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

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

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

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

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

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

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

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

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

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

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

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

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

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

“Keeping the Family Farm in the Family”
Great Plains Diversified Services, Inc.
1424 W. Century Ave., Suite 208
Bismarck, ND 58503-0917
Telephone: 701-255-4079
Fax: 701-255-6106
Toll Free: 1-800-373-4078

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“Keeping the Family Farm in the Family”
Great Plains Diversified Services, Inc.
1424 W. Century Ave., Suite 208
Bismarck, ND 58503-0917
Telephone: 701-255-4079
Fax: 701-255-6106
Toll Free: 1-800-373-4078

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.
1424 W. Century Ave., Suite 208
Bismarck, ND 58503-0917
Telephone: 701-255-4079
Fax: 701-255-6106
Toll Free: 1-800-373-4078

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

John and Jill came to me to tell me what they had thought about in their estate planning process and to get my opinion on their thoughts.

“We have a son who is farming with us for the past five years. He’s single and doesn’t have a girlfriend. We want him to have the machinery and the building site but the remainder of the farmland will be split between him and his two sisters” said John. “The two girls are married and have children and we don’t want them left out” he continued. “One of their boys even comes out to the farm – even though he’s only four – and sits on my lap while I do rounds in the field.”

“Our land is valued at close to four million dollars and we just don’t feel it’s right that all of this land goes to our son, Rocky” Jill explained. “Our girls should receive their fair share of the farmland and be able to pass it down to their kids.”

In my experience, this is a pretty common fate for unmarried children working on the farm versus non-farming children who are giving their children grandchildren – especially grandchildren who show an interest in the farm at an early age.

Sometimes, parents and grandparents can get so wrapped up in the involvement or non-involvement of their children and grandchildren, they fail to see the normal business rules each business needs to follow in order to succeed. If the land were split evenly between all of the children, I can guarantee Rocky will be out of business in under ten years’ time.

Why? Because it takes about five to ten years for the non-farming children to forget the promises to their parents that they would never sell the land, they will always permit their brother to use the land, and to find something new in their lives whereby selling the land at outrageous prices will more than pay for this new dream. It’s like dangling a honey bee nest over their heads and telling them to take the drips coming down. But as soon as the bees leave the nest, you know one of those children is going to be climbing up that tree to grab the whole honey comb.

And that someone could be the young man on the farm, Rocky! What happens if he finds someone to spend his life with and her ultimatum is “I’m not living on a farm”?

There’s a lot of primal instincts brewing in any estate planning situation. The grandparents want to see their farm legacy carried forward for generations to come. They see their son not producing heirs nor any near future possibilities. One of the other grandchildren is showing a huge interest – but he’s four, so….who knows? We have to balance these primal instincts with good business practices or everyone loses.

But what happens when those instincts lead one to a bad estate plan where no one wins? Splitting the land three ways and hoping the son can make a go of it is not going to work as he needs at least fifty percent of the land in his name to make it work.

In this estate plan, there is much to be considered. How to make a viable estate plan and giving the estate its best chance of survival?

We need a plan for what happens if the son stays in farming, gets married, and has heirs of his own. If this occurs, then we have to have a way for him to rent or purchase the land from his sisters for his farming career at a rate he can survive.

Are we going to put the land into trust and let the son farm it until he is finished and then give the third generation an option to farm if their four-year old interest turns into a lifetime passion? If the son never marries, will we allow this grandchild to enter the farming operation? If the son leaves the operation after Dad and Mom’s death, does the grandchild have the right to step into it with the same terms that the son had?

Lots and lots of questions to be answered – as is the case with every estate plan. Have you got all of your ‘what if’s’ addressed?

“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

Wanda and Bill had recently retired. They have in excess of four million dollars in real property and close to six hundred thousand dollars in savings. They also owned a home in Arizona that’s been appreciating lately as the real estate values rise. Their desire was for their home in Arizona to go to their daughter and most of the savings. Meanwhile their son would get a jump start on owning a portion of the land to start farming. They reached an impasse when land values recently rose and now see their shares as less than equitable for their daughter. They also want to protect the farm from long-term care issues but don’t want to spend annual premiums on an insurance policy.

Issues: Wanda and Bill had accumulated a considerable amount of savings but the problem is when protecting land, you expose the savings even more to possible long-term care needs and costs.

Wanda and Bill should purchase long-term care insurance, but didn’t like the idea of the premiums going out each and every year without any return on the premiums paid. I reminded them this is, in fact, how almost all insurance works – home insurance, farm insurance, car insurance, etc. Normally, if you have no claims – no car accidents, no homes burnt down, etc, you’re not going to get your money back.
Bill and Wanda’s money was currently sitting in CD’s at the bank and had dropped to under one-half of one percent on their earnings.

I asked them if the bank, in lieu of giving them interest, would provide them with three and a half times the deposit they made in the bank for long-term care insurance, would they be interested. In other words, if they put two hundred thousand dollars aside into another CD, the bank would pay up to seven hundred thousand towards any long-term care costs?

If they die without needing care, then the bank would pay their daughter their savings – plus interest of higher than .04%.

So, in essence, would you rather have long-term care insurance of up to three and a half times their deposit or would they rather receive the measly interest of .04% or $400/year?

When they understood their money would be as liquid after two years as it was in CD’s, and they were guaranteed to receive their money back – either paid out to them in whole after two years, paid out to their daughter as a death benefit higher than interest would have been, or paid out in long-term care benefits but now at a three dollar to one, their ears perked up.

If Wanda and Bill eventually had long-term care costs, these costs would have come out of the couple’s savings in any case. CD’s in estates are just self-funded long-term care plans, in essence, if care is needed. The fact they get a three to one return on their money gave their daughter a much more protection of retaining most or all of the savings.

When I look at estates and I have two different types of heirs to deal with. I have to make certain the parents think not only of protecting the land – which I agree is the golden goose – but the other assets as well. If they don’t and they have health problems, the non-farm heirs are the first to lose their inheritance. I agree there should be an equitable settlement for non-farm heirs but then the settlement agreed upon should be protected with equal vim and vigor as the farmland. Too often people focus on the land only. However, non-farm assets also have value and it would be silly to pass up a simple solution – especially when it involves protecting one heir’s inheritance to offset a much larger share.

The second item was the home in Arizona. Right now, droves of people are heading south for the winter to their second homes down there. Because most of these homes were bought without much forethought, and the homes were placed in the names of the buyers (Dad and Mom), the homes will go through probate in Arizona.
In Arizona, much like California, Florida or other winter haven states for snow birds, probate is really expensive. It’s possible the home in Arizona would take longer and cost more than probating the entire farm in North Dakota. Each state would have to open probate involving two different courts, two different legal representatives, etc. Arizona has much, much higher fees for probate than we have here.

Two solutions – one you can use an irrevocable living trust, which is a lengthy costly document to write and to administer if it’s just to avoid probate.

Two, you can do a TODD – a transfer on death deed – for your home in Arizona. The TODD deed is akin to POD’s – payment on death – for checking and savings accounts. If you have a POD designation on your accounts, all savings and checking go directly to named beneficiaries upon your death without being included in probate.
The same would be true of the TODD for the home in Arizona – or for the farmland here in North Dakota, for that matter. TODD’s are allowed in both states and in about seven others.

Under a TODD, the home or land goes directly to the beneficiary(s) named on the deed without going through probate. The values for the property are still included for estate tax purposes, but you still retain the right to sell, change or handle your property in any manner you choose prior to your death – unlike life estates or irrevocable trusts.

A TODD does not protect against long-term care costs however. I’ve seen conditional TODD’s, to paraphrase, such as “This land shall pass to my farming son, Bill, based on the fact Tiffany shall receive five hundred thousand dollars within one year of my death either from my estate, or as a beneficiary of any of my assets, or any and all shortages will be paid by Bill. If not, Bill shall forfeit half interest in said land to Tiffany’. Bill, the farming son, likely would have to sign to agree to these terms to make all of this verbiage a two-party agreement.

As your heading out for your winter homes, contact an attorney licensed in the state where your homes are located and ask him about putting together a TODD for the property there. It’s a cheap and inexpensive way to avoid probate in another state and mounds of headaches for your children.

“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

Don and Jenna have a family farm operation. One of their children is interested in the farm but is not an active participant. Their son, John, helps when he can and also farms a few quarters on his own with the help of his dad, Don, doing the majority of the heavy lifting. There are two other siblings, Rich and Shannon, who do not farm and haven’t been involved since they left for college.

Facts: Over the last ten years, the farmland has appreciated greatly – being positioned in the middle of many large producers who are committed to growing their operation. As a whole, the operation is not a huge income producer however – being half livestock and half grain operation and some hilly, rocky land in the pastures. The value of the land to the neighbors is far higher than the income value of the business located upon it.

John has come to them with a proposal. Upon the second death of Don and Jenna, he would like to buy out his siblings – if he can get the land for fifty percent of its current market value – or a true value based on the income produced by the land. If the appraised price should be lower than this value set, then John would have the option of taking the lower value. In addition, he would receive the machinery and any livestock. Currently, John has a good job, with better than average income, and his wife does not want to live in the country.

The Issues: With John not being in farming full-time, we don’t know how this is going to play out down the road. If John should be given the option to buy out his non-farming siblings, who’s to say what happens if John decides not to farm – after his parent’s deaths – and he decides to sell the property? I’ve always thought about this and thought ‘Gee, if my sibling got the farm for half-price and then resold it, I’d be angry!’

As such, many of my clients put wording into their wills stating ‘Farming child can buy the property for X price (fifty percent of appraised, a set price, or some other value set in the will) and if s/he re-sells the property within (ten years, fifteen years or whatever the parents decide) then the proceeds of the sale – over and above the purchase price – would be split between all the children.

By doing this, if the child resold, died and left the farm to a spouse who sold, or to heirs who sold within the prescribed time, then there would be equity in the estate plan. This works well with children who’ve spent their lives working with Dad and Mom on the farm.

In this case, it was a bit different from your average because John worked on the farm – but he also had a good job off the farm and was receiving more income from off the farm than he could farming. So, in this case, the question was maybe John would buy the farm at the lower price and he would rent the place out to the neighbors while working at his other job. Sure, he might keep doing his two quarters he’s doing now, but would he really leave his job to farm full-time? And if he wasn’t going to farm full-time, was it right to the other children he got to buy this asset for less than FMV, who could have also ‘farmed’ part-time if they rented some out and custom farmed the rest?

At what point do we draw the line and say ‘If you’re going to farm, yes, we’d like to give you a break on the family farm land from the kids who don’t farm’ and ‘Well, any of the kids would be happy to get these assets – as well as to their children’s estates – if this land is treated as merely an investment/return vehicle’. How much time does a child have to be on the farm, get their living from the farm, how much of an investment they make into the farm business before we can give them a break on the land?

Secondly, how many different conditions do we put on the land after our death(s) to our child who paid less than FMV to the siblings (such as the aforementioned re-sell, repay the other siblings clause) and how can I make them enforceable?

If the other children come back to visit and find their brother hasn’t visited the land in five years, should they feel angry about giving him such a break on the land? If the brother dies and leaves it to his wife and children and they sell it to the highest bidder, would the other children have a right to come in and claim some share? If the entire farm – or even a majority of the farm – is custom farmed by the brother – something any one of the children could have done – would the other siblings be angry being cut out for less than FMV on the land?

When we used to discuss farms in the eighties and nineties, we’d talk tens of thousands of dollars, believe it or not, farm families got along pretty good.
Now that just about every single farmer, rancher or ag retiree has to put that word ‘millions’ into their net worth statement, we’re starting to talk about serious, serious attention being paid to the estate plan and how it plays out for all the heirs. Heirs may have passed on a few hundred thousand here and there, but the word ‘million’ kind of perks their interest quite like no other word before. And why not? This is not just lifetime changing money – this is generation changing money! Kids, grandkids, great grandkids could all benefit from this kind of money!

In any case, if you were wondering what the answer to the above questions are, the answer is you’ll need to talk to a highly qualified farm estate specialist – one who is willing to wade through all of these questions first with you, then with your children – and come up with the best answer. If you don’t know of anyone, call our office and we’ll be happy to give you our list of names.

“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

Dear Michael:

Thank you for the articles concerning estate planning.  They all are very informative and helpful. We are 64.  We plan to retire fully by age 70.  Our two sons live on the ranch with our older son now managing half of the ranch. Our younger son admits he is not sure if this is the life for him but is making no moves to choose another career, although he finished trade school and has worked off the ranch for a few years.  This year he made the choice to move home and buy heifers.

Six years ago, our married daughter with the idea to be part owner, but her husband hated ranch life.  After two years he said they were leaving.  He was upset with us and now we are still estranged.  We love our daughter and her family. However, we’ve seen out of state relatives with part ownership in some of our lands, which was a headache.  Having alleviated that situation by buying their shares, we do not want to burden our sons with that scenario.

There must be ways to include our daughter and/or her children in our estate without compromising or encumbering the real estate, which we feel belongs to whoever is managing and making their living here.  Any ideas for options to discuss with our attorney and CPA? = Clearly Baffled

Dear Baffled: I’m sorry to hear that things didn’t work out with your daughter, but putting four entities on the farm/ranch operation is going to lead to a lot of conflict – as you found out.

Both your lawyer and your CPA – albeit trusted advisors – are going to expect you to have a plan prior to coming in the door. Until you are ready to draft your plan, your attorney is going to keep sending you home until you do come up with something or, worse yet, send you home with a generic will that doesn’t address your situation.

As you describe your situation, of your three children, it appears your oldest son is the only one ‘truly’ committed to the farm operation. Your second son has come and gone and come back again but it sounds like he doesn’t know exactly what he wants to do with his life. As long as you two are there as referees, the two boys are going to do what you ask of them – but I think if you were gone, sparks might fly there as well.

With all that in mind, you have to devise a plan that protects the integrity of the ranch, first and foremost. Making everyone happy might be a foregone conclusion at this time and the worst possible outcome would be everyone fights it out to the bitter end until the ranch is all gone. Focus on the ranch operation and what it would take for it to succeed and worry second about making everyone happy – because no matter what you do now isn’t going to meet everyone’s expectations.

As such, I would determine exactly what the oldest son would need to succeed in ranching. This normally entails a plan where he can someday own the buildings at the heart of the operation. Perhaps you have another farmstead where you can start preparing for the second son to start building his own operation.

If so, then you’d decide what acres are needed by the first, which ones are needed by the second son and geographically separate them in your will so they make the most sense to the farmstead(s). If there is no other farmstead, then the oldest should be prepared to pay half of the value of the farmstead to the younger son to build his own site – IF he stays in ranching. Your will should state this will happen only if the two sons decide to go their separate ways in the future and both of them ranch and stay in ranching for longer than five years after your death. You might use a trust to own the land after your death – known as testamentary trusts – for the period of time necessary to determine who is serious about ranching and who is not.

Should one of them leave and join their sister as a non-farm heir, then they would receive either a settlement from the ranch operation – a value of your choosing whereby equitable is not equal – and your oldest can decide how he wants to fund this future purchase. Many people use a second to die policy – originally designed for paying estate taxes as there are no death benefits paid until the second spouse dies – when estate taxes are due – but now used more and more to buy out non-ranching heirs.

How you determine the right amount is up to you. I’ve built a ‘sweat equity calculator’ on my home page that might be of assistance when determining the value of the child(ren) who stuck with the farm/ranch operation.

“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