the problems each age brings about. Too many people get stuck in the accumulation phase far too long for their age and end up losing a lot more than just their savings and investments.

“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

The Party’s Over

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

Dear Michael: We haven’t done anything with our wills since the kids were young. We have two children – one farming with us and one who farms next door as she married the neighbor farming child. Our son just got married but our married daughter has three children and been married for over ten years now. We would like to make sure the son has the farmland and equipment and then save up enough money for our daughter to offset what he is getting. We’ve done a good job keeping our farm debt free so it shouldn’t be a problem for our son. What do you see in a situation like this? Haven’t Updated.

Dear Haven’t Updated: Well, the number one problem is that you have an outdated will and if you died today your children would split the property leaving your son in partnership with your daughter.

But, I imagine the reason you haven’t updated is because you really don’t know what to do or what issues you need to face in your estate plan. A lot of people talk about needing to do something, but when they sit down for a chat about it, they don’t come up with the right questions or the right answers so they shelve it for another day, another year, another decade, and so on.

In any case, if you want your son to get the farm, you have to realize being newly married (and likely without any pre-nuptial agreement) that any property going to him could end up in your new daughter in-law’s hands either by the death of your son or by a divorce in the future.

You’ll likely want to design your estate plan so that if either of these two events occurs, the farmland and farm operation would be protected. You can do this by putting a clause in your will or plan that your son must farm until he is a certain age and if he doesn’t, for any reason, then the farmland reverts back to your farming daughter who is a little more established.

We have to remember, we’ve had a decade of good prices and good crops and you were smart and paid off your debt with this extra income. However, going forward, when projections show you could do everything right the next few years and still lose money, then you better consider all the possibilities.

The number one reason for divorce is money – or the lack thereof. You could make a lot of money, but if your family is used to spending more than what you can make, then expect problems.

In fact, money problems are going to be a part of our future. We have a few issues this is going to bring up. Farm debts that haven’t been a part of farming for over a decade will reoccur. A new generation that had it pretty easy will now have to see the other side of the coin when an industry has it’s issues.

All business go through cyclic changes. One day Apple is laying off 120,000 workers and the next year they are experiencing growth. Car manufacturers have years where they can’t keep inventory, the next year they are shutting down factories. This doesn’t just happen in farming, folks.

The interesting thing is when money is easy and farming isn’t difficult, people forget to plan. My business has been slow for the past decade because people didn’t have money problems. Now that the new projections are coming in, and people are starting to realize planting without planning could end up in disaster, business has gotten significantly better.

Money makes the world go around. With it all problems are manageable. Without it, all problems become magnified, especially if you’ve had no experience in dealing with debts or shortfalls in income.

As time goes on, more and more families are going to have to deal with these issues head-on and they’ll need the help of an experienced estate planner.

“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

Christmas Gifts

Written by Michael Baron on . Posted in General Estate Planning

Dear Michael: We have been working on our estate plan for the past few months. We have a farming child, who is married and we have three other children – all of whom are coming home for the holidays. Is this a good time to visit with our children about what we are thinking in our estate planning or will it ruin the holidays? – Don’t Want to be Scrooge.

Dear Don’t Want to be Scrooge: This can be a touchy, touchy subject as you well know.

If you are intent on having an open session regarding your estate planning, set down a few ground rules.

One, this is a meeting between you and your kids – period. This is something intensely personal and you might see some emotions that the rest of the in-laws and grandkids don’t have to see – either from your children or from yourselves.

Make sure all of the in-laws and children and other distractions are somewhere where they won’t be a constant interruption. You need to evoke feelings and emotions from your children and it doesn’t help if there are children who keep interrupting the flow of the conversation. Set aside a room where it is quiet, where you can speak and the children can speak about what you all are thinking and want to express.

Make certain everyone understand there are no bad thoughts or feelings about your estate planning. You’re not there to judge and neither are they. It’s a time to express yourself, get whatever you or the children need off of your chest, and once everything is out in the open, then you can deal with the issues one by one.

Explain how important it is to you that the family farm continue into the future, the commitments your farming child has made to keeping the family farm whole, and how you see the future evolving – whether you’re in it or not.

If you cannot get all the children together in one spot – away from the maddening crowd – then see if you can individually talk to your children for at least one hour. Show them your estate plan, what you are thinking, and, again, tell them they can express themselves without fear of judgement by you.

Expect them to say things “Dad and Mom, this is your stuff – whatever you want to do with it is up to you.” Someday you’ll be gone and then it becomes their stuff and you want to know they are on board with the overall plan as to how you want things to work in your estate post-death.

You might also expect things like “Dad and Mom, you’ve helped Jr. out on the farm for so many years, why does he get so much?”

Explain to them how Jr. has committed his life to farming, has helped you grow in your farm operation with his labor, his expertise, his help. Use examples of other farms in the neighborhood, which aren’t there anymore because they didn’t have a child willing to take on the farming business.

All of this requires time to talk to your children and to communicate with them. Some children will be silent, but maybe they are just digesting the information and need time to think about it. Some will be outspoken and against your plan, but it’s better to get that out in the air now rather than after your deaths. You can deal with it today. If your children are coming one day and leaving the next, you don’t have time to squeeze these meetings in. It’s too rushed and too much going on.

Last but not least, if the in-laws want to be part of the discussion, unless they have a vested interest – such as the farming in-law has – then explain that you won’t be sitting in when their parents have such a meeting with them! Sorry, but if you won’t be invited to their meeting with their parents, then the same applies here.

For everyone, keep the spirit of Christmas in your heart. Give thanks for all that has been given to you over your lifetime, and especially thank God for the gifts of fortitude, unwavering commitment to your children and your farm, and for having courage to face what you did to make certain this family and this farm exists today. God’s gifts are all within us, a part of us – not what we have acquired over our lifetime. Pass these gifts on to your children for they are your true gifts.

“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

The First Step

Written by Michael Baron on . Posted in General Estate Planning

Dear Michael: We have a time management issue. We know we should be updating our planning but our year to year has changed so dramatically in the past decade. We’re now growing crops that we take off the field later. We’ve also purchased a home in Arizona where we like to go as soon as the crops are in. We come back for Thanksgiving, Christmas and necessary doctors’ appointments, etc. Our son runs the ranch operation during the winter months. Between coming and going, we never find the time to sit down and do what we need to do on our estate plan – Too Busy Snow Birds

Dear Busy Snow Birds: The first thing that comes to mind is you can invite me down to Arizona so I can get out of the cold for a few days. I’m not sure if you want me sleeping in your guest room, however.

The second thing that you might consider is when I work with my clients, they pay me a one-time fee and it’s good for up to two years. On one of those trips back to the northern climes, you can come in and tell me all about your situation – either here in Bismarck, in Minot, Dickinson, Jamestown or Fargo. I’m in each locale every three weeks or so.

The other option is to send your information to me and we can talk on the phone. While you’re down in Arizona, we can visit about your particular situation. But then I have time to do background work for you.

You’ll tell me what you’re thinking but then I call up your son – who’s back home on the farm – and without revealing what your thoughts are – have a long discussion with your son and/or his wife about how they see things coming along and where they want to be in the future.

Estate planning – when there is a farming child involved especially – it’s about understanding what each generation is trying to do or accomplish over time and melding those sometimes different thoughts and desires together to come up with a cohesive plan.

More and more, with land values being high, we’re starting to see people set aside this valuable land in trust so their farming child can use the land for little or no cost over the years following their death – subject to some age limitations – so the land is protected from divorces or deaths of the heirs, etc.

You can set things up so there is no cost to using the land, but if the son changes his mind on farming or if he gets into financial trouble and we discover we backed the wrong horse, then the land doesn’t get sold out at auction or pass to his wife, if he dies.

The age limitations would be something like ‘If Jr. is still farming and he’s been there non-stop and he’s reached the age of fifty, or sixty or sixty-five, then the land goes to him without restriction.’ You know your children’s tendencies and weaknesses – build an estate plan around that.

On the other hand, if I visit with your son and he feels like your holding him back on growing in his farm operation, maybe it’s time to swing some of the land over to his name and he can buy it from you. As long as the price is fair, you’re happy and he’s happy, let him start building his estate.

I run into all kinds of different situations and every family has their own life story and the players in that story. Each estate plan has to be individually crafted to that family, their history and their future.

That’s why I have a two-year contract with my clients. Many of my clients take that long – especially my snow birds – to get this done. But ‘a journey of a thousand miles begins with the first step’ and that step is deciding to get going – even if you feel time is an issue. I think it is better sometimes when you’re away in Arizona to consider all the important issues carefully – away from the farm and away from family distractions.

“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

Have the Talk

Written by Michael Baron on . Posted in Equalization

Dear Michael: We have a situation that may or may not be unique. We have four children and two of the boys farm. One started farming back when all we could do is help him build his own operation and the other started more recently and hasn’t acquired the assets the first son has.

We are a little bit stuck because we don’t know how to quantify the help we gave our older son – adding to his success greatly in acquiring assets – versus what we should do with our second son farming who hasn’t acquired a whole lot as he’s worked with us. We helped our older son buy land, buy machinery and get established but it’s been years since we helped him. How do we get this straightened out now? – Different Help in Different Eras

Dear Different Help: This situation has always been a puzzler for both my clients and for me to sort out.

Where would your first son be if you hadn’t helped him out during his starting phase or during some of the tough times? Truth be told, he’d likely be out of farming right now rather than amassing the net worth he has now. It seems like the help you gave him twenty years ago doesn’t come near to the value your second son needs today – in pure dollars and cents.

However, if I helped a child buy three hundred dollars an acre that’s now worth fifteen hundred an acre, isn’t that the same as helping the second child acquire that same acre today? Even though the value today appears to be much, much more than what you helped your first son with?

We have to think of this like if it were a gallon of milk or a dozen eggs. We might have paid twenty-five cents for a gallon of milk or a dozen eggs twenty years ago but today those same things cost three to four dollars. However, just because the dollar value rose in the past twenty years doesn’t make the omelet you can make from these any better tasting, does it?

In much the same way, your costs dating back twenty years ago were more near and dear to you than they are today. Also, the son who received your help long ago also had the benefit of owning these assets much longer than your younger son.

However, when it comes to splitting up today’s pie, they only look at the net worth today – unless you sit down with the both of them and have a conversation about the help received by the older one and the help you’ve received from the younger one as he’s helped you in your partnership.

Now sometimes these conversations go pretty good – sometimes you find a lot of things that aren’t being said. But the worst thing is not having the conversation at all. This is a pretty tricky situation to talk about with their kids and sometimes people need me to sit in on the talk and moderate, if you will.

I’ve found, when I sit in on these meetings, both children – when allowed to speak freely and openly – will express themselves how they feel. Eventually, as they talk about what’s right and what doesn’t feel right, they’ll inch closer to a settlement that both of them are happy about.

Other times, I’ve had Dad and Mom just tell one of the kids ‘this is the way it is and that’s the way it will be because it’s my stuff to do whatever I want to” and the meeting ends that way.

Either way, we have an answer as to how things are going to happen when Dad and Mom die. Either way, both children will be faced with this reality and be able to make life decisions towards that eventuality. If there’s a division between them after we have the talk, you have the rest of your lives to get the two boys to understand why you did what you did and see if you can mend fences between the two of them before you die.

This beats the heck out of them both thinking different things until you die – and both being surprised how you decided to do it. And then fighting about it for the rest of their lives.

This is Thanksgiving week, so let’s all give thanks for the bounty God has given us and please, let Him give us the wisdom to handle all of 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
Fax: 701-255-6106
Toll Free: 1-800-373-4078

Road Map to Success

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

Dear Michael: We have just two children – a son who is not interested in farming at all and a daughter who married a neighbor boy. They’ve been married a few years and they have a little boy together. Last year we hired our son-in-law to work on the family farm on salary for the first year. We would like to know how we set up our estate plan when the son isn’t interested in farming and the son-in-law is our most likely candidate to farm? What are the ups and downs of working with an in-law? – Thinking Outside on the In-law.

Dear Thinking: Most people would assume this is a gender neutral problem – what difference does it make if the next generation is your son or your daughter?

However, in most cases, the actual business and labor of farming occurs with your son-in-law rather than with your daughter – unless she is actually the one doing the farming and not your son-in-law.

As such, it’s hard to leave him outside the circle when it comes to planning for the year ahead or for decades ahead in your estate plan. The longer he stays with the family farm, the more he’s going to be ensconced into the business. You’ve started him off on salary – which at this time means he is an employee and nothing more – but it sounds like you have hopes he would be more.

To that end, I would ask your daughter and son-in-law if they’re actually are interested in taking over the family farm business someday? I’ve had quite a few young people say ‘No thank you’ when approached with actually running and managing the farm business in the future and are perfectly happy with getting a salary.

If they are interested, then we need to lay out a ten-year plan for them.

This would include how they are going to start acquiring equity in the farm business over the next ten years – usually starting with machinery.

As machinery needs replacing in the future – don’t buy machinery just to accomplish this – take some of your rented land, calculate approximately what the profits you would have from some of this land and let your son-in-law do the farming on this land. If he has a normal year, he will have the machinery payment due at the end of the year. Then use your trade-in and his payment to buy the new piece of equipment as joint owners.

Explain to your daughter and son-in-law that over time, this method of transferring first joint ownership and eventually full ownership of the equipment is how they will eventually take over the farm business.

Also explain to them that over time you are going to let them derive their income from farming and the sale of crops – not from salary. They should not get too comfortable receiving a salary each month because each year you are going to reduce the salary and increase the number of rented acres they farm.

We also need to show them how they will be able to deal with their non-farming sibling someday on the ownership of the most important asset – the land. They need to understand if they will be able to buy out his share – rent his share – or acquire that share of the farm business.

The more we explain to them today what the roadmap for the future is going to be, the better they can make decisions to either stay on that road or choose another career for their lives. You can’t plan your lives – especially in farming – without things laid out for them – giving them targets to hit along the way.

As long as you are here to help them, and this is the road they want to be on, the more successful we will be in keeping this family farm in the family.

“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

IRA’s and Long-Term Care Solutions

Written by Michael Baron on . Posted in Long-Term Care

Dear Michael: We read with interest your column some time back about how we can use some of our retirement funds to provide for long-term care in the future, but can’t seem to find the exact article. Can you reprint or explain again how this would work? We have a significant amount in retirement funds, but really don’t need the income from it. We will likely take the Required Minimum Distributions and leave it to our non-farming kids while our son gets the farm. – IRA Confounded.

Dear Confounded: It’s a funny thing about IRA’s and other qualified money.

If you have a large amount in qualified money, typically it’s because you had a rather successful life and later on in life during retirement, you really don’t need the money because you have farm rental and other income.

For people with smaller IRA amounts, the amount isn’t large enough to change their standard of living so, they too, only take out the minimum required or RMD.

In almost all cases, over time, most people only take their RMD’s and leave the rest to their children from their IRA – the savings that was supposed to be the defining retirement tool when introduced. Not many people actually use their savings in qualified money to supplement their retirement income on an on-going basis – as was intended by Congress when first approved.

Many, many farm families, such as yourselves, want this money to go to the non-farming children in lieu of farm property to the farming child. However, even if they got every penny in your retirement account, they’d still have to pay income taxes on their inheritance whereas the farming child does not.

Second, this is money that cannot be protected by long-term care. Being as it is an ‘individual retirement account,’ if this individual requires care, these funds will be used to pay for care if there isn’t sufficient income to provide it. And, there goes the non-farming children’s inheritance. To protect it, you’d have to withdraw it, pay the taxes upon the entire amount and then gift it away.

Because of this, many people are considering how to remove income taxation and protection from long-term care for their non-farming children.

One company I am aware of allows you to transfer your qualified money – or a portion of it – to them. They will then make systematic withdrawals from your account each year for twenty years. They will also pay you interest on both the amount not withdrawn yet and the amount growing in the next account. A person would have to pay income tax on these systematic withdrawals over twenty years, but sooner or later someone is going to have to pay taxes on these funds in any case.

The company then takes these withdrawals and provides a life insurance/long-term care benefit from the payments received. As you might know, a death benefit from life insurance is not taxable to your heirs versus your qualified money. This death benefit is anywhere from one and a half times to three or four times your deposit amount– depending on age.

This contract also allows you to access your death benefit early in the event of ‘chronic health care’ issues. The contract will pay out the death benefit for chronic care issues – which typically means long-term care costs.

For example, you can put in one hundred thousand dollars of qualified money. In turn, the contract would give you, for example only, two hundred and twelve thousand dollars in death benefit. You would pay income taxes on the $5,800 annual withdrawal over twenty years each year as it is transferred.

If you needed care, you would receive two percent per month of the death benefit or $4,240 per month for care needed – long-term, home care, assisted living, adult day care, etc. If you died prior to receiving all of your death benefits early, your children would receive the death benefit less any claims paid. If no claims were paid, the children would receive the entire two hundred twelve thousand tax free – much more than the one hundred thousand taxable.

Last, but not least, you can make this a joint policy – covering both you and your spouse. Now your qualified money can do double duty. You can also add on a lifetime rider for a nominal amount stating that even if you use up all of your death benefit and are still receiving care, the contract continues to pay as long as you live.

For people with qualified money who have no intent to use this money other than to leave it to their children but don’t have long-term care covered, this may be the perfect solution.

“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.