Dear Michael: We went to a few meetings sponsored by our lender about estate planning. We agreed to meet with their estate planning specialist from this meeting afterwards. She recommended that we consider doing a Limited Liability Partnership. We farm together with my husband’s brother as joint tenants in the land and equipment etc. and she thought this would protect our land from long-term care costs in the future. We thought we should get your opinion on it. – LLP For Us?

Dear LLP For Us: There seems to be a growing trend of people buying in to things again because this is the only option for ‘estate planners’ to get paid. Vendors are out there selling living trusts (another form of ownership similar to joint tenancy), Limited Liability Partnerships, and Limited Liability Companies as solutions to such things as long-term care issues, ease of transfer at death, probate avoidance, etc.

If Living Trusts avoid probate, then why do they come with a Pour-Over Will that says ‘upon my death, put everything I don’t have, that I either forgot or didn’t put into my trust’s name, back into my trust.’ Such things would be things I forgot or didn’t keep up with such as motor vehicles, savings accounts, etc. If they come with a Pour-Over Will, don’t I have to go through probate to put the stuff back into my trust? If Living Trusts were perfect, then why do they need a Pour-Over Will?

Avoiding probate on the rest of my assets, right?

Okay, so at my death I name successor trustees to act as my attorney in fact or trustee for me upon my death. Typically children are named as successor trustees.

Which one of your children feels confident enough to make changes to deeds, set up estate accounts to account for any outstanding bills and income, do the income and estate tax returns, etc. all the while knowing they have a fiduciary responsibility to do this the right way. If they don’t the other heirs (other children) can sue them for making mistakes or for not getting their money they thought they had coming, or just because they want to.

Which child is going to look at this and say “I’m not dealing with all this – I’m going to hire an attorney to do all of this so I can’t get sued by my siblings” And aren’t we right back where we started, paying legal fees – aka probate costs? Where’s my savings?

Other estate vendors are saying use an LLP or LLC – it’ll solve all your problems.

An LLP in its purest sense means this: The Limited Liability typically means any liabilities incurred in the future would be limited to the assets held by the LLP or LLC. If a person gets sued, goes broke or needs long-term care, isn’t it true that only the assets of the LLP or LLC can be taken? If you put all of your land into the LLP or LLC, isn’t the only thing creditors can take is all of your land – the very thing you were told to put in there to protect it?

If you want to try and protect your land, you might think about putting your farming business into an LLP or LLC. You might start a new company that does all of the business on your farm and it might include machinery, vehicles, livestock, etc. If any of the aforementioned liability occurs from the operation of your business, I think they can only go after these assets – not the land you personally own outside the LLP or LLC.

If you’re dealing with estate knowledge purveyors who don’t know the answers to these questions, you’re perhaps dealing with someone who is selling legal documents and not solving problems for you. They may be just like the old ElectroLux salesman standing outside your door just hoping for an opportunity to dump dirt on your floor!

These are the questions I would ask before I jump into anything that sounds too good to be true. I don’t have the answers because I’m not an attorney.

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

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

In this case, the family came to me with the following problems. Their mother had a life estate in both a farm and in some minerals. Both the minerals and the farm had the opportunity to turn into a taxable estate if the values increased.

Fact: Because the mother retained a life estate in both the minerals and in the farmland, the entire value – its total appraised value of both land and minerals – would be included in her estate for estate tax valuation purposes.

Most people assume life estates either are not included in estate tax returns for decedents or the value will not be the ‘full’ market value at the time of death because the life estate owner has gifted away the deed. This is not true. IRS states the ‘full value of any property with a life estate shall be includable for estate tax returns’.

Problems: At the time the remainder interest was gifted to the children and the mother kept a life estate – shortly after the time of their father’s death – the attorney handling the estate had not filed a gift tax return for the estate as he assumed – correctly at the time – the estate would not be a taxable estate. However, as the minerals became active and the farmland quadrupled in value, appraisals now showed the total value of Mom’s estate to be around eight million dollars – far and above the five three hundred and forty thousand now allowed. This would have led to estate taxes on the excess over and above this amount.

Solutions: First of all the property was appraised – both the farmland and the minerals. The appraiser was then asked to give an appraisal dating back four years to when the farmland had been gifted. An appraisal of minerals back four years ago was impossible to attain.

This allowed the clients to determine what gift Mom had made four years ago. IRS does have a formula to follow – based on the appraised value and the age of the grantee (Mom, in this case) – what the value of the gift was to the children back in 2010. At the time, the gift was about forty-five percent of the value of the land.

The clients then submitted a gift tax return for 2010 with these amounts and the appraisal. Because the client was allowed to gift more than the total forty-five percent value of the land was, this was a non-taxable event.

However, this gift did have to be deducted from Mom’s lifetime exemption of five million three hundred and forty thousand dollars. IRS has three years to disagree with the filing of the gift tax return and if not, the value then stands.

Next, the client gifted her life estate value in both the minerals and the land into an LLC. Being as she was still able to discount the entire value of the property by almost fifty percent, using IRS’s life estate/remainder interest tables, and because she was retaining interest in the LLC, we had another non-taxable gift – again which was filed with IRS.

Why inform IRS every step of the way? Because, like this woman, someday your children may have to prove what land was selling for years before when she made the original gift, and when she made the secondary gift to the LLC, and what the value of her remaining stake in the LLC will be at the time of death. Without letting IRS know the value of these gifts – even though they were all non-taxable gifts – we allowed the three-year look back period for IRS to expire and then all the gifts were allowed at the amounts she put on the return. Without this paper trail with IRS, the children would be at sea on a rowboat without a paddle at the time of Mom’s death!

Many people might tell you to go ahead and make gifts and ‘don’t worry about reporting it to IRS because it’s not a taxable gift’ – remember – any gift exceeding the current thirteen thousand dollar per person per year rule must be reported so you have a future paper trail with IRS. This includes gifts of life estates, bequests from estates received from decedents, or any other cash or real property bequests received exceeding this dollar amount. It’s not required by law – but it is smart business.

“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

Again, we’ll continue with case studies rather than questions from readers as this time of year during harvest, I don’t get a lot of questions. So case files will be fun as they cover things I’ve been involved in over the years.

Wendal and Mary Jane K. had two children. Their son, Bob, had been farming on the farm with Wendal and Mary Jane for many years and had developed a comparable estate – in value – to Wendal and Mary Jane. Bob had help from his parents over the years with small loans and help in acquiring more land and Wendal and Mary Jane were quite satisfied with what Bob had acquired. They now wanted to be equitable with their daughter, Jenny.

After a recent visit to an attorney, Wendal and Mary Jane talked about using an LLP or LLC to own their business to both pass their assets on to Bob and Jenny, as well as possibly lower any future estate tax potential. Their estate was in the eight and half million dollar range at this point in time.

Issues: Wendal and Mary Jane want a simple method of transferring their property to their children as well as eliminate estate taxes.

The solution discussed was using an LLP or LLC to make this a simple task as each year Wendal and Mary Jane could gift ownership percentages – in the case of the LLP or stock in the case of an LLC – to their children, Bob and Jenny, by making gifts. If they didn’t exceed the $13,000 limitation per year per person, they would not even have to file gift taxes. The attorney also noted that if the $13,000 wasn’t enough Wendal and Mary Jane could use spouses of the children and grandchildren to gift additional stock or percentage.

Possible Advantages: An easy way to transfer business ownership and gain some estate tax advantage down the road.

Possible Disadvantages: Any time we take a business that is solely owned and begin to fracture the ownership – by giving shares or percentages over time – we have to look at the entire business model to be sure this is the right thing to do.

First of all, setting up an LLP or LLC is setting up another tax entity. This should tell you additional recordkeeping will be needed as well as reporting taxes, keeping track of this separate tax ID#, and sharing net income with all of the different ‘owners’ of the business.

For people who like to keep life simple, this can be a bit of a challenge to maintain – especially as the gifts continue and income is going to seven or eight different sources. How does this affect your borrowing ability, reporting to ASCS, etc? Decide for yourself –as you look at the years coming – if this is something you’ll be able to and want to stay up to date on.

Second, when I fracture ownership of a sole business by using an LLP or LLC, I am giving percentages of ownership to people rather than acres of land or pieces of equipment, etc. Each share or percentage represents whatever you put into the LLP or LLC. If it’s only going to be land, then ultimately we will have undivided joint ownership of land someday.

If I used children, grandchildren, spouses of my children, how do I protect those shares from being attached with liens by divorces, medical costs or long-term care costs, bankruptcies, bad business decisions, etc? The more I spread out the ownership of an asset, the more possible exposure I bring to the assets because, people being people, someone sooner or later is going to mess up.

The answer to this is to have a properly written business agreement and stay within certain confines on your gifting. A properly written business agreement (LLP or LLC) defines exactly what happens if one of the owners wishes to sell, who they can sell to (normally the other co-owners), what happens if they are forced to sell (liens), and how they have say or no say in the business (voting or no voting stock in the LLC).

Gifting should be limited to the people you want to have a voice within the ownership of this asset. If you have a son-in-law or daughter-in-law or grandchildren who are minors or are someday going to be teenagers or young adults (thirty is the new eighteen), none of these classes would be good candidates for gifting. Why? Because a gift given is a gift lost. And all of them can make your life miserable in the business if they turn a different way in life than you expect them to.

In this case, Wendal and Mary Jane have two children. Because their son, Bob, has built his own estate to almost as large as theirs, an LLP or LLC might be acceptable for use with Bob and Jenny – as long as they have an incredibly strong business agreement including who has first option to farm, what happens when one of them dies or wants to sell, etc., etc. If Bob were dependent on receiving the farmland for his future agri-business success, then no, the LLC and LLP would not be a good answer. No one wants to be partners with a non-farming sibling in their business.

“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 very complex life since the oil industry started. We had a fairly good sized ranch before the oil. This ranch alone, with the growth in per acre value over the past ten years, is probably close to ten million. Then we started getting minerals off of the land we owned and we don’t know for certain what they are worth although the income has been good. Last, but not least, we helped our son start a welding business. He didn’t have much money, so we started an LLP – under the guidance of our attorney – and gave him twenty percent of the business. We started the LLC as a shelter for liability to our other assets, but now another advisor is telling us to use this LLC and another LLC to own our minerals and perhaps part of our ranch. Are we doing the right thing by jumping into all of these different entities to protect estate taxes? Is the LLC the ‘magic fairy dust’ we’ve been looking for? – Do You Believe in Miracles?

Dear Miracle – Unfortunately, miracles only happen on ice and we have to go back to Al Michaels call back in 1980 on the Olympics to even hear that again!

In an LLP (Limited Liability Partnership) or LLC (Limited Liability Company) you have two things that may be accomplished.

One, of course, is the limitation of liability to the assets held within the company itself. In other words, in your welding business, if you cause an accident in the course of your business and get sued, the other party can only receive assets owned by this LLC. This is a good argument for using LLC’s for high risk businesses – such as one with trucks out on the road.

Now, using LLC’s or LLP’s to reduce estate taxes is a wholly different issue from limiting liability exposures.

In the old days (ten years ago) if I fractured ownership in my assets by gifting shares to my children, I could discount those gifts by as much as forty percent. I could also claim the remainder value of my assets – in my estate – should be discounted by this amount, due to loss of market value.

IRS, after seeing LLP’s and LLC’s for so many years, has now devised formulas you need to use to claim these. There are still a few firms out there claiming to get 30% or 40% discounts – in order to drum up clients – but if you call a reputable CPA firm – like Eide-Bailey – they would shy away from these promises.

In the meantime, if I was, say, working with someone who promised me huge deductions in my estate and I spent a lot of time and money gifting to my children (not knowing IRS as much as ten years to disallow these gifts and/or their discount) I might be blissfully ignorant of the storm heading my way.

In addition, you’ve also just given away chunks of your business, your ranch, and/or your minerals and haven’t really put into terms what that means. Right now, all your focused on is how much you kept from going to IRS.

You see, along with ‘gifting’ of LLC shares or LLP percentages, you also gave away your right to receive all of the income from these entities. In either an LLC or LLP, the ‘profit’ of the business will be split between all of the owner entities – voting and non-voting alike. You may have just given away all of your income and/or control to avoid estate taxes. You may have handed it to your kids – who may not be ready to handle this type of ‘free’ money.

I’ve always wondered why a person would give up control and/or fifty to seventy percent of their income – especially income that could drop dramatically in a few years when rags to riches turns into rags again – when they could have set up a simple trust to pay estate taxes – using life insurance – and paying five to ten cents on the dollar in most cases. Some companies even have ‘return of premium’ – if you don’t need the coverage anymore – and you get your money back.

But some people are so anti-life insurance, they’d rather give up three hundred thousand dollars in income to avoid five hundred thousand dollars in estate taxes – and all they had to do was gift fifteen thousand dollars a year to an irrevocable life insurance trust. They can maintain control and spend the other two hundred and eighty-five thousand. Talk about cutting of your nose to spite your face.

There will always be those people out there looking for the next ‘fairy dust’ to not pay estate or income taxes, and there are plenty of people out there selling ‘fairy dust’ – but long-term the costs of setting these plans up is going to cost them so much, much more than if they’d done just a simple annual gift and let the insurance company pay the tax liability. It’s the same when you pay your car insurance, your home insurance, your farm liability insurance – you pass liability on to an insurance company.

“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