Road Map to Success

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Case #905

Written by Michael Baron on . Posted in Farm versus Non-Farm, General Estate Planning, Transferring Ownership

Brad and Deanna Diggs came to me with the following questions.

“Our son, Brad Jr., has been farming with us for a few years,” Brad told me. “He worked out for a while and then decided he wanted to make a career of farming so he’s been back only two years. He doesn’t own anything yet and we’ve just been paying him wages.”

Deanna said “We have three other children who have also helped us – when they were home – to keep our farm running through the tough years. All of them worked hard on the farm while they were here. We don’t think it’s fair that the other children – at this point – would receive substantially less from our estate!”

Brad said “In a few years or so, maybe Jr. should get more, but as of right now, we don’t think it would be right to give him the farm and the other children nothing. We have a lot of value in land, machinery and some livestock, but we don’t have a lot in savings or retirement funds to give to the non-farming children.”

“Being Jr. is relatively new to this agri-business,” I told them “you might want to consider all parts of your operation separately. If something happens to Brad Sr., what are your plans for the machinery and livestock with Jr.? Is he going to buy it from Deanna, rent with an option to own, lease? How about the cows? Does Jr. like the livestock end of it?”

“Well, he wasn’t too thrilled with cows when he left the farm, but prices being what they are, he’s paying a lot more attention to them now,” said Brad.

“So, he’s understanding more and more of the varied income aspects of the business?” Brad nodded and I continued “So, he’s starting to grow into what the business of farming is all about?” Again Brad nodded in affirmation.

“We don’t mind if the other kids don’t receive any of the cattle or machinery,” Brad said, “but we think all of the children should receive an equal share of the land. We can always set a rate on the land low enough so Jr. can make it.”

“You can set the rent rate low enough so Jr. can make it,” I told Brad and Deanna. “However, if you’re a normal human being – as I’m sure you’re non-farming children are – and you know you own one-quarter of something that’s worth say two million dollars but you’re only receiving one-quarter of the rent amounting to say twelve thousand a year total, what’s your inclination going to be? Keep taking the rent forever at a low rate or cash in and take the half million dollars?”

Deanna said “Well, the girls would likely let Jr. rent for that amount and be happy, but our other son has a tendency to spend more than he makes. I’d worry about him – and I’m not so sure of our son-in-laws either.”

I stated “That’s the problem with moving such a large amount of asset value to people and then expecting them – or forcing them – to take a low return on this value. Sooner or later, either one of the children is going to decide to cash out, or one of them is going to get divorced, or one of them is going to have their spouse tell them to sell, or someone’s going to die and their heirs likely wouldn’t feel bound by the instructions you left in your will!”

“The other side of the issue is this,” I said, “If Jr. rents for his entire life – renting seventy-five percent of the property, he has three issues. One, he can get outvoted by the majority at any time regarding the property. Two, if he doesn’t have at least fifty-five percent ownership in the property he won’t be able to get loans very easily as bankers use this mark of debt to asset ratio. Three, even if he’s able to survive all the previous things, he’s going to have to retire on one-quarter of the assets you now have. That’s a tough row to hoe.”

“Jr. should buy enough second-to-die life insurance on you two so he at least gets a fifty-five percent ratio with his siblings. This will give him majority rule. It will allow him to get land loans, and he will be able to eventually buy out the others. Insurance is expensive but it’s only one one-hundredth of the cost of waiting to buy everyone else out. Get a business plan together with Jr. and then ensure that plan will work. Otherwise, you’re giving your farming son a very, very uncertain future.”

After comparing the insurance costs – lifetime – versus the cost of Jr. buying everyone else out, they agreed it would be a good idea for Jr. to insure his future.

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

Case #277 – A Path to Follow

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

Cecil and Marge Fusco came to visit with me about their situation. Like many couples, they had a child farming with them for a few years but had no idea how the process needs to unfold.

Cecil said “We have a son who farms with us, newly married with no children but he’s been working with us for some time. We’re just not sure if his wife is truly devoted to the family farm. We’d like to help him out with some things, but we’re unsure how to start.”

Marge chipped in “She’s a very nice girl – she just doesn’t come from a farm background. She’s got a good job but she doesn’t help out at home much. They seem very happy – but you never know!”

“This is just my opinion, Cecil and Marge, but I think the stereotypical farm wife may have gone away. If the two of them are happy and both feel like they are contributing to the overall success of building their life together and having a family together, the fact she doesn’t come out and milk feed the calves shouldn’t be held against her. Who knows – maybe cows scare her, if she didn’t grow up around them!”

“Secondly, if she has a good job and brings income home to be shared between the two of them, it is going to be more beneficial long-term than spending time with the cows. When you start transferring assets – a process you should begin now – your son isn’t always going to have income year to year to pay both you and for his family. Thank God she has the extra income!”

“I suppose that’s true,” Cecil agreed and Marge nodded along with him. “We’re just so used to the way things were. Marge here has been my right-hand woman for years. We thought our boy could use the same. But, we know times can get tough and many women support the men and their families on the farm. So how do we begin transferring things without it causing huge issues on the farm?”

“Start small, Cecil and Marge. If you’ve got a cattle operation, let your son keep some of the replacement cows to start building farm/ranch income. However, along with this new income give him new financial responsibilities as well. Let him pay for a share of the next piece of equipment. Let him use the income to expand the herd – if you’ve got room for it. Give him more income, but make sure he uses this new income to reinvest in his future in agriculture.”

“If a piece of equipment needs replacing, figure out how many calves he’s going to need to pay for a share – or all of it. The more he invests in the farm, the more he’s going to put long-time roots down on your family farm. If you’ve got a grain operation, you can ‘rent’ some of your land – or share rented land with your son – but make certain he reinvests, again, back into the farm.”

“Too many people wait until they are ready to retire to start moving assets. This just leads to huge complications, as we’ve got a couple with a mountain of assets going to a child with no credit history.”

“Last but not least, develop an estate plan that shows your son he is an integral part of the plan – whether you live, whether you die, or whether you get sick for a long time. He has to understand that you have a plan for the future and he needs to know what his place is in this plan should any of these things occur.”

“He also needs to know what happens in the event he takes over and then changes his mind afterwards to the assets he’s received. He’s got to stick with the plan for a period of time or the deals off. This also has to be part of your estate plan.”

You could see the light was coming on in Cecil and Marge’s eyes as they nodded along with me. “I can see we need to take a new, fresh look at everything,” Cecil said. “Maybe we haven’t given our son – or our daughter-in-law – enough of a track to follow or told them our plans for them. We need a day to day, year to year plan as well as a plan in case something happens to one or both of us and we need to share it with them!”

“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

Case #443 – Once Begun

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

Bill and Patty Bridgewater came to see me. Like many farm couples, they had no idea where to start.

Bill said “We’ve just been working at building our farm for so many years we really never paid attention to what would happen to it someday. Most years, we were concerned with farming for another year let alone worrying about a future past that!”

Patty chimed in “During the eighties and nineties, we faced so many different challenges – low prices, high interest rates, no crops – but somehow we made it through to today. But after focusing for so long on keeping going, we’re not sure how to plan to stop. We have absolutely no idea where we go from here.”

This is pretty typical for most of the families who come to visit me for counseling. They’ve been so focused on not going out of business for so long, it feels foreign to do planning for all of the things they’ve built. Many people want to just take a little rest period in between building and planning to stop. However, men are typically sixty-five plus by then and about eighteen percent of them don’t make it through the next five years.

Having absolutely no idea where to go from here is not a great excuse to do nothing and many farm families pay the consequences of not taking some action.

I told Bill and Patty “The first thing we need to do is quantify what you have today. We have an easy to fill out Confidential Survey (click here for link) that lists everything from land to machinery to savings and retirement accounts.”

Continuing on “Now, when you fill out the land value section, there’s going to be three values you can put down. There’s the value your banker thinks it should be, there’s the value you think it should be and then there’s the value of land sold close by you in auction recently. These are going to be widely varying numbers and we can talk about what the value really is.”

“The next item, Bill and Patty, is a simple question. Is someone in your family farming now or have a desire to farm or has everyone gone on to different careers that do not involve farming and no one in your lineage will ever farm?”

Patty said “Our youngest, Sam, has always said he wanted to try farming, but he and his dad could never work together. Perhaps if Bill were ‘retired,’ Sam would be interested in coming back.”

Bill, with a wistful look on his face said “You know, when times were hard, I had to be hard too. I might have, just by my attitude, chased one or more of the kids off the place because I didn’t want them to go through what I was going through. I might have done too good of a job at it!” he said ruefully.

I explained to Bill and Mary “We are all different people at different times in our life. I don’t feel the same way, I don’t think the same way, and I don’t have the attitudes I did as when I was twenty-five or thirty-five or forty-five. I have evolved, changed, learned, learned not to, and so forth throughout my life. I am not the same person I was ten years ago, twenty years ago, etc.”

“The same is true for you, Bill and Mary, and the same will be true for Sam. We don’t know exactly when Sam will get the option to farm. We don’t know what Sam will be facing at that point of his life. Maybe he’ll be ready, maybe he’ll want to stay where he’s at because of what he feels and/or faces at the time, what his wife and children think and these attitudes all change as time passes. The twenty-five year old Sam is going to be different from the thirty or forty-year old Sam.”

“However, if you want Sam to have the ‘option’ to farm, we have to build that into your estate plan now. We have to have some verbiage whereby he can buy the machinery, rent the land or buy the land or somehow acquire this business either from you while you’re alive or from his siblings should you die. If we don’t have the ‘option’ built in, he’ll never be able to farm just inheriting his ‘share’ of the land and be at the mercy of his sibling’s wants and desires.”

“You’ve gone through phases and your estate planning has to keep up with those ‘phases’ as well – just like you do with your crop plantings, new farm practices, and evolution of your farm business. Like everything else, taking the first step is the hardest and things always get easier. To quote ‘A journey once begun is half done’ so just start somewhere.”

“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

Case #431

Written by Michael Baron on . Posted in Farm versus Non-Farm, General Estate Planning, Transferring Ownership

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Case #1332

Written by Michael Baron on . Posted in Transferring Ownership

Robert and Kelly Fuller set up a meeting with me regarding their estate plan.

‘We’re getting close to sixty and we don’t even have a will in place. We have some debts but our assets have grown considerably in the past ten years. Our son came back to work in the operation although he’s still working off of the farm. We have two other children. I guess the main reason we haven’t done anything is we don’t know quite what to do!’

‘You see, our son is quite young’ Kelly explained. ‘Just married five years with two kids. Our other two children should be treated fairly if something should happen to us. We don’t want to leave them out. And yet, in order for our son to make it, he’s going to need most or all of the farm and ranch. We just don’t feel like there’s enough to go around.’

Robert and Kelly showed me what they had in assets and liabilities – the first step in estate planning – quantifying.

Based on their assets and liabilities, they were in a strong position – about a ten percent debt to asset ratio.

However, if they had no will or a will that divided the assets between all of the children, their son would have been left with all of the liabilities and only one-third of the remaining assets. With a quick calculation, it was easy to see that the son would be in about a sixty percent debt to asset ratio upon their death – even if they left the machinery to him.

Then Robert came up with the all-time end-of-the-farm line I hear almost all the time.

‘Well, we started with less than nothing and we made it,’ Robert said.

I’ve heard this line umpteen times in my career and I always want to turn to the farming child and yell ‘Run!!’

‘We had to buy cows from my folks and eventually we bought the land on a contract for deed from dad. If our son receives this much money (which on paper was a considerable amount), he should be able to make a go of it. He can rent the land from his siblings, buy out their share of the cows and he should make it – same as we did!’ Robert stated.

I think somewhere deep down inside all farming parents there is an overwhelming sense of pride that they came from a very lowly situation, pulled themselves up by their bootstraps, and became a success. Most elderly couples today had to work with difficult parents, through many difficult times (the eighties) and they have a real sense of well-deserved pride of what their farm is today.

Because they are so proud of this prize, many parents feel like their farming child should have to go through the same process of suffering, of worrying about crops, about farm prices and inputs, and ‘if they work hard enough like we did’ they too will enjoy the fruits of their choice of agriculture as a career. This is not an abnormal human feeling to want the next generation to ‘prove themselves’ before handing over the reins to the kingdom.

The fact is, today the average family cannot get by with a half a beef every six months, vegetables from the garden canned for the winter, and selling enough to keep shoes on the kids. It was a nice time – a much, much simpler time, for certain, when farms transitioned in generations before.

Today’s farms are not communal acreages producing just sufficient food and support for its inhabitants. Today’s farms are big businesses and subject to big business obligation and rules. For example, if their son walked into the bank and told the banker ‘I’m seventy percent in debt and I need an operating loan, please.’ He’s going to get a cup of coffee and a cookie, but no loan. His farming career is over before it’s begun. Just ‘working hard enough’ is not going to keep this business going.

People need to adapt to the thought of ‘how things were’ to ‘how things are’ in agriculture and plan accordingly. What your parents did for you isn’t going to work in agri-business today. Hanging onto the thought of how your Dad and Mom did it is really just hanging the farm out to dry.

Wake up. Realize the incredible value in your farm operation and make the best business decisions as to how this business is going to survive. Let go of what was. This is what it is now. Welcome to the big leagues!

“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

Case #8548

Written by Michael Baron on . Posted in Asset Protection, Life Estate, Planning Documents, Transferring Ownership

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

Case #1747

Written by Michael Baron on . Posted in Farm versus Non-Farm, Long-Term Care, Transferring Ownership

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Case #1434

Written by Michael Baron on . Posted in Farm versus Non-Farm, General Estate Planning, Transferring Ownership

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.