Should Have Listened…

Written by Michael Baron on . Posted in Transferring Ownership

Dear Michael: I wanted to write and tell you a story about what happens when you don’t get things done. We had come and talked to you about twenty years ago when I first started farming with Dad and Mom on the family farm.

At the time, all of us children were young and we got along so well. I was working with my parents on the farm and my brother decided he wanted to pursue a different career. My sister was young at the time, sixteen, and didn’t seem to have any interest in farming.

When we talked to you, you told my parents not to treat us as we are now but to envision our family in the future. I remember you asked my dad “Do you have any siblings of your own?” Dad answered “I do – six of them – three brothers and three sisters”.

I remember you asked him “How would you like to be partners with ANY of your brothers or sisters right now??” My dad laughed. He said “I love my brothers and sisters but I know too much about them to be partners with them in my business. Two of them are divorced and need money. One, if he had a nickel he’d spend a dime. The rest of them are okay, but I don’t want to be partners with them”.

You told him and Mom that day “If that’s the way you feel, then don’t make your children partners in this farm operation”. Well, Mom took great offense to that telling Dad that us kids were different – that we (her kids) would never end up like Dad’s brothers and sisters. We were ‘good’ kids and we’d never argue like they had.

So, in spite of your advice, Dad and Mom kept their same will that divided everything three ways and told us to ‘work things out’. They told me I could buy the land at a cheap rate when they died.

I bought a lot of machinery together with Dad. I worked many years side by side with him, keeping the farm going through some mighty tough times. I tried to buy some of the land from Mom and Dad, but Dad always said ‘Why buy when you’ll end up with it anyway. You can buy it at two hundred an acre”.

My sister, who was young at the time did get married. She got married to the son of a nearby farmer. His father is very, very well-to-do and is a very aggressive farmer in our area. Whenever land comes up for sale, he’s sitting in the front row and very seldom leaves without what he wants.

Now, I’m fifty-four and Dad and Mom both passed away in the past two years. When it came time to read the wills and I was expecting to hear that I could buy the land from my siblings for two-hundred per acre, like my Dad had told me, I found I could buy it for the County Average. When I asked the attorney about the two hundred per acre, he said “Well, that’s what it was selling for at the time he did the will”! All these years I had put in working side by side with him and now I had to come up with close to fifteen hundred dollars per acre. You would think that was a bargain – and it is compared to what land really sells for.

However, when I went to my lender, they were not in the same mood as they were in past years. I now had to borrow over a million dollars – at age fifty-four – and my last two years I was just able to cover my operating debt. My little sister and her husband have come in with a more substantial offer because he’s backed by his dad’s money. My other brother – pushed by his wife – wants to take their offer because it gives them a lot more money than I can pay.

I know, in my heart of hearts, Dad and Mom wanted me, their oldest son, to keep the family’s name on the family farm. I have a son farming with me, but he’ll never get the chance to farm.

Tell all your readers this could happen to them! Don’t depend on your kids to ‘do the right thing’ twenty years later. Don’t believe they will always get along fine like they do today. Get things put into your will that make economic sense for the future of your family farm because sometimes things that ‘sound good’ aren’t good.

“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
Toll Free: 1-800-373-4078
Fax: 701-255-6106

Life is a Journey, Not a Destination

Written by Michael Baron on . Posted in Transferring Ownership

Dear Michael: We wanted to write and thank you for the article about ‘Don’t Complain About Farmers With Your Mouth Full’. It’s about time someone explained that subsidies aren’t making farmers rich – they’re to keep farmers in business to produce the most valuable commodity in the world – food. This benefits not just farmers but every time people go into a grocery store to buy food – having a willing and able workforce to provide low cost food items.

We’ve had four generations on our family farm – each one taking over from their father or their father’s father, in some cases. But now, it seems so much more complicated than it used to be when my husband’s father took over and my husband, in turn, after him. We don’t know where to begin? What was once simple now seems to complicated – we don’t know where to start? – Stuck in Neutral.

Dear Stuck in Neutral: Life used to be a lot simpler in oh so many ways, but too many people think transition planning has to be complicated.

For example, livestock producers can set up their herds so that they can do shares with the next generation. If the retiring producer will do shares on the calf sales, keep the income from the cull cows, and let the next generation slowly build their herd, in seven to ten years the herd will be transferred. To keep income at a steady rate, the charge for pasture and hay land can be continuously raised so the loss in calf income will be offset.

People with machinery debt need to sit down with the next gen and figure out how many acres Jr. is going to have to take over from Dad and Mom to pay off the debt on a single piece, or multiple pieces of machinery. If it’s owned land, the acres would be less and if it’s rented land, you’ll have to consider the costs of rent into the equation.

The same with land debt. If you are still working to pay off land debt, consider selling a piece of land to Jr. with him making payments to you equal to the amount of your payments.

Think about it – you work all year – you make money from your sales – you make a payment to the bank on your loan for another fifteen years when you’ll be eighty years old while your child gains no equity.

Why not set things up now where he can buy a piece of land from you on a contract for deed so while he’s paying you off, you’re paying your loan off at the same time?

You both win, as he gains equity over time and you can retire. If your income is low, in the zero to fifteen percent income tax rate, your capital gains tax will be zero. You need to charge an interest rate to him but right now rates between family members is very low at about 2.65%.

These are some simple ideas on how to get an estate plan into motion. A good estate plan is one where all the big decisions are handled should you die tomorrow or they are answered over time by simple, small progressive moves over your lifetime. You need to do both – have an emergency plan written out – and you need to have yearly targets you and the next generation are moving towards in tandem.

Too many people get caught up in “Mmmm….. I don’t know what to do!” and not doing anything. Suddenly thirty years passes them by and the small problems they had have become mountains of property to worry about, plan for, try to pass on to the next generation and you can’t comprehend what to do!

Work with an estate planner that understands estate planning is not something you complete once and move on from – it’s something you make a part of your life.

“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
Toll Free:  1-800-373-4078
Fax:  701-255-6106

Changing Perceptions, Continued

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

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

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

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

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

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

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

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

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

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

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

Various Types of Ownership

Written by Michael Baron on . Posted in Long-Term Care, Ownership, Transferring Ownership, Trusts

Dear Michael: We’ve been farming for many years. We were talking to friends and they mentioned they have a living trust to handle their estate planning. We’ve checked into various trusts – is this the one that protects our estate from long-term care costs? – Living Trust.

Dear Living Trust: In its simplest terms, a living trust is another way for you and your husband to own property together. You have sole ownership – if one of you owns the property. You are allowed to pass your property to whomever you desire during your lifetime. However, if you are married, your spouse may have ‘spousal rights’ to the property upon your death – even if you direct it to someone else. Each state has their own laws regarding ‘spousal rights.’

You have joint tenancy with right of survivorship as another option. This type of ownership means there are two owners and the ‘survivor’ will automatically inherit the property from the first owner’s death. It doesn’t matter what your will states to the contrary, the property is now owned by the survivor. Why? Because joint tenancy WROS states there are two owners and upon death, the one who died is removed from the deed.

People use this type of ownership all the time to pass property between spouses so they don’t incur probate costs. It is, however, a terrible way to own property between non-spouses as the ‘with right of survivor’ means the property will pass to the last owner standing. I’ve come across a few cases were siblings owned property JTWROS and their shocked to find out if one of them dies, their name is just removed from the deed….and so on, and so on until the last person standing owns the property.

Next is tenants in common, and undivided half interest in the property. Undivided means you can’t draw a line down the middle of the property and claim this is your half. However, you can sell, gift or give your tenant in common interest to someone else – even upon your death – again subject to the ‘spousal rights’ in your state. Just because your spouse would automatically get her half of the tenant in common property doesn’t mean she has no right to claim on your estate.

This is the most common way for non-married people to own property. Siblings, business partners, non-related people normally have tenants in common. Now we get into trusts. Trust are either revocable or irrevocable. Revocable trusts (or living trusts) are, as the name states, revocable, changeable, and are merely another method for owning property. Irrevocable trusts cannot be changed once property is deeded to the trust without the consent of the trustee. If you make yourself the trustee, then you have a revocable trust – not an irrevocable one.

An irrevocable trust is a carefully planned ownership designation naming someone as trustee and what rights and duties this trustee will perform as long as the trust owns property. You decide what these rights and duties of the trustee are as a part of the trust. Many irrevocable trusts are found in wills when someone does not want property to go directly to heirs or beneficiaries who must meet the conditions give to the trustee before they receive the assets. Common conditions might be a certain age, a certain life milestone, or an eventual event in their beneficiary’s life. These are testamentary irrevocable trusts.

Other people set up irrevocable trusts to avoid having their assets go to long-term care. These assets must be transferred and free of any ownership rights of the grantors for at least five years before they are not included for Medicaid purposes. Revocable trusts have no protection from long-term care as you can revoke or change them. Medicaid states if you have this right, then you can revoke your trust and pay for your care.

Revocable trusts are also promoted so people tend to believe they will avoid probate, however, in of themselves, they are a tremendously difficult documents to read. Most people name their children as secondary trustees, but not many children are close to being able to handle the fiduciary responsibilities of a trust upon their death. This leads them to hiring an attorney anyway upon death negating all probate savings.

“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

Life Insurance in Estate Planning

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

Dear Michael: We have been working with our local property and casualty agent purchasing insurance to cover our estate tax issues. He told us to buy another seventy hundred and fifty thousand dollars of insurance, so we paid him the premium and he returned the policy to us a week or so ago. Do you think it’s the right thing to do – buying life insurance to cover estate tax issues? – Not Sure We Did Right

Dear Not Sure: When you have estate tax issues, you need to follow a list of possible solutions. Life insurance is the medicine you drink when you’ve exhausted all other possibilities.

Estate taxes are based on having more assets than the current five million four hundred and thirty thousand dollars per spouse as of 2016.

Some remedies just take time – such as owning a lot of machinery or grain that you intend to dispose of, transfer, or move during your lifetime. Having these type of assets disappear gradually from your estate may lower your estate values.

Depending on how long you think it might take you to move these items out of your estate, you can take a look at term insurance options to cover the estate tax issues while these assets drop in value to your estate occurs naturally. Most people feel ten to fifteen years would be sufficient.

The other item you can look at is gifting. Gifting is still at $14,000 per person per year (you and your spouse) to any number of people you desire. These can be gifts of cash, machinery, grain, land, or any other farm assets you might have. If you don’t have a sufficient list of people to give to, I can supply you with one.

Charitable contributions upon your death also reduce your estate tax liability. You’ve heard of the Buffets, the Gates and all the wealthy families gifting their vast estates to charities. A couple sometimes needs to decide if they’d rather give to a good cause then give it to the Federal and State governments.

I have had some people who were willing to give so much away to their children or to other sources that they actually impact their standard of living by gifting so much. If this is the case, then this is the perfect situation to use life insurance.

If a couple is gifting so much away today that it’s going to dramatically affect them in the future, then think about gifting to an irrevocable life insurance trust. Just two or three gifts add up to $28,000 to $42,000. That kind of money buys a lot of life insurance for the average couple.

For example, I can give away land to my children but along with this gift goes the income from the land. Now my children have the income and the land but my standard of living has been reduced. If the gift to the life insurance trust was less than the income I gave away from the land, why wouldn’t I take the least expensive and most cost effective route?

Last but not least, you either have to have your children or an irrevocable life insurance trust own, pay for and be the beneficiaries of the life insurance. If you have any incidence of ownership, you are just adding fuel to the fire. Estate taxes are due upon the death benefits – not income taxes but estate taxes – if you have paid for, own, or have any incidence of ownership in the policy.

You can gift the premiums to your children, but as beneficiaries, your children might not be obligated to pay the estate taxes on your estate. One of them might say “Thanks for the money” and leave their siblings hanging with the estate tax debt. That’s when people use a trust.

If you’ve already applied for this insurance, you still have some recourse. You can contact the agent and ask to get your money back. In most cases, you can get all your money back up until thirty days after the receipt of the policy – not the policy date but the day you received it.

Then you can find a qualified estate planning professional who can help you. Obviously your P&C man isn’t up to snuff although this is estate planning 101.

“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

Stock Redemption Versus Stock Purchase

Written by Michael Baron on . Posted in Asset Protection, S or C Corp, Transferring Ownership, Wills

Dear Michael: We have a family farm corporation which has evolved over the years. We wanted a simple way of moving our estate to our children and farming son and our CPA suggested this would be the best. At this point, we have just our farming business – machinery, grain, etc. – but none of our land in the corporation, as we rent the land back to the corporation to avoid Social Security taxes on this income.

Recently, we were told by an insurance agent that if we wanted our stock to go to our son in the business, the corporation could buy life insurance on us and redeem our stock upon our death. The agent thought it would be easier for the corporation to come up with the payment than our son. Can we use this as a deductible expense to the corporation as the agent did not know? Tax Season Always

Dear Tax Season: There are two basic types of business purchase plans used by most corporations, that being the corporate ‘buy-sell’ agreement and the corporate ‘stock redemption’ agreement.

Under the ‘stock redemption’ agreement, the stock would be ‘redeemed’ by the corporation buying the stock from your estates upon your death. Ostensibly, this money would then flow from your estate to the heirs you name in your will.

If the life insurance premiums have been deducted from your expenses in any way, the death benefits will then come to the corporation as taxable income to the C Corp or as pass-through taxable income in an S Corp. This would greatly complicate any redemption of your stock as corporate or personal income taxes would have to be completed prior to the redemption of your stock.

The other item that occurs when you ‘redeem’ stock is that the stock is simply retired in the corporation no matter if it is a C or S corp. The corporation has money due to the death benefit and your stock is retired.

Because there was no exchange from outside the business by an individual, no one can claim any tax deduction for having made an additional investment into the business.

Had your farming son owned and been the beneficiary of the life insurance under a ‘stock purchase plan,’ he would have been able to ‘invest’ this money into the corporation to purchase the machinery, grain and other assets. Any assets purchased would be deductible to him for depreciation, etc. unlike the internal stock redemption plan that merely retires stock.

With your son as owner, payer and beneficiary of the death benefit, he can now purchase your stock from your estate – you’ll have received a stepped up basis in the stock on some portions of your stock – and the money will then flow to the beneficiaries of your will. Your son will get a tremendous income tax benefit from handling the funds this way versus the stock redemption.

By the way, if your agent doesn’t know these things, find one who does – yours is playing out of his field of expertise. You need better advice.

This also prevents shares of the business from going to ‘unintended beneficiaries’ if your will does not address these shares. Many people forget when they convert their farm business to a corporation, they have to mention the ‘shares’ in their wills so as to be distributed by the instruction of these wills.

Too many people forget to change their wills and then the ‘shares’ become part of the ‘residue of your estate’ – commonly known as everything I didn’t mention by name in my will – which is typically split evenly between all the children.

Last, but not least, if your son can’t afford the premium, raise his wages or 1099 him for the income needed to pay this premium. Its better he pays a little tax now to reap the huge benefits of having him own the insurance outside the corporation.

Happy Easter everyone – our annual rebirth is finally here!

“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

Leaving the Nest

Written by Michael Baron on . Posted in Asset Protection, Long-Term Care, Transferring Ownership

Dear Michael: We have one child who is farming and two others who are not. We’ve been gradually turning over rented land and machinery to our farming child while putting money in savings for our other children. We do have long-term care insurance that we bought it back in the nineties so we’re covered for long-term care. What other things should we be thinking about? – Got It Covered.

Dear Got It Covered – You’ve done a nice job on your transition with your farming child. Too many people wait and hold on to assets far too long not allowing the next generation to get a foothold in farming.

You now have to decide when you and you’re farming child switch caps – where s/he is the farming manager and you become the hired help or junior partner in the operation. For some people, this is an easy task to turn over the major decisions of the farm. For other people, control is a hard, hard thing to let go of.

Maybe it’s good to set a date, a year in the future when you decide this is the year to let this occur. Your farming child should be informed of your decision as to the date and what his or her responsibilities will be then. For example, who borrows the money to farm, what the plantings are going to be, how many head of livestock, etc. and then work towards this date together.

If it seems like your farming child is a little slow on the uptake, remember they’ve had years of practice listening to you and depending on you. But now it’s time to push them out of the nest and see if they can fly.

You also mentioned that you purchased long-term care in the nineties and that you are covered for long-term care. I’ve heard this many a time. “I’ve got long-term care insurance so we don’t need to worry about that!”

When someone says they bought insurance in the nineties, I would bet a hundred dollars that this is what you are insured for – one hundred dollars a day. Everyone bought insurance based on the costs at the time and during the eighties, people bought eighty dollar a day insurance, nineties one hundred dollar a day and in the last decade perhaps two hundred dollars per day.

To be sure you have sufficient coverage, use the average cost of care in North Dakota per North Dakotan receiving long-term care – that average being about eighty-six hundred dollars per month or just under three hundred dollars per day and just over one hundred thousand dollars per year.

If you’re insured for one hundred dollars per day, you have three thousand dollars per month. Add to this your income – Social Security, land rents, and any other income. Remember, if one of you requires care and the other doesn’t, the cost of living for the one out does not drop significantly. He or she will still need to pay for electricity, food, land taxes, etc.

Also, don’t assume Dad won’t end up needing care. With health care getting better, men are now living long enough to require care eventually. They used to only constitute twenty percent of people needing care – now they’ve jumped up to almost forty-three percent. People are just taking a lot longer to die – both male and female.

In your scenario, you’re about fifty thousand dollars per year short from hitting ‘average costs of care.’ You would then take the nest egg you’ve set aside for the other children and divide it by your annual shortage to determine how long your nest egg will last. That’s what you are truly insured for.

Of course, that does mean the kids off the farm will slowly watch their inheritance disappear if you take a long time in care status – whether that’s home care, long-term care or assisted care. That creates a big problem for your farming child someday when s/he has to explain how their inheritance got used while his is still intact – unless you didn’t have a cash sum sitting aside. Then the land would be used too!

“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

Use an LLP, Not an LLC

Written by Michael Baron on . Posted in Farm versus Non-Farm, LLC's & LLP's, Transferring Ownership

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

Phases of Life

Written by Michael Baron on . Posted in Asset Protection, General Estate Planning, Long-Term Care, Transferring Ownership

Dear Michael: We have a good family farm operation. Our son works with us and owns quite a bit of land on his own – although we still own the central properties. He should be able to buy out his siblings share. We’ve also put quite a bit aside into the stock market over the years to go to our non-farming children of which we have two. This sum has grown to a sizable amount – nothing like the farm – but a good amount. We are coming into our seventies now and wonder if the stock market is a good investment for us – and ultimately for our children. Is this a good place to get a good return? – In The Market

Dear In The Market: I can honestly answer you one thing about the stock market and it’s returns in the years to come – no one knows. That includes any expert you want to bring up from Warren Buffet to Jimmy Buffet.

Investment portfolios, over the years, were started by people who were concerned about their retirement income. It has been a good place to put money aside and ride out the ups and downs. The rate of return – for most people with good brokers – has been higher than CD rates – which isn’t saying too much lately.

I think what happens to many people as they go through their phases in life is they forget to change their investments thinking from ‘How much am I going to build up one day?’ to ‘How do I protect this and all of my other assets?’

Everyone should go through a checklist to make certain they are where they should be in their life at any given time.

For example, when I’m young and have debt, I need to check off the ‘If I die, how will this debt be paid off for my family?’

When you reach sixties and seventies, the questions you ask yourself have to shift from building an estate to protecting it. You would have an entirely different checklist to go through.

You might ask yourself ‘Does my farm produce enough income for me and my spouse that we needn’t worry about the future?’ If you can’t, you might think about the fact your lifespan is shortening each day and it might be wise to sell some of your land to your farming son to raise your level of income.

If you have sufficient income to meet your lifestyle, great. Check.

The next item on your checklist might be ‘If we die today or in the future, is their sufficient assets to provide for the non-farming children to give an equitable inheritance to them?’ If not, you and your son need to have a long conversation about what you expect from him to pay his siblings to equal out what you would consider an equitable settlement. Then, if you want to avoid future problems, bring the other children in on the conversation and tell them what you have decided. This keeps Jr. off the hook later when you die.

If you’ve got this handled, great. Check.

Last but not least is having funds like you have now. You’re worried about if they will be enough or continue to grow for your non-farming children? If I were you, I would be more worried if they are still going to be there when you die.

With life spans ever increasing, the percentage of people requiring some type of care – home care, assisted care, facility care – before their death is now up to seventy percent of all people. Many people say ‘Well, I bought nursing home insurance years ago – I’m good’ but what they bought is $100/day coverage when average costs are now at $275.00 per day and growing at 8%. This is like insuring your home for eighty thousand when it will take two hundred thousand to rebuild it. Only your home doesn’t have a seventy percent chance of burning down – but you do.

You should now start positioning your money – if you have sufficient income, got the farm transition handled with your son and other children, etc. – for maximum protection from getting old and the seventy percent chance of needing care. What good is a seven percent return on money that went to pay for long-term care?

As we go through the aging phases of life, we have to address the problems each age brings about. Too many people get stuck in the accumulation phase far too long for their age and end up losing a lot more than just their savings and investments.

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

The Party’s Over

Written by Michael Baron on . Posted in Asset Protection, Equalization, Transferring Ownership

Dear Michael: We haven’t done anything with our wills since the kids were young. We have two children – one farming with us and one who farms next door as she married the neighbor farming child. Our son just got married but our married daughter has three children and been married for over ten years now. We would like to make sure the son has the farmland and equipment and then save up enough money for our daughter to offset what he is getting. We’ve done a good job keeping our farm debt free so it shouldn’t be a problem for our son. What do you see in a situation like this? Haven’t Updated.

Dear Haven’t Updated: Well, the number one problem is that you have an outdated will and if you died today your children would split the property leaving your son in partnership with your daughter.

But, I imagine the reason you haven’t updated is because you really don’t know what to do or what issues you need to face in your estate plan. A lot of people talk about needing to do something, but when they sit down for a chat about it, they don’t come up with the right questions or the right answers so they shelve it for another day, another year, another decade, and so on.

In any case, if you want your son to get the farm, you have to realize being newly married (and likely without any pre-nuptial agreement) that any property going to him could end up in your new daughter in-law’s hands either by the death of your son or by a divorce in the future.

You’ll likely want to design your estate plan so that if either of these two events occurs, the farmland and farm operation would be protected. You can do this by putting a clause in your will or plan that your son must farm until he is a certain age and if he doesn’t, for any reason, then the farmland reverts back to your farming daughter who is a little more established.

We have to remember, we’ve had a decade of good prices and good crops and you were smart and paid off your debt with this extra income. However, going forward, when projections show you could do everything right the next few years and still lose money, then you better consider all the possibilities.

The number one reason for divorce is money – or the lack thereof. You could make a lot of money, but if your family is used to spending more than what you can make, then expect problems.

In fact, money problems are going to be a part of our future. We have a few issues this is going to bring up. Farm debts that haven’t been a part of farming for over a decade will reoccur. A new generation that had it pretty easy will now have to see the other side of the coin when an industry has it’s issues.

All business go through cyclic changes. One day Apple is laying off 120,000 workers and the next year they are experiencing growth. Car manufacturers have years where they can’t keep inventory, the next year they are shutting down factories. This doesn’t just happen in farming, folks.

The interesting thing is when money is easy and farming isn’t difficult, people forget to plan. My business has been slow for the past decade because people didn’t have money problems. Now that the new projections are coming in, and people are starting to realize planting without planning could end up in disaster, business has gotten significantly better.

Money makes the world go around. With it all problems are manageable. Without it, all problems become magnified, especially if you’ve had no experience in dealing with debts or shortfalls in income.

As time goes on, more and more families are going to have to deal with these issues head-on and they’ll need the help of an experienced estate planner.

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

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.