Case #905

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

Brad and Deanna Diggs came to me with the following questions.

“Our son, Brad Jr., has been farming with us for a few years,” Brad told me. “He worked out for a while and then decided he wanted to make a career of farming so he’s been back only two years. He doesn’t own anything yet and we’ve just been paying him wages.”

Deanna said “We have three other children who have also helped us – when they were home – to keep our farm running through the tough years. All of them worked hard on the farm while they were here. We don’t think it’s fair that the other children – at this point – would receive substantially less from our estate!”

Brad said “In a few years or so, maybe Jr. should get more, but as of right now, we don’t think it would be right to give him the farm and the other children nothing. We have a lot of value in land, machinery and some livestock, but we don’t have a lot in savings or retirement funds to give to the non-farming children.”

“Being Jr. is relatively new to this agri-business,” I told them “you might want to consider all parts of your operation separately. If something happens to Brad Sr., what are your plans for the machinery and livestock with Jr.? Is he going to buy it from Deanna, rent with an option to own, lease? How about the cows? Does Jr. like the livestock end of it?”

“Well, he wasn’t too thrilled with cows when he left the farm, but prices being what they are, he’s paying a lot more attention to them now,” said Brad.

“So, he’s understanding more and more of the varied income aspects of the business?” Brad nodded and I continued “So, he’s starting to grow into what the business of farming is all about?” Again Brad nodded in affirmation.

“We don’t mind if the other kids don’t receive any of the cattle or machinery,” Brad said, “but we think all of the children should receive an equal share of the land. We can always set a rate on the land low enough so Jr. can make it.”

“You can set the rent rate low enough so Jr. can make it,” I told Brad and Deanna. “However, if you’re a normal human being – as I’m sure you’re non-farming children are – and you know you own one-quarter of something that’s worth say two million dollars but you’re only receiving one-quarter of the rent amounting to say twelve thousand a year total, what’s your inclination going to be? Keep taking the rent forever at a low rate or cash in and take the half million dollars?”

Deanna said “Well, the girls would likely let Jr. rent for that amount and be happy, but our other son has a tendency to spend more than he makes. I’d worry about him – and I’m not so sure of our son-in-laws either.”

I stated “That’s the problem with moving such a large amount of asset value to people and then expecting them – or forcing them – to take a low return on this value. Sooner or later, either one of the children is going to decide to cash out, or one of them is going to get divorced, or one of them is going to have their spouse tell them to sell, or someone’s going to die and their heirs likely wouldn’t feel bound by the instructions you left in your will!”

“The other side of the issue is this,” I said, “If Jr. rents for his entire life – renting seventy-five percent of the property, he has three issues. One, he can get outvoted by the majority at any time regarding the property. Two, if he doesn’t have at least fifty-five percent ownership in the property he won’t be able to get loans very easily as bankers use this mark of debt to asset ratio. Three, even if he’s able to survive all the previous things, he’s going to have to retire on one-quarter of the assets you now have. That’s a tough row to hoe.”

“Jr. should buy enough second-to-die life insurance on you two so he at least gets a fifty-five percent ratio with his siblings. This will give him majority rule. It will allow him to get land loans, and he will be able to eventually buy out the others. Insurance is expensive but it’s only one one-hundredth of the cost of waiting to buy everyone else out. Get a business plan together with Jr. and then ensure that plan will work. Otherwise, you’re giving your farming son a very, very uncertain future.”

After comparing the insurance costs – lifetime – versus the cost of Jr. buying everyone else out, they agreed it would be a good idea for Jr. to insure his future.

“Keeping the Family Farm in the Family”
Great Plains Diversified Services, Inc.
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Bismarck, ND 58503-0917
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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.