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

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

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

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

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

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

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.