Case #1487

Written by Michael Baron on . Posted in General Estate Planning, Transferring Ownership, Trusts

Albert and Judy have three children. They have a farm operation valued somewhere between five and six million dollars. It is a farm operation with no livestock or other means of income. Their youngest son, Kade, has spent the most time with the farm operation while the oldest prefers to come only when needed. They also have a daughter, Julia, who is not involved at all. The oldest son, Bill, is married with two children but the other two are single and in their early twenties. Albert and Judy are fifty-seven and fifty-five respectively. They still have a simple will with everything going to the surviving spouse on first death and divided evenly on the second death.

Goals: Albert and Judy’s goals are to bring their young son, Kade – age twenty-four – into the farming operation full-time and begin the process of transferring their farm business to him while being fair to the other children. They also want to protect the farm from long-term care costs or other health issues they might have.

Possible issues: Kade is only twenty-four and still single. Many children are now waiting to marry until their late twenties or early thirties. One area of concern for me is who is Kade going to marry? Is she going to be happy on the farm? Is she going to be happy in a rural environment? The divorce rate is still hovering at just a little more than fifty percent, so how much property do I want to put into Kade’s name knowing if he has marital problems you might see financial problems for the farm?

Solutions: Albert and Judy have two factors – one, they are approaching retirement age and want to be out of farming by sixty-five or so. Two, they have a young, single son who needs to acquire assets to be successful in farming.

As such, Kade needs to develop assets towards his future career in farming. The easiest place to start in this scenario is with the ‘replacement machinery transfer’. Albert and Judy have to give up some of their rented land to Kade to allow him to make income from the farming operation. However, the income isn’t going to go into other things except back into the farming operation. Every time a piece of equipment needs replacing, Kade takes the income from his land and uses it to replace the old piece.

Now, this doesn’t start with replacing the big four-wheel drive tractor, the air seeder or the sprayer. It begins with replacing grain augers, Bobcats, new bins needed, or other small items that wear out and need to be replaced. Nothing too big to start with but get Kade in the habit of taking his income from farming and putting it back into farming. You did this your entire career and if he’s serious about farming, he’ll do the same.

Back in the day, you felt like you didn’t have a choice about this when you started out. Start training Kade this is how successful farms – or any business, for that matter – makes it over the long-term. Start small and build and build.

The goal is to have Kade own fifty percent of the equipment by your retirement date and the other fifty percent within five years after you retire. If Kade does get married and you see the marriage isn’t working out as well as you hoped, you can always choke this transfer down.

In the meantime, your ‘estate plan’ or new will has to have provisions in it for you to deal with the death of one of the two of you – most notably Albert if he should die. What does your will say about Kade buying the machinery from Judy? Does Judy rent or sell the land to Kade if he is looking stable and successful in life and in farming?

Secondly, we have to have a plan in place for how Kade might buy out his non-farming siblings share someday. If you two both die too soon, we need to park the farm assets in trust and have a trustee who will dole out these farm assets to Kade as you would have had you both been here. What circumstances do you put into the trust where Kade can farm? Does he get credit for rents paid either to you or to the trust, if you both should die? Normally, he’ll need this to build up enough equity to buy out the non-farming siblings.

The year to year plan is to transfer slowly. In the background is your ‘emergency’ plan or estate plan for what happens if one or both of you should die with special emphasis on protecting Judy should something happen to Albert. Your year to year plan should work hand in hand with your ‘emergency’ 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

List of Things to Do

Written by Michael Baron on . Posted in General Estate Planning, Planning Documents

Dear Michael:

Recently, we have been considering all of the things we have to do before our deaths. My husband is in poor health and there are a lot of things we have yet to do – although for us – we’re not sure of all of those things. Can you give us a quick rundown of items we should check and recheck prior to our health changing for the worse? – Need a List.

Dear Need a List: What an excellent timely question!

You need your basic documents brought up to date:

Your will should be updated to reflect your current desires and wishes for the disposition of your property. If your estate is in excess of $5,340,000, you’ll need to make certain you talk to an attorney now to set up either a disclaimer will or to make certain you claim the first decedent’s Unified Exemption ($5,340,000) by filing an estate tax refund. Even if your estate is at three and a half to five million, make certain you file for this exemption – due within nine months from the date of death – to claim this unused portion.

Your property may not be worth more than $5,340,000 now, but if land and other assets continue to climb, you may find yourself kicking yourself for not applying for this unused exemption. For those more than the $5,340,000 this is simply mandatory to have this done.

You should review your powers of attorney. There are two specific types to review.

One would be the durable power of attorney. This document gives financial powers to someone you trust to handle financial affairs for you. This may be as mundane as paying your heat and lights or as important as selling your farm to pay for medical bills that arise in the future. It’s better to have two people on this document, because with one, you’re always going to have fights about why this one child is running the show, and if you put more than two on there, it’s going to cause problems getting anything done when it has to come up to a vote every time a bill needs to be paid.

Second, you should have a power of attorney for health care. This document gives power to someone you trust – normally your spouse with one of the children as secondary – to make medical decisions for you if you cannot make them for yourself. The secondary POA should be someone who is geographically close to you so they can attend doctor’s consultations in order to make good, sound health decisions for you.

Many people feel like they have this covered with a ‘living will’. However, that is not the case as a ‘living will’ is an entirely different document than a POA for Health Care. The ‘living will’ is another document that expresses your desires and wishes as to how to extend your life – or to not extend it, as the case may be. This document tells both your POA and your physicians how to treat you should you be terminally ill. These things would be the withdrawal of water, or feeding, or machinery necessary to support your life. A new addition in recent years is the verbiage ‘I wish to receive pain medication – even if it should hasten my death – if my body appears to be in pain’. Most people don’t have this in their old living wills.

Last but not least, sit down with your children and have a talk with them about who you put in charge of what and why, and how you expect things to go when you die. You save your children so much grief with one another later if you tell them face to face, amongst all of them, how you want things to be.

I also want to express the grief I feel for the loss of one of my longest tenured friends and clients – Kaye Heffta – who died this past Sunday.

Kaye was many things – a wife, a mother, a grandmother and great grandmother. Just as importantly, she had literally hundreds of ‘dear friends’. Kaye had all these friends because she always gave of herself and never asked anything in return. She never asked for pity with her long illness and stood proud until the moment of her death. If the rest of us were able to give ten percent of what Kaye gave to all the people around her, we would live in a perfect world. I was a recipient of Kaye’s generosity and I will miss her dearly.

“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

It’s Snowbird Time

Written by Michael Baron on . Posted in General Estate Planning

Dear Michael:

We’ve been trying to get our estate planning done for years. Now, we are semi-retired and spend the winter in Arizona and summers in North Dakota helping our son with the farm operation. Do you know of anyone in Arizona who does estate planning? We’d like to get this done, but our only free time is when we are down south. Nowadays, we’re so busy with planting and spraying, we just can’t find the time. – Snowbirds From Dakota.

Dear Snowbirds: I do get a lot of phone calls and inquiries along this line. The problem is most practicing attorneys in Arizona do not have a license in North or South Dakota and, therefore, unless you become residents of Arizona (spend more than six months of the year there), a North Dakota licensed attorney will have to help you.

You may be able to find an attorney who, like yourselves, is retired and living in Arizona during the winter months and s/he might be able to help you.

Other than that, all I can tell you is if you had any other ‘emergency’ situation, you would make time for it.

I’m always amazed when I talk to people about meeting them in various places and during the course of our conversation I find they’ve been to Bismarck for doctor’s visits, eye exams, weddings, shopping and all other kinds of things. So, I’m not so sure if it’s not having the time or just not making it a priority.

Of course, many people feel that it’s going to take multiple meetings (which it is) that they can’t commit to in the short time frame they have open – unlike a doctor visit or shopping trip.

However, I have many clients from Nebraska, Iowa, Wyoming and Montana that I’ve never met face to face. Every single one of our meetings has started with an interview on the phone, followed up by a summation of the conversation I send out to them summarizing their thoughts and ideas.

Once they receive this, we talk again on the phone and discuss their various options and what they’d like to do. Again, I summarize these comments in a follow up letter and the process goes on and on until they feel like they have a summary they can take to their local attorney for drafting.

Once the documents are drafted into a legal framework by an attorney, they often call me again to review the document and ask me what other people have done in their situation. Sometimes they need to call their attorney again and have the draft tweaked here and there, but eventually, they get what the estate plan they want.

So, if it’s possible for someone to do their estate counseling with me from another state – whom I’ve never met face to face – you’d think it would be possible for someone from this area to come in and visit with me for an hour or so – tell me what they are thinking – what things keep them up at night – and if you head south to warmer climes in the fall, we can still keep in contact by phone, email, or with the incredible technology of Skype where CAN actually talk face to face.

I know when the spring and summer season comes, everyone heads out to the fields like a hunting dog on opening day, with nothing else on their minds except the task at hand. Then, by the time they finish up in the fall, it’s getting close to Thanksgiving, which leads to Christmas which leads to everyone heading south again and another year goes by without the future of your family farm decided once again.

If you’re like many farmers, there’s always that wet and rainy streak where you can’t do much in the fields. That’s the time to call our office, tell us you’ll be in that day or the next and we can get you the information – via email – of what we need to have you bring with you. Then, you can come in and visit and we’ll start the process of getting you the estate plan you want – whether that’s face to face, via email or regular mail, or by phone.

Those who fail to plan will plan to fail. If there’s a will, there’s a way. If there’s a way to get the right will, find a day that works for you.

“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

 

Who Do You Trust?

Written by Michael Baron on . Posted in General Estate Planning, Trusts

Dear Michael:

We are getting up in years and we have a large farm – rented out – and none of our children are interested in farming. We are old enough now to have married grandchildren and realize how far and wide our estate might be spread someday with children, grandchildren and spouses, and now great grandchildren. We were also fortunate enough to have income from oil and we have been sharing this with our children, who in turn, have been sharing with their children. Right now, we are in charge of the farm income and the oil income. But who do we pass this torch onto when we are gone? It keeps me up at night thinking about all the possible issues after we die. – Up All Night.

Dear Up All Night: Obviously, you two have lived a long and interesting life. How wonderful to see your union leading to children, grandchildren and great grandchildren. I’m sure you have stories to tell of times where you could barely make ends meet, and you had to do extraordinary things in order to keep family and farm together. Most success stories, like yours, have many instances where the ‘average’ person would have given up, but you persevered and it’s all led to this.

For many people who have crossed the threshold of security with assets such as yours, this has led to new worries. Who do we leave in charge of this? Who do we trust will make objective decisions? How can we make certain our wishes are followed after our deaths?

The other thing to consider here are the class of assets. You have basically two types – land and oil income.

Most people are realizing farmland has been one of the finest investments to acquire and own over the last thirty years. It’s an asset that produces six to seven percent income and lately has had capital growth of fifteen to twenty percent per year. Ultimately, in our paper world, people have finally realized paper profits and gains can disappear, while land survives.

As such, people would like to make certain this land doesn’t get mishandled in the future. It’s awfully hard to explain to a thirty-five year old heir that ‘Yes, you can sell the quarter for four hundred thousand, but the twenty thousand a year in income you are receiving is far, far better than anything you can do with the money’. This heir is thinking ‘I can buy this, and buy that, and have this, and I can’t have all those things unless I get the whole four hundred thousand’. That’s true, but ten years from now, my guess is all of the things he buys today will be gone and he’ll have lost everything – not to mention the capital gains and income he lost on the land itself.

Oil income is another slippery slope – pardon the pun. Here you have an asset that does nothing but push out cash and this cash gets deposited in a main account until it is distributed to who you want to receive this money. Right now this is your account and you make the decisions. What happens when this cash account passes on to the next generation? Who will be in charge of making these decisions? Who can I trust to handle this much money without being tempted?

If I name a child as a successor and put them in charge of all of this income, there is no oversight body who watches over this child or children to make certain they are making the proper decisions with this cash. There are no ‘will’ police who run around checking to make sure your successors are doing what they are supposed to be doing. When you put this much cash into the hands of a select few and charge them with the responsibility of doling out this money over years and years, without any oversight on the operation, one of three things is going to happen.

Either the child or children does everything perfectly, but someone is disappointed they are not in charge and feel things could be done ‘better’ – and the fight is on.

Two, the child who is in charge starts noticing all of this cash floating in and out with no checks and balances or people looking over their shoulder, and gives into temptation.

Three, the child or children you leave in charge either decide to quit, become unable to perform these duties or die – leaving these duties to someone else – someone else you may not like handling these duties.

Whether or not you have farm and oil income or just valuable farmland you don’t want sold, you may want to consider a Legacy trust to handle your assets. In the next column, I’ll cover some of the in’s and out’s of such a trust and some ideas of who should be left in charge of this trust after your death.

“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

 

Estate Planning is Goal Setting!

Written by Michael Baron on . Posted in General Estate Planning

Dear Michael:

We have been talking for years about what we want to put into an estate plan. Our son has been working with us, but he fears he will take on too much debt if he starts taking over our livestock and machinery operation. Even though he is the logical choice, he seems hesitant about what to do in taking on some of this risk. In our day, we didn’t have the choice of being hesitant – it was kind of thrust upon us whether we liked it or not and we had to go through a lot of tough years. Now, we can’t seem to put our plan together because we just can’t tell what he is thinking. What should we do? No Mind-Reader

Dear No Mind-Reader: I can think of a few basic reasons why your son hasn’t jumped into the farm operation with two feet. Maybe he is dealing with someone in the upper echelon management (Dad and Mom) who is a bit too overbearing and he doesn’t want to upset the applecart and live a life of disappointing his parent(s). Or, maybe he just doesn’t have the aggressive gene.

If it’s the first thing, whoever in upper management who is not listening, or shutting off ideas before he gets started, ought to learn to let him make a few mistakes.

Oftentimes, parents are overeducated on the right and wrong way to do things – those who’ve been through the school of hard knocks. Or, maybe they are parents who don’t want their children to go through the same school of hard knocks the way they did.

No one out there worth his or her salt has ever made one hundred percent correct decisions throughout their agri-business career. Everyone’s gambled, lost and then gambled again and won in small business. That is small business. Being good and being bad at small business is a thing he needs to experience for himself. He has to know one thing: Good times and bad times have one thing in common – neither one last forever.

If you’ve been preventing him from making some small decisions, let him go and give it a try. Now is a good time to try a few things and if he fails, he fails. The lesson learned isn’t whether or not he succeeded or failed – it’s that he can fail, pull himself up out of the mess and he can go on. If you’re not getting knocked on your butt once in a while in small business, you’re failing.

If he won’t make decisions, you’re going to have to be brave enough to toss him into the deep end of the pool and let him sink or swim – on a small scale, of course. You’re going to have to force him to make some decisions (take on this field and plant what you want, buy these cows, etc.)

If he absolutely won’t do it, remember five percent of the people make up the leaders and the other ninety-five percent are followers. You can’t leave a farm operation to a ‘follower’ and expect it to succeed. If he just won’t go, maybe you saddled up the wrong pony to take over?

The other reason I find a lot of kids are reticent to do anything is because they don’t have a clear picture in front of them.

One of the key elements in estate planning is to write down what you’d want to see happen in the event of your death(s). Later, when we bring the farming child in, after lengthy discussions with the parents, and we explain it to him, it’s usually the first time this child has been shown a direction of where things are headed in his familys’ business.

As surprising as that might seem to you, even more surprising is normally this is the first time the parents have put these goals down in writing, as well!

When you put goals down on paper and both sides of the equation – parents and child(ren) – see these goals, it sets the brain in motion from both sides working towards those goals. Suddenly, Mom and Dad understand their estate planning goals, and see all the little day-to-day decisions they make along the way in life will affect the long-term future of the farm. They hadn’t seen it in this light before because they never thought of it in terms of ‘what if I’m not here and I have to write these goals down now?’ (commonly known as a will).

Junior, for the first time, sees the order of life, of maturing and aging, and finality of death and understands the day-to-day decisions he makes now will have a huge long-term effect on his own life, his family’s life, and his success.

Estate planning forces you to put your goals down in writing and its really fun to see business with both sides of the equation tracking towards their goals – now that they finally know what those are.

You’ll be surprised how quickly Jr. starts making better and better decision on the farm when he knows where he’s heading and how he’s supposed to get there. Your transition from active to retired, should you live, will eventually be made so very much easier and will still reflect the same goals you put into your estate plan.

Goals aren’t set in stone when put into writing and are subject to changing conditions. However, not putting goals down in writing, in your estate plan, just makes everyone wander around without knowing where they’re going – and then you get mad at Jr. for not being more decisive. Maybe it’s not his fault!

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

What You Think Doesn’t Matter!

Written by Michael Baron on . Posted in General Estate Planning

Dear Michael,

We have a child that wants to farm. When we recently sat down with our attorney, he asked what the value of the land was and we told him under one thousand an acre. We set up a plan where our son can buy out the family farm interest from his siblings, but we really didn’t specify the value of the land in the will. Later, some land, next to ours, went up for sale and it sold for over twice that value. It’s got us thinking if our attorney did things right in our will to make certain our son will continue to farm? – Not Worth Two Thousand.

Dear Not Worth Two Thousand: When you set up your estate plan or transition plan, if you’re not giving the professional helping you the right numbers for the true value of your property, you’ve set up a plan that’s obsolete even before the ink is dry.

The results? Either your farming son won’t end up farming or your non-farm children are going to be so upset they’ll hire a different attorney to get paid a ‘fair share’ for their land.

I’ve listened to all of the arguments.

‘You can’t pay for land at that high price’. What you’re saying is ‘My farm operation can’t make it pay at that high price’. That doesn’t make any difference. There are plenty other people out there – farmers and non-farmers alike – who do think they can make it pay at that price and will pay that price. If your farm son has to contend with these buyers, and you’re six feet deep, he’s going down.

‘Land is going to come down in value someday and I don’t want to set it too high!’ Historically, land has gone down two times – the Great Depression and the eighties when fifty percent of the farmers were wiped off the map by high interest rates, inability to borrow, double digit inflation and no fuel. It was the ‘Great Farm Depression’ of our generation. Do we really want to have to go through times like these again to see farmland values decline? And unless they do happen, farmland is not going to decline.

This list of justifications goes on and on.

Let me tell you the actual truth about what happens when you die.

Nobody cares what ‘you thought’ the land was worth, or what your son ‘should’ pay for land, or what the future ‘might’ hold. Everybody is going to look at the appraised values when you die and, if you son is lucky, he’ll be able to work off of appraised values. If he’s not so lucky, and one of the non-farming children gets a bid from the big farmer in the county, then your son is done. Of course, he was already done using appraised values so the higher bid won’t matter if appraisals are twice as high as what you told your planner to use as a basis for your estate plan.

You don’t realize what danger you’ve placed your farm in when you ‘undervalue’ your assets by such a large amount.

The same goes for machinery that you think will wear out or be gone by the time you die, but it’s worth close to a million dollars today. If you die, your son’s going to pay market price and, unlike land, he’s going to have to pay that in a lot shorter time. Same goes with livestock operations that are an all-time high value.

The same is true for people who did their estate plans five to ten years ago and used true numbers from this period of time. We’ve seen a two to four hundred percent increase in value in the past decade and yet you’re running around with a will from 2001 or 2008. It’s just not going to be realistic with today’s values.

You can justify a lot of arguments why things are so high today and shouldn’t be. But do your really want your family farm to end because you weren’t realistic in your estate planning? That’s stubbornness to a fault – and the next generation is going to pay for this by losing the family farm.

“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

Tools You Can Use

Written by Michael Baron on . Posted in General Estate Planning

Dear Michael:

We read with some interest about your new web site you were starting to help farmers and ranchers. At the time, you were having some difficulty with the site and you said you’d let us know when it was ready. We use the computer somewhat but it’s kind of limited to email and games. Our son, who farms with us, uses his computer quite a bit, so maybe he can help us. When will you be ready? – Waiting

Dear Waiting: The site is finally up and running – hopefully without too many snafus popping up. Our web designer says it takes about a month for all the bugs to work themselves out and the only way to find them is for people to use the site and let us know what works and what doesn’t.

On our web site, we have a variety of items for everyone. You don’t have to be a computer geek to use the web site. I designed so it can’t be that complicated.

We have our ‘Farm and Ranch Magazine’ column posted every two weeks. If you travel or like to receive your reading material even when you’re on the go, you can sign up to receive these columns on your computer, tablet or even your cell phone. You’ll be able to read along – even when you’ve got the ‘auto-steer’ set.

We have information posted on income tax rates for the coming 2014 year, although not being a CPA, all I do is post the rates off of the IRS web site. This section gives people an idea where they want to be or need to be when they are selling commodities and what probable tax bracket they would be in.

As time goes on, we’ll be posting ideas written by guest CPA’s about how to handle farm income and/or other income as your life progresses with tips and tricks on how to lower your income tax rates without going into debt.

There is an estate tax calculator on the web site. You put in the approximate values of your entire estate and determine if you have an estate tax problem or not. If you want to be certain you don’t have an estate tax problem, use ‘recent land sales’ in your area as a value for your own farmland – because that’s what IRS is going to be using. You may never sell it for that amount nor expect your children to pay that amount but, put quite simply, IRS only cares about what you ‘could’ sell it for.

We also have the Equitable Distribution of Assets to Farming and Non-Farming Children finally up and running.

This section allows you to put in your basic asset information regarding your current status by helping you list your assets in two categories – farming and non-farming.

This is something I do routinely with my clients to show them what they have in farm assets versus what they have in non-farm assets such as savings, unsold commodities life insurance proceeds, retirement plans, etc. This is key to helping you set up your farming child for success. This will show how much you have to give to the non-farming children in non-farm assets to offset what the farming child needs in farm assets to succeed.

This continues into a section to help you determine what value your farming child has provided to you, to the family farm operation as a whole, and what percentage of the total value of your family farm your farming child has earned in ‘sweat equity’ over the years. It’s pretty easy to use and gives you real numbers you can use to quantify there contribution to the family farm.

The last section then boils all the numbers down for you – what happens if you give the farm to all the children, what happens if you give the entire farm to one child and non-farm assets to the non-farming children and what happens if you give the ‘sweat equity’ portion to the child who stuck it out with you.

There’s even farm rent and mortgage calculators to give you real numbers as to what your farming child will face someday. Now you can break down all the ‘don’t know’s’ into real life numbers to help you in planning your estate.

I’ll be demonstrating how to use this web site at the KMOT Ag Expo and the KFYR Agri-International each day with a one-hour seminar to teach even the most computer challenged person how to make sense of the numbers. Look for me there and plan on attending at 2:00 PM each day.

“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.