Emil and Diana Dewald came to see me in 1998 – almost twenty years ago. Like most people, Emil and Diana had no clear plan for their family farm when they first came in other than they wanted to make certain their son, Jeff, got the opportunity to farm.

“The other children certainly helped” said Diana “But Jeff is the one who has stayed with us. His dream is to run the family farm and turn it into an organic farm as we don’t have a lot of land and that’s his best chance of profit”.

Emil said “We’d like to design something whereby if Jeff stays with us on the family farm, he would have to pay less and less to the other children for their share of the land. I think it would be fair if he got a percentage of the family farm for each year he continues to work with us!”

After much discussion with Emil, Diana and Jeff, they came to an agreement that Jeff would receive a reduced price on the farm for every year he stayed with the family farm. It was one of the first ‘years of service’ estate plans I had ever worked on and still remains a stable of what I do today. We took it to an attorney and had him draft it into a will.

Jeff came to me later and told me “Health issues have became a concern for Dad and Mom (Emil and Diana) and we need to do something more to protect the land”.

The will then morphed into a life estate deed to protect the property from possible long-term care. However, the provisions on the original will stayed with the life estate deed and all the children agreed to those provisions by signing they understood there were conditions, as per the attorney’s instructions.

Diana’s health took a sudden turn for the worst and she died leaving Emil by himself. Unbeknownst to many people was that Diana was helping Emil who had begun showing signs of dementia.

After Diana’s death, Jeff and his wife Janet and the rest of the family tried to help Emil as best as they could. For a time they were able to take care of him at home but eventually Emil needed to enter a long-term care facility.

Because Jeff had stayed on top of the ongoing process of estate planning, the long-term care costs did not cause the loss of the family farm. Jeff was constantly checking and calling to make certain things had been done right and understood the concept ‘estate planning is a journey – not a one-time thing’.

As situations changed and evolved, Jeff made certain he – and his parent’s estate plan – changed and evolved with it.

Emil lived for a few years in the long-term care facility and Jeff spent a lot of time dealing with both the facility and Medicaid to make certain Emil received the best possible care. He had both power of attorney and power of attorney for health care for both of his parents and these papers proved invaluable in the process of taking care of his parents.

Many people overlook the fact their power of attorney for financial and for health care needs to be done and updated as needed so the best possible candidates are in position to help when time comes.

Emil died and Jeff – who had always insured that he would be able to buy out his siblings – was able to do just that. His dream of turning the family farm into an organic farm has also been realized as he finally owned the land in its entirety and was able to move forward the way he had hoped.

Jeff Dewald did everything right through a very difficult time period with his parents and the farm economy. He stuck with it through more down times than up but his determination and perseverance paid off. Unfortunately, at the time he was successful in reaching his goals, God had another plan for him and I write this with a sad heart. Jeff died last week of esophageal cancer at the age of fifty-four.

“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

Elmer and Gina Williams came to see me. They had a smaller farm operation, had moved off of the farm, and they had three children who had no interest in farming or ranching. They were in their mid-sixties and had a home in town, and about four hundred thousand in savings at the local bank in CD’s. Their land was valued just over one million five hundred thousand dollars. They had no long-term care insurance.

The first words out of their mouth when they came in to express their needs and goals were ‘We’d like to protect our farmland for our kids. Both of our parents received long-term care before they died and we’ve heard rumors this type of care would cost close to one hundred thousand per year’ said Gina.

Elmer said ‘We want to know if we should use an irrevocable trust or some other method of protecting our farmland. We feel like we should pay something towards our costs of care and that’s what the four hundred thousand is for, but we know from past experience this might not be enough’.

In most cases, people are curious about trusts to protect their property. Trusts fall under two basic categories – revocable and irrevocable. Revocable trusts provide no protection from Medicaid, so then irrevocable would be the next option.

For an irrevocable trust to protect property, certain conditions need to be met. One, you have to transfer the property today but it’s still subject to a five year look back by Medicaid. All transfers – no matter what you do – are. Second, the grantors – in this case Elmer and Gina – can only be income recipients of the trust. Naming themselves as trustees – although doable – is inviting disaster if they ever do anything deemed to be self-serving by Medicaid. A safer route would be to name a trustee.

The bad part about an irrevocable trust is the grantors have no say over how the property is managed and if they do, they invalidate the trust. Also, if life changes in the future, all the terms of the irrevocable trust cannot be changed.

We then discussed a life estate – which has the same protections as an irrevocable trust. The advantages – in North Dakota – are the property again is protected after five years – with the exception of the income. However, the life estate owners retained the right to income and use of the property.

“Both of our parents – his dad and my mom – needed long-term care prior to age seventy and we’re concerned we may be caught short on that five year look back by Medicaid. Do you think the money we have is sufficient?” queried Elmer.

Four hundred thousand dollars would seem like a lot of money, but with upper care costs now reaching five hundred plus per day ($180,000/year), who knows? Medical insurance used to have a one million dollar limit, then change to a two million dollar limit and now has been removed entirely because neither of these sums was sufficient as time passed.

We decided to take half of the four hundred thousand dollars and we put it into an asset based long-term care policy. This two hundred thousand dollars bought four hundred and twelve thousand dollars of either death benefit or long-term care benefit that either spouse could use during their lifetime.

Traditionally, men have short-term expensive stays in long-term care whereas women have less expensive but much longer term stays with escalating costs over the years.

The plan provides one hundred percent liquidity from year one and if they needed any of the money for income later, they could access it the same as they could with their CD’s. With the death benefit, if both of them needed care of, say, a total of $150,000 during their lifetimes, their children would still receive the $260,000 difference from the death benefit. I was also able to check with a multitude of top-rated companies to ascertain they got the best product for their money.

By rearranging ownership and their assets, Elmer and Gina were able to have a much more certain future for their children and the protection of their assets.

“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

Vernon and Kathy came to me with an interesting problem. They had three children – one of whom was farming part-time.

‘We have two goals,’ Vernon stated. ‘We’d like to see our son, Ben, who is farming part-time be able to take over the family farm operation. Right now he has a great job, but he’s out there every weekend. The problem is his wife likes to live in the city and we know the farm house will never be used. They live only twenty miles away, but we’re not certain he will ever farm full-time. Also, we’d like to make certain that the farm is protected from long-term care costs, if at all possible. We have some savings, but they’d be used up in a couple of years’.

I asked them what price they would ask from their son, if he wanted to buy it from them or if he had to buy it from his siblings. ‘I know land is going for much higher but I’d like to give him a break on it. It’s worth twenty-two hundred now, but I’d sell it to him for one thousand. That’d be the number to use, as well, if he bought it from his two siblings,’ they answered.

This is a classic problem. If the parents sell for FMV, the land is too expensive to pay for. However, if they lower it to an affordable amount, then what is to stop Ben from buying the land for one thousand dollars, paying for the land by subletting the property and letting cash rents make the payments.

Whether that occurs if the parents sell it to him or whether it occurs when he buys from his siblings, it is grossly unfair for Ben to acquire a three million dollar asset and only have to pay one million for it – if he doesn’t actively farm the land. He may just keep his ‘good job’ and never farm.

To cover this, as well as the long-term care issue, we talked about using a life estate deed with conditions on it for Ben.

I asked Vernon, Kathy, and Ben what things they felt would be fair to have in a life estate transfer deed to Ben so it would be fair to all.

Vernon and Kathy stated ‘We’d like to know what happens if Ben decides not to farm and sublets the farm, or what happens if he dies, and leaves the deed to his widow?’ Ben didn’t think it would fair to have the land go to him or his wife if he never actually farmed it.

So I asked Ben ‘Would you agree then, if the deed contained language whereby you would agree – right on the deed in writing – that you would accept the terms your parents are setting for you? Such things as ‘You cannot sublet the farm, you cannot custom farm the entire operation, if you die prior to their death, the property deed will not pass to your widow but will come back into all three sibling’s names?’

In return, Ben wanted to know how he would be protected by inflation and long-term care costs. Vernon and Kathy said ‘How about if we set a price in the deed, allow that any rents paid by Ben to us will be reduced from this price, and Ben will build up credit over the years. If Ben stops farming, then the deal is off and the deed reverts back to all three kids?’

We talked to an attorney who drafted all of the ‘wish list’ into the life estate deed which was gifted to Ben. Ben signed agreeing to all of these conditions, as well as his parents. Vernon and Kathy.

The other children were given copies of this deed so that if Ben should go in a different direction than what he was intending today, they could then proceed to get the deed put into all three names. Not to assume this is an easy task, and enforceability might be an issue in the future, but at least it was there.

The life estate deed, of course, gave some protection from long-term care issues. All in all, after many discussions all the parties – Vernon, Kathy, Ben and the other two children – were happy with the outcome.

“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:

About ten years ago, after my husband died, in his will he put our land into a life estate with our children. At the time, none of the children wanted to farm. Since then one of our son has come back home and decided to take a lot of the land that was in CRP for many years and has turned it into farmland. Land that was barely worth five hundred dollars is now – as of the last sale next to us – is now selling close to five thousand dollars per acre. We put over twelve hundred acres into life estate to keep it from going to the nursing home. Did we do the right thing? – 20/40 Hindsight?

Dear 20/40 Hindsight: This has come up a number of times in the past few years and mostly because of land values jumping in value. It’s especially critical when you took non-productive land and, with new farm methods, turned it into productive land. This certainly changed the value of the land in a farmland starved environment as we have now.

IRS has a whole code written about life estates. First of all, they have a table to determine what the value of the two parts of a life estate are – the ‘life estate’ or right to receive income or use for the remainder of life and the ‘remainder interest’ deed – which is the deed given to the children. They receive it upon the end of your right to receive income – at your death. Based on your age at the time your husband ‘gifted’ the remainder deed to your children via his will, the land should have been appraised at the time, and a gift tax return filed for the value of the remainder deed based on the IRS table.

This IRS table is based on age. The younger you are at the time of the gift, the less you are giving to your children due to, actuarially speaking, you’ll likely live for a long time before your children finally receive the land without any income to you. For example,
If you are age one, the gift to your children is virtually nothing – if you could have children at that age. By the time you reach ninety, the table tells us the gift your making is almost the entire fair market value of the gift.

A mid-point is right at age seventy-six when IRS says the value of the life estate interest is roughly equal to half the fair market value of the property at the time of the gift. So, if you are age seventy-six and gave land valued at one million dollars, you would need to file a gift tax return for half a million dollars.

The good news is you can give up to five million three hundred and forty thousand dollars per person in 2014, so there would be no gift taxes upon this gift – but it does reduce this total Unified Credit by this amount.

The problem comes later on when this same IRS tax code states that if you keep a life estate interest in this property, the property will be included in your estate for estate tax purposes at its full market value at the time of your death. In other words, you lose some of your lifetime credit when you make the gift of the residual deed to your children but you still have to pay estate taxes based on what’s left of your credit and the total value at the time of your death.

For people who’ve done this over the past decade, make certain your land is not valued for more than five million three hundred forty thousand now, or you are guaranteed your children will pay estate taxes when you die.

In your case, if land is selling for five thousand an acre and you have twelve hundred plus acres in life estate, that adds up to about six million dollars. Anything over the five million three hundred forty thousand dollars – in your case about seven hundred thousand – is going to have forty percent estate taxes upon it. Bad as that may be, that’s just the value today! What happens if you live for another twenty or more years and the land continues to appreciate over time. Every dollar it goes up in value is another forty percent to the IRS.

What you can do is start shifting out of your life estate – either by gifting your life estate interest to your children today – or setting up a special trust to hold your life estate interest until you die. Doing either is going to affect their step-up basis, but that only affects your children if they sell the property. Good estate tax planning is about avoiding certain taxation at the time of death versus long-term taxes on capital gains.

The other thing that happened – beyond your control – was that now that your son came back to the farm and wants to farm, how is he going to handle being partners with his siblings for the rest of his life? That’s a whole ‘nother can of worms that needs to be worked out – usually with patient negotiations between the children before you die. They’ll still listen to you now, but don’t count on it after when millions of dollars are at stake.

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