Low Basis versus Estate Taxes

Written by Michael Baron on . Posted in Equalization

Hi Michael: I have a question for you. We have quite a bit of land with little or no basis in the property. Our tax person told us if we pass this to our children they will receive a stepped-up basis in the land – if they farm it for three years. Would an irrevocable trust be the way to go? How does the new estate tax proposal change how we should be planning? – Low Basis.

Dear Low Basis: Estate taxes have always been based on the fair market value or appraised value of the assets held within your estate. The current amount you can pass without estate taxes is $5,490,000 Unified Credit per person or almost eleven million dollars per couple.

Upon your death(s), your estate will be appraised and all added up to come to a total. If your estate(s) are less than the Unified Credit, your children will receive a stepped-up basis in the property and there is no condition they farm for three years or, for that matter, have to farm at all. If they sell the assets later on for the same amount as the FMV at the time of death, they could do so without paying any capital gains taxes.

Some people have been told the children receive a stepped-up basis if they use a trust. This depends on if it is a revocable or irrevocable trust. A revocable trust – as you retain power over the assets until your death and is included in your estate at FMV – will receive stepped-up basis – the same as a will.

An irrevocable trust set up during your lifetime and receiving assets prior to your death has two tax considerations. One, as you ‘gift’ the assets to this irrevocable trust, you cannot exceed the Unified Credit amount of $5,490,000 per person or the gift taxes will equal the estate taxes.

The assets themselves – as they were a lifetime gift and no death occurred – are valued within the trust at your original basis. Not what they are worth today, not what you used for a ‘gift’ to move the assets, but the actual amount your originally paid for these assets. Upon your death, the assets pass to your children at your original basis and if they sell these assets, they will have very high capital gains.

There is a new idea sweeping around called a Delaware Trust. This involves finding someone who’s estate would not have estate tax issues and is relatively the same age as you – making them the beneficiary of your trust – and upon their death, the children would receive a stepped-up basis. In other words, you’re using someone who has no estate tax issues and using their Unified Credit. These transactions are all protected within different trusts moving around.

Estate taxes are always one side of the coin in estate planning, however. What happens if this person you’ve borrowed the Unified Credit from ends up in a long-term care facility and is owing hundreds of thousands of dollars in care costs when suddenly them become the beneficiary of your trust? Sure, when they die, the kids will get a stepped-up basis without paying estate taxes – of what’s left over if this person had health issues.

These type of ‘ideas’ get passed around every few years as one side tries to find a way to dodge taxes while IRS waits them out for a few years and, under current law, can disallow them upon your death. You may think you have hit on the perfect solution (LLC’s, LLP’s, Delaware trust, etc.) but IRS doesn’t have to accept your tax plan when you die – they can disallow it.

The new tax plan proposed states there would be no more estate taxes and family farms and small business would receive an exemption of up to $10,000,000 per family on capital gains.

Of course, the devil is in the details and would a farmer who sold his farm qualify for this exemption when he’s not going to be a farmer anymore by selling his farm? How long do I have to be a farmer to qualify? When I die and my children receive the land and they sell, do they get the $10,000,000 exemption because I farmed? Wouldn’t my family have been better off getting a stepped-up basis rather than having to pay estate taxes over and above $11,000,000? Long-term, could my capital gains be more than my estate taxes?

The answer is: We don’t know. Washington has been full of new ideas painted in broad strokes so we’ll see when they get it all figured out!

Operating Costs

Written by Michael Baron on . Posted in Equalization

Dear Michael: We have been trying to get our estate organized so that our farming son can keep on operating and our daughter, who does not farm, gets an equitable inheritance from our estate. Sadly, we weren’t able to put aside much into retirement funds and savings to provide some benefit to her. We also have quite a bit of grain in storage – or we did before the planting season began. Now it’s been sold and used to purchase fuel, seed, and all the things we’ll need for the year. Is grain a good thing to leave to our daughter in lieu of cash? It’s a sizeable amount but doesn’t our son need that to farm? – Grain Dilemma.

Dear Grain Dilemma – An important side benefit of the past decade of good prices is that many farmers now keep enough grain to pay for upcoming expenses in the following season.

Prior to this time, farmers routinely went in to the bank in the spring, got an operating line of credit, and used what they needed throughout the year. They would pay it back in the fall or winter when they sold their grain. However, many farmers found it hard to effectively market their grain when they knew they had interest adding on to their operating loan and had this incentive to sell their grain. Having grain in the bins, not having to borrow money, and being able to market grain timely has been a great expense saver.

In cases like this, we have to remember two things. One, you have to determine the cost of having to borrow the operating loan if your son didn’t have the grain to use as you do. What would it cost annually to borrow your operating costs?

If the annual cost of having to borrow this amount of money for the months he’ll need operating capital is more than the cost of buying term insurance or second to die life insurance for the two of you, then buy the life insurance to cover the amount of the grain. Your daughter is assured to receive a cash benefit and your son will receive the grain to continue operating as is.

Normally, the interest cost of borrowing today’s operating budgets – even for just half the year – can add up to tens of thousands of dollars in costs. You two can buy a lot of term or second to die insurance to guarantee your daughter’s inheritance for a lot cheaper than that.

Second, you are looking at the here and now when you are thinking about your estate plan – what you have now, what your situation is now, how best to do things with the assets you have today.

In estate planning, you have to take two views of your life. Of course, you have to consider the here and now. But you also need to consider where you will be in ten years, fifteen years and twenty years? Who will own the assets then?

By then, your son should have acquired these assets from you – such things as machinery, grain, etc. You’ll be in your seventies and your son will be approaching his fifties. Your son should have slowly purchased these assets. This should have created a larger savings account for you by then.

Or maybe, in the typical transition of assets, you really didn’t add anything to your savings as your son stepped in without actually paying cash for these assets.

However, you’ve just passed from one risk area of life to another. Now things like becoming ill, needing long-term care, or needing more income can cause serious doubts as to whether your daughter will receive any savings from your estate while your son, in essence, already has his.

If you had been really, really smart when you were young and purchased enough second to die life insurance to fill in the holes for the grain on hand, the ‘future you’ could sit back knowing your daughter is guaranteed her inheritance – even if you do need long-term care and/or burn up all of your savings. And the premiums would be so low because you bought young, they’d be an afterthought in your expenses.

Estate planning is a short-term and long-term planning process – one view as it is today and another of how it will be in the future. Plan for both when you do your estate planning. No one likes life insurance premiums – unless you’ve had it for a while and now realize what a bargain it was at the time.

To Gift or Not to Gift

Written by Michael Baron on . Posted in Equalization

Dear Michael: We have been fortunate to put aside some money as well as pay for our farm operation. None of our children are farming and we are getting close to retirement. With no children farming, we probably don’t have the same problems other people do. However, my husband and I disagree on whether or not we can gift anything – of our savings – to our children. How do we know what we’ll need in years to come? – Have Saved.

Dear Have Saved: In every single client case I work on with people, I help them answer three questions:

What happens if I die tomorrow?

What happens if I live too long and don’t have enough income?

What about my long-term health needs and costs as I get older?

If you think about it, if you can get an answer to these three questions, it helps you answer a lot of other questions such as:

How much can we gift to our children without risking our own financial security if we live for twenty, thirty or more years?

What can we spend today on our retirement – such as homes, vacations, etc. without having to worry we won’t have enough income to live on in the future?

Being as money is made up of mathematical units, there is a way to set up the funds you have today into four categories: money you need to live on now, money you’ll need to live on later, what can be set aside for fun categories such as retirement plans, gifting, etc. and how do I make certain I have enough money to pay for long-term care costs should I become unhealthy?

By taking your current income taxes, I can see at a glance what the two of you live on for your day to day living expenses. It’s usually on the first page on the first major line (what they call above the line income) of your return before you start adding and subtracting expenses and credits.

Next, we determine how much income your current assets and Social Security will bring to you. We determine what rents and expenses will be on your farmland – expenses such as land taxes, insurances, etc. You may have other income – minerals, interest income, wind towers, teacher’s retirement, etc.

For most people, this is your base income to work off of.

Next you have your investments. For most people their idea of investing is I’m going to put this amount into CD’s or savings, give the rest to my stockbroker and hope that someday I’ll be rich.

My concept is different in that I can show you if you put a certain amount of money aside today, and depending on when you need it, show you a guaranteed income for life. Not only that, but each year you wait your income changes to meet inflation.

Now that you know how much you need to live the way you want and how much of your savings you can dedicate to this, you might look at ways to make certain your health doesn’t use up all of your money. Many people place a share of their savings – qualified or non-qualified – into a single premium nursing home policy with a death benefit. If you die, you spouse or kids get a death benefit higher than your deposit and if you need long-term care, it comes of this higher death benefit rather than directly out of your checking, savings, or brokerage account.

When we’ve answered all of these questions to your satisfaction, we then determine if there is any money left over for gifting.

I’m a firm believer it’s not how much you leave your children when you die, it’s how much you can help them during critical times during their lifetimes. My parents helped with a down payment on my first home, which then rolled into my next home and my next home. That little gift built more equity than you can imagine over my life. So, once you know how of your savings you can use to help your children without being afraid of the what the future might hold for you, your free to gift or live the way you want.

Changing Perceptions, Continued

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

Last week, we talked about the changing nature of farm families in relation to farming as a business and farming as a way of life. I talked about how each generation since the Great Depression – Baby Boomers, Gen X and Y, etc. – has different perspectives towards farming and towards their own lifestyle choices. We also talked about how mechanization (better machinery) made it easier for children not wanting to be involved in the family farm at a young age to avoid farm work whereas previous generations had no choice.

So, we reach today’s non-farming children and what their attitudes are towards the family farm and what they think is fair and equitable.

The last decade brought unprecedented income from farming and ranching never seen before. Along with this income, farmers and ranchers did a lot of updating of equipment, bought a lot of land, saw their own land soar in value and suddenly a million dollars was not the value of the farm but the operating note for the year. Inflation was rampant in the agri-sector as vendors took advantage of rising incomes to raise their own prices to the farmer/rancher. Costs of operating hit all-time highs.

During this time, the Breadbasket states plus Texas had one of the worst drought cycles since the Great Depression. This drought finally finished about two years ago and since then, as you well know, the value of commodities has dropped and dropped as reports of higher and higher commodities has increased.

We can expect that farmland values will decline in value – especially if the Fed should raise interest rates on loans – which effect seems to impact the agri-sector faster than any other area. We can expect that values of on-the-farm equipment to drop dramatically in the next five years as new replacement machinery will not be bought at anywhere near the rate it has been over the last ten.

In estate planning, we are at the same crossroads as the rest of the farm economy. We have a lot of non-farm heirs who have read about the widely chronicled increasing value of farmland over the past ten years. They have visited their homes and noticed new machinery, new buildings and a different lifestyle for their parents and/or for their sibling who stayed with the family farm. They have read about the advancements in machinery with auto-steer and other methods that have made farm life not quite so labor intensive.

With this in mind, as they are brought in on the estate planning process, there is a lot less empathy with their farming sibling from the non-farming heirs. They’ve seen and heard the difference in family farming over the past decade. More are demanding to know what the value of the family farm is today so that they know what their sibling is receiving in today’s values and, hence, what they will ultimately receive in the future in comparison.
When there is a difference in values of what the farming child will receive, there is a far greater outcry of ‘Foul’ as the numbers sink in. This generation wasn’t told ‘children are to be seen and not heard’ and they are loudly expressing themselves as to what they think is right and wrong in the estate plan.

However, we have to remember, we’ve been through these cycles before and the farmland isn’t worth the value it shows on paper unless it is sold. Mom and Dad have no plans on selling it and the next generation family farmers have no interest in selling it either. If the farming heir does sell it for any reason or transfer it to someone not in the family, we can make certain in our estate planning that all heirs will then share in the value of the family farm and its net value.

We continue to put the estate plans together that keep the family farm business intact for the next generation to use, and if their lives change and if the farm heirs choose not to farm need to sell, then all of the heirs will benefit. But until all of the heirs wish to come back and work on the family farm, take the same risks involved in farming and are willing to take lesser incomes when commodity prices fall like family farmers are, then it’s still imperative the farming child has enough to survive during good times and bad.

“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

Changing Perceptions on Farm Families

Written by Michael Baron on . Posted in Equalization

Dear Michael: We have two sons who have been farming with us for the past twenty-five plus years and we have three children who left as soon as they could to go on to successful careers. We are approaching our seventies and wanted to set up our estate so the boys on the farm got the farm – via a life estate to protect it from long-term care costs – and the kids off the farm received the other assets as well as a cash payment from the two boys on the farm.

We brought up our plans to all five of our children on the Fourth of July and within minutes the debate was raging over the value of the land today, what the non-farming children were entitled to receive based on current market values, etc. etc. The three non-farming children thought it was unfair the boys on the farm received ‘millions of dollars in real estate’ while they received considerably less than that in non-farm assets as well as a million dollars in life insurance benefits from a life insurance policy the two sons on the farm bought to be ‘fair’ to their siblings. How do you explain to non-farming children that the boys on the farm aren’t receiving ‘millions of dollars’ and their share should be commensurate? – Exasperated Parents.

Dear Exasperated: I’ve had more contentious discussions with non-farm heirs in the past five years than I’ve had in the last thirty regarding ‘what they are owed versus the children who stayed on the farm.’

The history is an evolution of time periods from the Great Depressionists to now the X and Y generations. There’s a reason each generation is given a name because each of these ‘generations’ has its own unique characteristics, lifestyle choices, views on life and the world around them, and how they feel about themselves and what the world either offers or owes them by their having been born into it.

I, like many of my clients, am a Baby Boomer and Baby Boomers were raised by the post-Depression generation. When we were young, prior generations labeled us as the most ‘self-absorbed and selfish’ generation ever seen. Looking at it now, when you talk to Gen X’s and Y’s, you realize Baby Boomers may have been self-absorbed and selfish, but they still believed in the American standard of ‘you get what you earn out of life by hard work.’ You may not have shared as much as prior generations of your wealth, but your wealth was determined by your lifetime body of work.

Gen X and Y’s do not believe that you get what you ‘earn.’ Their viewpoint is ‘Hey, you had me as a child – I didn’t ask to be born and you brought me here – but now that I’m here I want to live the same lifestyle now that took Dad and Mom years to reach regardless of my efforts in my life.’ These children like to buy the brand new house upon marriage, buy the two Cadillac Escalades (one for him and one for her) and, if they get close to losing everything because of mismanagement, Dad and Mom should bail them out. Why? ‘Because we deserve it! You raised me to believe I could have anything I wanted when I was young – with no strings attached (like having to muck out the manure in the barn before you got to go into town for the night) and that’s the lifestyle you taught us – so we’re here to cash that check.’

Everything goes along good as long as the money keeps rolling in and, for the most part, the Gen X and Y’s are paying their own way. That’s good!
What’s bad is when you come to explain to them they won’t be getting an equal share as the children who stayed on the farm and it goes against everything they perceive to be correct in life. They never had to contribute in order to get the things they wanted when they grew up – what does ‘contribution’ have to do with anything when it comes to dividing up the estate?

Granted, a lot of things changed in farming when mechanization took over for hands on labor and farm kids weren’t expected to do as much as they used to because now a machine was doing the work in half the time over the past three decades. But, the non-farm kids don’t see the person running the machine (farming children) to be working as hard as Dad and Mom did when they were young – mostly because Dad didn’t have a Bobcat.
With mechanization, it was a lot easier to let the kids who wanted to be outside, involved in farm work, come out and help and gave the children who didn’t want to be outside so much the opportunity to stay in the house. A job that used to require four or five bodies helping only required one or two. Having more than that – with the machinery involved – actually kind of hindered the process.

In any case, that’s been the evolution for the past thirty years – from post-Depressionists to Baby Boomers to Gen X and Y – each generation has seen modernization and mechanization change the very fabric of day to day life on the family farm.

However, as perceptions have changed, the very nature of the farming industry has not. It’s still about two major inputs – land and labor – just like any business. The perception from the outside, however, from the non-farming children as that farming children do not have to work as hard as their parents – ‘Look, they sit in an air-conditioned cab in a nice tractor all day.’ Therefore, the farming kids are not entitled to as much as they used to be – in the non-farming children’s mind’s eye.

Next article we’ll talk about why that’s true to some extent, but just because the numbers have gotten bigger doesn’t necessarily make the farming children’s life any easier. I’ll give you some ‘suggestions’ for your non-farming children to consider after they tell you what they are owed.

“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

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

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

Family Fireworks

Written by Michael Baron on . Posted in Equalization, Farm versus Non-Farm, Long-Term Care, Partnerships

Hal and Judy Sanders came in to visit with me about their farm situation. I asked ‘How was the Fourth of July?’ and Judy stated “Well, if you wanted to see fireworks, you should have been at our house that weekend. We had all our kids home – along with our farming child – and we brought up the fact that we wanted the family farm to go to the farming son and the rest of our assets would go to the other two children.”

Hal noted, “One daughter said ‘What happens if you go into the nursing home and there is no cash when you die – no other assets left? Does that mean we lose our inheritance and Jim (the farming son) gets to keep his?’ I never expected that from her – although she’s got a husband who keeps asking questions – if you know what I mean.”

Judy said the other son thought he’d like to own some land too. “He wants to do some hunting and he’d like to keep some cows. Now everyone wants a piece of the pie. By the time we got a little into discussing all this, the fireworks were flying all right!”

I told Hal and Judy “It’s a great thing you brought this up now and got to experience what will likely be a microcosm of what will happen upon your second death. However, everyone in the family feels like they own a piece of the family farm for their own reasons, right?” They nodded in agreement.

“When a person feels like they own something and suddenly that something is lost to them, every human being goes through the same steps to deal with this loss – sadness, anger, bargaining, depression, and finally acceptance. They are still somewhere between sadness and anger. My guess is the next thing you’re going to hear is ‘bargaining’ where they come up with an ‘alternate’ plan to owning the farm assets – if you haven’t already.”

“However, if you feel like Jim needs to own the family farm in order to make a go of it in agriculture, you’re just going to have to let your other children go through these steps. Some steps they will pass through quite quickly and others may take some time. But you have set them on the path of the future and the sooner they reach acceptance, the better off everyone will be.”

“If you give in to the anger, or the sadness, and especially the bargaining – when they come up with alternatives for dividing the family farm, you’re likely going to risk the family farm and its ability to function in the future. Imagine if your son, Joey, wanted to run some cows on the family farm. Who’s going to feed them, care for them, house them, etc? Is he thinking Jim would do that for him?”

“Alternatively, if Jim and Joey can sit down and work out a plan now – even if it’s a plan that will likely never come to fruition – about how to run some cows together and who would do what in this partnership and how each of them would be paid – you can eliminate the problem with Joey. Get this agreement in writing, however, as they tend to forget the ‘details’ of the deal they made.”

“Second, sit down with your daughter and explain to her that all of the assets are at risk if either or both of you go into a nursing home. Perhaps a fair agreement would be that if this were to happen, each child would lose a proportionate amount of the assets they received in order to pay for this care.”

“For example, if Joey receives seventy-five percent of the total assets, then he should be responsible for seventy-five percent of the care costs and the other two would contribute twenty-five percent – or their share of the estate.”

We have to recognize people go through all kinds of different emotions, feelings, and sometimes these can turn into fireworks, but with a patient hand and an ability to work out compromises, anyone can make a successful farm estate plan.

“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

Case #0337

Written by Michael Baron on . Posted in Equalization

Bob and Carol worked with their son, Chad for the past sixteen years. They have three other children who worked on the farm when they were at home but left for other endeavors when they finished high school.

Chad spent almost four years in school prior to his return, a great deal of time learning about new technology. He helped Bob learn how to use the equipment they acquired over the past decade. Without Chad’s help, Bob would have been lost on the programming and technology necessary to run today’s machines.

Bob and Carol came to me to ask what the fair thing to do for Chad was, either in their will or during their retirement years. They also wanted to know what the other children should receive from their estate. In other words, ‘what’s an equitable settlement for all of the children?’

I don’t have a stock answer for this but I do have a series of questions I ask my clients to determine what Chad’s value added to the operation.

For instance ‘What kind of debt to asset ratio was there at the time when Chad started farming and how was he paid?’ Bob responded ‘There was quite a bit of debt in the farm operation when Chad started and probably represented close to 40% of the entire farm operation. Chad was paid minimal wages when he came back to farm and Chad’s wife had to support their then growing family’.

When Chad came back to farming, he came back when farming was not as profitable as it is today. In fact, when Chad came back the farm operation labored with debt and had it not been for Chad’s input – from a labor and technological aspect – the farm would not have grown to its value today.

I asked Bob what he thought. ‘If the farm was in debt to the tune of 40% of its net value at the time he came back, what percentage of that debt was retired because of Chad’s inputs into the farm?’ Bob responded that Chad  contributed at least fifty percent of the debt pay off during the years he worked with his father and mother.

I then asked ‘If Chad helped pay off fifty percent of the debt at that time, would he not be entitled to at least twenty percent of the farm’s current value today?’ Bob thought about it and said ‘When you look at it that way, I guess he would, wouldn’t he?’

In any businesses where there is debt of a substantial amount at the time of taking on a partner, the partner should be entitled to that percentage of the business in the future if it’s paid off due in some part to his or her involvement in the business.

The other thing I asked Bob and Carol was whether or not Chad’s interest in technology and new farming methods had benefited the farm. Carol said ‘If Chad hadn’t gone to learn about how to run these machines, we’d still be running combines and tractors from 1999!’

Both Bob and Carol thought that Chad’s education and continuing learning had brought them from ordinary yields – and returns – to extraordinary yields and returns. When asked to quantify what that meant to the farm operation, Bob and Carol both thought it was worth probably fifty percent of the growth in the farm since Chad had come aboard.

When dealing with second generation children, you have to ask yourselves these questions: How long have they been with the farm operation? What kind of debt did they help resolve along the way? What kind of inputs did they individually bring to the operation that increased the value of the farm today?

When you stop and put numbers and percentages to all of these questions, resolving an equitable estate plan is easier than you might think.

“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.