Vernon and Kathy came to me with an interesting problem. They had three children – one of whom was farming part-time.
‘We have two goals,’ Vernon stated. ‘We’d like to see our son, Ben, who is farming part-time be able to take over the family farm operation. Right now he has a great job, but he’s out there every weekend. The problem is his wife likes to live in the city and we know the farm house will never be used. They live only twenty miles away, but we’re not certain he will ever farm full-time. Also, we’d like to make certain that the farm is protected from long-term care costs, if at all possible. We have some savings, but they’d be used up in a couple of years’.
I asked them what price they would ask from their son, if he wanted to buy it from them or if he had to buy it from his siblings. ‘I know land is going for much higher but I’d like to give him a break on it. It’s worth twenty-two hundred now, but I’d sell it to him for one thousand. That’d be the number to use, as well, if he bought it from his two siblings,’ they answered.
This is a classic problem. If the parents sell for FMV, the land is too expensive to pay for. However, if they lower it to an affordable amount, then what is to stop Ben from buying the land for one thousand dollars, paying for the land by subletting the property and letting cash rents make the payments.
Whether that occurs if the parents sell it to him or whether it occurs when he buys from his siblings, it is grossly unfair for Ben to acquire a three million dollar asset and only have to pay one million for it – if he doesn’t actively farm the land. He may just keep his ‘good job’ and never farm.
To cover this, as well as the long-term care issue, we talked about using a life estate deed with conditions on it for Ben.
I asked Vernon, Kathy, and Ben what things they felt would be fair to have in a life estate transfer deed to Ben so it would be fair to all.
Vernon and Kathy stated ‘We’d like to know what happens if Ben decides not to farm and sublets the farm, or what happens if he dies, and leaves the deed to his widow?’ Ben didn’t think it would fair to have the land go to him or his wife if he never actually farmed it.
So I asked Ben ‘Would you agree then, if the deed contained language whereby you would agree – right on the deed in writing – that you would accept the terms your parents are setting for you? Such things as ‘You cannot sublet the farm, you cannot custom farm the entire operation, if you die prior to their death, the property deed will not pass to your widow but will come back into all three sibling’s names?’
In return, Ben wanted to know how he would be protected by inflation and long-term care costs. Vernon and Kathy said ‘How about if we set a price in the deed, allow that any rents paid by Ben to us will be reduced from this price, and Ben will build up credit over the years. If Ben stops farming, then the deal is off and the deed reverts back to all three kids?’
We talked to an attorney who drafted all of the ‘wish list’ into the life estate deed which was gifted to Ben. Ben signed agreeing to all of these conditions, as well as his parents. Vernon and Kathy.
The other children were given copies of this deed so that if Ben should go in a different direction than what he was intending today, they could then proceed to get the deed put into all three names. Not to assume this is an easy task, and enforceability might be an issue in the future, but at least it was there.
The life estate deed, of course, gave some protection from long-term care issues. All in all, after many discussions all the parties – Vernon, Kathy, Ben and the other two children – were happy with the outcome.
“Keeping the Family Farm in the Family”
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