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

Dear Michael: We want to transfer our assets to our children and protect the assets from long-term care. However, one of our children has had a bit of a troubled history with a bankruptcy and two marriages with children from both. How can we be sure if we transfer assets to him these assets won’t be lost? He’s a good kid but seems to make bad decisions. We have three other children and they seem to be financially stable, make good decisions with their lives and with their money and we don’t want to penalize them for one child’s different attitude towards life. What should we do? – One Black and White Sheep.

Dear One Black and White: In a lot of ways, we are all black and white sheep. We all make decisions that have turned out good or turned out bad. How many times do you look back and say ‘I could kick myself for having made THAT decision!” None of us is snow white when it comes to decision making throughout our life.

However, some people do tend to like to live life on the edge more than others. It’s an addiction of sorts – to tempt fate and see if you can come out the other side looking great and having everyone say “Wow, I wish I had seen that coming the way you did – that was awesome!” By believing they can elevate their self-worth by living so close to the edge and making this dream come true, it becomes a lifestyle rather than a once-in-awhile decision.

Fate, however, tends to say ‘If you want to mess with me, the bull, sooner or later you’re going to get the horns.’ Occasionally, the risk-taker is rewarded, but sooner or later the fall off the edge takes away any and all advantages gained in the past – and sometimes even mortgages their future.

Trying to get someone to change from this lifestyle is like banging your head against the wall. They’ve made a decision about this lifestyle and until they see that this lifestyle puts everything at risk – or more likely – this lifestyle has cost them everything and they need to change – they will not change.

In your case, you will have to provide for this type of behavior in your estate plan – not as a punishment but as a protection for the child himself. I once had someone tell me that if he left his estate to his children – both drug addicts – that it would literally kill them. They would then have the money to pay for drugs in the quantity they wanted – with his estate – and with that much money, they would be dead within the year. The only thing keeping them both alive was they were too poor to pay for the drugs in the quantity and amount they desired.

As such, sometimes you have to do what’s best for the child’s situation – and that may be very different than what the child wants.

In this case, you’ll want to segment your estate into shares for each of the four children.

For the child with the issues, you’ll need to plan his share to be handled in a specific way via a trust for these assets in his name and managed by an independent trustee. Putting another child in charge of this trust would be child abuse to the trustee child – who wants to put up with the problems you’ve been putting up with your whole life? A bank trustee doesn’t care if the beneficiary comes and kicks on the door at one o’clock in the morning or calls at all hours of the day or night. It’s better to pay them eight or nine percent of the income than lose one hundred percent of the assets.

Then you can leave instructions in your trust – you design the trust, by the way – so it provides for your child. Perhaps such things as directly purchasing a home – still owned by the trust – but providing shelter to the child. Perhaps income paid out from the assets over a long, long period of time. You can even give the trustee certain reward bonuses – such as no DWI’s for five years – as a reason for the child to receive more. It’s up to you because you design the trust.

You decide what the child will need, provide it in the verbiage of your trust, and then sleep well knowing you’ve done your best.

The other children can receive their assets outright and maybe he’ll kick and scream about that, but you’ll be dead and deep inside he’ll know why you did what you did.

“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

Jack and Alice Wilson came to me to ask some questions about estate planning they were completing in Minnesota. Their attorney had suggested a revocable living trust with half of the estate going to a by-pass or marital trust upon the first death.

“Our attorney suggested the revocable living trust to make certain our large estate – approximately $8,000,000 – does not go through probate and help us avoid taxes” Jack said. “He thought we could use our first Federal exemption of $5,340,000 to put into this trust – upon first death, likely me – so that this amount would grow without taxation to our two children. Neither child farms so it’s really about tax avoidance using the revocable living trust.”

“We have two children who have never showed an interest in farming. We question whether or not they would handle the value we have accumulated wisely” Alice said. “Maybe they would, but their husbands would be a handful. Our attorney told us the revocable trust would help us with this, as well.”

“So, we have two problems here. One, you want to avoid estate taxes and two, you’d like something put together so the two children (or their spouses) can mature into their inheritance, is that about right?” I asked. Both agreed this is where we they want to go with their planning.

I read through the revocable living trust and, curiously, I found nothing about the preservation of assets. There was a lot of legal stuff about splitting the estate upon the first death into two parts for estate taxes, but there was nothing there about the ability – or the taking away of – the children to handle the estate. In fact, they were named as secondary trustees.

But nowhere was it stated when (what age) the children received their inheritance, how they would receive it (lump sum or over time), how they receive it (based on their life circumstances at the time), etc. In other words, it was a nice looking document but left people in charge with no instructions about how to handle things in the event of Jack and/or Alice Wilson’s death, or their inability to handle affairs prior to their death. If I tell my trustees ‘You’re in charge if I am disabled or dead’ I sure want to give them some guidelines about how to handle things.

Also, I asked Jack and Alice “Would your two children or your trustees be able to better handle things upon your death or mental disability with this document? Or does this document just make them more confused and more likely to return to the attorney for help when this situation arises? As far as decisions made during your lifetime, wouldn’t a simple Power of Attorney to the people of your choosing accomplish the same thing as naming trustees today?”

Last but not least, I was confused with the standard document stating half of the estate would go to a by-pass trust upon the first death. This is normally a great feature – unless you happen to live in a state where they have inheritance taxes such as Minnesota.

In Minnesota, there are state taxes. In essence, every person is given a $1,400,000 exemption which rises every year until 2019 when the state exemption reaches $2,000,000 and then stops growing. Estates in excess of this are taxed at a low rate of ten percent and a high rate of sixteen percent. With an estate of eight million dollars, I’m now confused by the language in the trust.

If I put half or four million dollars into a trust to escape estate taxation upon the second death, wouldn’t I incur taxes on the excess (somewhere between two million six hundred thousand and two million) to my estate from the state of Minnesota at the first death?

And if I only put the amount the state of Minnesota allows me to put (the aforementioned amounts) and leave the rest of my estate to my spouse, aren’t I back loading the second death for both Federal and Minnesota taxes? Was that the intent of the legislation was to have people pay ten percent taxes upon the first death to Minnesota to avoid the possible fifty (State and Federal) percent tax rate later on upon the second death?

What it tells me is two things. One, I don’t know the answers for certain and two, a typical will or revocable trust that avoids Federal estate taxes – at least in Minnesota or other states with an estate tax – may not be enough.

“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

Bill and Josie Welch came to me with some interesting questions in their estate planning.

“All of our children have left the farm and now we are renting the land out. However, we have some concerns about how the children will handle the land upon our death” said Bill.

“It’s not just our kids we worry about, but some of their spouses weren’t raised on the land like our children were, and we worry what happens if one of our children dies and leaves the land to their spouse, or gets divorced. What happens then?” Josie asked.

This exact situation arises in every single estate planning case when you have married children – whether they are on the farm or not. It is also the most overlooked aspect of estate planning.

First of all, one has to understand the laws regarding marriage and inheritances. In most states, property owned by one spouse is deemed to be owned by both of them in some part. This would include any inheritances received by either spouse.

The codified law of most states says that upon death or dissolution of the marriage, both partners are entitled to fifty percent of the entirety of the net estate value – even if one of the spouses states in their will they’d like to see the property they inherited from their parents pass to their children rather than to their spouse. The surviving spouse still has marital rights and can claim fifty percent of the decedent spouse’s estate.

Even if the surviving spouse does let the property pass to the children, if the children are minors, the surviving spouse would be their guardian and, as such, still in charge of the property until the children turn age eighteen. In essence, still under his or her control and could be sold, changed or titled differently if they chose to do so as financial guardian.

“I trust my son-in-laws and daughter-in-laws” said Josie. “I think they would do what’s best for the children.”

I always nod my head and agree with them “Of course, you trust your in-laws – they’re the parents of your grandchildren. However, imagine for one second your child is gone and now your in-law comes home with a new husband or wife. Knowing what you know about marital rights, do you realize their new spouse now has the same rights as they once did? That they now own fifty percent of the estate you left behind for your family?”

Now the lights start coming on in Grandpa and Grandma’s eyes when they understand the implications of how property passes from generation to generation and how the act of marriage can divide that property instantly.

“So how do we protect the property from our in-laws – not that we don’t love them – but we don’t want to see our farm get divvied up this way when we die” said Josie.

“I’ve seen other people use either a testamentary trust or an irrevocable trust with a life estate deed” I replied. “As I understand it, the testamentary trust is put into your will so that upon your death, instead of the property passing directly to your children, it goes to a trust created by your will. This trust does not exist until you die or both of you die and only then comes into existence. You can have the property held until your children reach the ages where they are past having divorces, or still have minor children – say age fifty or fifty-five.”

“In other cases, where people want to have their property protected during their lifetimes, I’ve seen where they set up an irrevocable trust today – only with a twist. The irrevocable trust is created today but only to hold the residual deed while Mom and Dad still keep a life estate interest in the property. This qualifies for the five year look back period. Upon their deaths, the property rights – income and use – are passed to the trust and subject to the same terms as the aforementioned testamentary trust.”

“In other words, the only way to truly protect your property from what may or may not happen in your children’s lives is to put it away into a safe place until they are of the age to manage, own and control the property.”
“Keeping the Family Farm in the Family”
Great Plains Diversified Services, Inc.
1424 W. Century Ave., Suite 208
Bismarck, ND 58503-0917
Telephone: 701-255-4079
Fax: 701-255-6106
Toll Free: 1-800-373-4078

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Over the years I’ve always answered questions from readers. I thought, for a change, it would be interesting to do case studies. I’ll give you the parameters of the case I have worked on, what the farmers/ranchers did right or wrong, and what was done to correct the problem.

Case Study #373 – The In-law

Jim and Patrice had bought their family farm from Jim’s father. It had never been easy until the last ten years for Jim and Patrice to make a go of it but they paid off all their loans and retired. During their time farming, they had two sons – David and John – who had worked on the operation. John had issues with substance abuse and eventually quit the farm business. David stuck it out.

As times evolved, Jim and Patrice modified their estate plans many times – putting both boys in, later taking John out, and then setting up the estate plan so that David could see clear to buy out the other non-farming siblings of which there were four. David purchased a million dollar second-to-die policy to facilitate the purchase of the farmland from his siblings.

However, recently David and his spouse have had severe marital problems. David’s wife had decided to move to town and only visited the farm infrequently. Jim and Patrice got the feeling that she was just biding her time until they passed on and David inherited and/or bought the land. At that point, they thought it likely she would then divorce David and take half of the land.

Case Notes: Jim and Patrice had done all of the right things over the years as their farm operation changed and evolved over time. They kept up with their wills, made necessary changes, and kept on top of the situation. David had set himself up financially to buy out his siblings upon his parent’s death with the life insurance. Everything looked to transition smoothly upon Jim and Patrice’s death.

However, the hardest thing to deal with is the unpredictability of people after your death – especially with someone who has marital rights – under state law – to claim fifty percent of his or her spouse’s net worth. If that happens to be one of your children, steps can be taken.

Case Resolution: After working with Jim and Patrice and hearing all of their worries, and working with their attorney, it was decided to take the following steps:

The land would be placed into a trust upon Jim and Patrice’s second death. The trustees would be David and one of the other non-farm children.

David would pay the other children the life insurance proceeds in order to use the farmland – in trust – free of charge other than to meet the necessary costs of ownership – such as land taxes, care, upkeep and maintenance.

Everything in the estate plan would stay the way it was with the key element of David not owning the farmland outright. He and his sibling could make loans against the property in trust as trustees for improvements or further purchases of land to add to the trust.

The property would release from the trust to David only if he were divorced from his current spouse and had been that way for five years. This time period would eliminate any possibility the in-law would file for divorce, wait until David received property and then talked him into a marriage again.

David would receive income from this trust for the remainder of his life – even after he retired from farming. It was stipulated if any of his children should decide to farm they could buy the farmland from the trust at an agreed upon price by the trustees – both David and his sibling – at their discretion for whatever price they decided was fair. If no child farmed, the land would be held in trust until the grandchildren – David’s children – all reached the age of fifty and the land would be disbursed to them at that time ending the trust.

Lesson Learned?: If you don’t ‘trust’ the people who are going to own your property – or have the right to go after your property after your death – use a ‘trust’ in your estate planning to eliminate the problem.

“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:

Thank you for the articles concerning estate planning.  They all are very informative and helpful. We are 64.  We plan to retire fully by age 70.  Our two sons live on the ranch with our older son now managing half of the ranch. Our younger son admits he is not sure if this is the life for him but is making no moves to choose another career, although he finished trade school and has worked off the ranch for a few years.  This year he made the choice to move home and buy heifers.

Six years ago, our married daughter with the idea to be part owner, but her husband hated ranch life.  After two years he said they were leaving.  He was upset with us and now we are still estranged.  We love our daughter and her family. However, we’ve seen out of state relatives with part ownership in some of our lands, which was a headache.  Having alleviated that situation by buying their shares, we do not want to burden our sons with that scenario.

There must be ways to include our daughter and/or her children in our estate without compromising or encumbering the real estate, which we feel belongs to whoever is managing and making their living here.  Any ideas for options to discuss with our attorney and CPA? = Clearly Baffled

Dear Baffled: I’m sorry to hear that things didn’t work out with your daughter, but putting four entities on the farm/ranch operation is going to lead to a lot of conflict – as you found out.

Both your lawyer and your CPA – albeit trusted advisors – are going to expect you to have a plan prior to coming in the door. Until you are ready to draft your plan, your attorney is going to keep sending you home until you do come up with something or, worse yet, send you home with a generic will that doesn’t address your situation.

As you describe your situation, of your three children, it appears your oldest son is the only one ‘truly’ committed to the farm operation. Your second son has come and gone and come back again but it sounds like he doesn’t know exactly what he wants to do with his life. As long as you two are there as referees, the two boys are going to do what you ask of them – but I think if you were gone, sparks might fly there as well.

With all that in mind, you have to devise a plan that protects the integrity of the ranch, first and foremost. Making everyone happy might be a foregone conclusion at this time and the worst possible outcome would be everyone fights it out to the bitter end until the ranch is all gone. Focus on the ranch operation and what it would take for it to succeed and worry second about making everyone happy – because no matter what you do now isn’t going to meet everyone’s expectations.

As such, I would determine exactly what the oldest son would need to succeed in ranching. This normally entails a plan where he can someday own the buildings at the heart of the operation. Perhaps you have another farmstead where you can start preparing for the second son to start building his own operation.

If so, then you’d decide what acres are needed by the first, which ones are needed by the second son and geographically separate them in your will so they make the most sense to the farmstead(s). If there is no other farmstead, then the oldest should be prepared to pay half of the value of the farmstead to the younger son to build his own site – IF he stays in ranching. Your will should state this will happen only if the two sons decide to go their separate ways in the future and both of them ranch and stay in ranching for longer than five years after your death. You might use a trust to own the land after your death – known as testamentary trusts – for the period of time necessary to determine who is serious about ranching and who is not.

Should one of them leave and join their sister as a non-farm heir, then they would receive either a settlement from the ranch operation – a value of your choosing whereby equitable is not equal – and your oldest can decide how he wants to fund this future purchase. Many people use a second to die policy – originally designed for paying estate taxes as there are no death benefits paid until the second spouse dies – when estate taxes are due – but now used more and more to buy out non-ranching heirs.

How you determine the right amount is up to you. I’ve built a ‘sweat equity calculator’ on my home page that might be of assistance when determining the value of the child(ren) who stuck with the farm/ranch operation.

“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:

Reading your last article, you stated a commercial trustee may be a better option for handling our land and mineral assets than having one of our children handle it. Why do you feel this way? – Trust My Family.

Dear Trust My Family: I understand how many people feel about their families. But families are not a static unit as time goes by. People are added and subtracted – due to births, deaths, divorces, etc.

If you have an asset of considerable value that you believe should be held onto – whether that’s land, or minerals, or the right to income from either – regardless of any circumstances in the future – that the long-term value of the income will always offset any purchase price offered – then you need to lock it up somewhere where human emotion is taken out of the equation – this would be an irrevocable trust with a commercial trustee.

Or, if you feel the value of the accumulated income or asset value may sometime put the person in charge of these funds or asset value may place them in a compromising situation in the future, then use someone who follows your instructions to the letter as to what you want to see happen.

For example, many people have mineral trusts and these trusts merely hold the mineral and all of the income is disbursed from this trust. This protects the mineral value from inclusion for estate taxes upon your death (less any Unified Credit lost for gifting to the trust originally). It also provides a vessel to accumulate and distribute these funds.

As long as you are alive, there is oversight and there is accountability in these trusts – in most cases. The rare case where this wouldn’t be is if you experience some type of dementia or physical disability that limits you from being able to care whether or not there is oversight and accountability.

However, again, upon your death, the biggest complaint I hear from beneficiaries of trusts is “I don’t know what’s happening with the trust. My (brother – sister) runs the trust and just sends checks out. I don’t know what’s coming in and I don’t know what’s going out and I don’t know if everything is as it should be. I ask and ask, but they refuse to send out any information”.

Again, if you mandate that each beneficiary of your trust is to receive an (annual, quarterly, monthly) statement from your commercial trust, they will receive their statements – including any and all information you decide they disclose.

This not only happens with the current beneficiaries, it happens with all subsequent beneficiaries. Your commercial trust is run by bank appointed trustees. If the trustee becomes injured, or retires, or dies, they have another person to step up and do the job you entrusted them to do – because they are bound by law to follow those instructions.

What happens if they don’t follow these instructions?

For a personal trustee, beneficiaries are left to sue the trustee (their brother, sister, etc.) and hold them personally responsible for any losses to the trust. I’ve run across many situations where beneficiaries have come to me to see how they can recoup losses incurred by their sibling and when I tell them they’ll have to personally sue them, best case scenario, or bring in the officials and they could be arrested and charged, many beneficiaries don’t see this as a win situation.

Most people tell me ‘Well, the reason they mismanaged or took part of the money is they had money problems themselves. If I went after them in court, it’d be like getting blood out of a turnip. Why put him or her in jail over this when I’ll never see a dime’.

In the case of a commercial trustee, if the assets are mismanaged or mishandled, the bank is bonded against such occurrences and, yes, they will have the deep pockets between the bonding and their own net value to make up any losses. Hence the reason for the major oversight by the bank itself over it’s own trust department.

If you feel the assets will go to your children upon your death, then maybe the personal trustee is the way to go. If you want the asset and/or the income thereof to go on for two or more generations, then perhaps a hard look at commercial trusts is the way to go. For those people who say ‘When I’m dead, it doesn’t really matter’ then maybe you don’t need a trust at all.

“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 read your last column regarding commercial trustees. We’ve always heard these horror stories about commercial trustees who don’t manage the assets properly, or who charge such high fees and the beneficiaries don’t get anything from the income, or who just plain don’t pay attention to the assets in the trust and we would have been better off just having one of our children do it for nothing. Wouldn’t it be a lot cheaper to have one of the children be our trustee? – Trust In Kids.

Dear Trust in Kids: There are two types of trusts – revocable and irrevocable. Revocable trusts are run by the parents and then the trusteeship is passed on to one or more children after your death. Irrevocable trusts are either living – made during your lifetime – or testamentary, which are created by your will and only come into being once you die.

It would be cheaper – in the short run – to have one of your children act as a trustee. However, for anyone who has done this work for their parents – and received nothing for it – you realize this is not a great job to have.

You must take care of all of the taxes including filing income tax statements for the trust, make sure property insurances are paid, make sure the payments of income are received and distributed. In short you, as a personal trustee, get to do what you would have done as if you owned the property outright. It’s just that you don’t get paid for it.

That being said, many personal trustees would and still do a fine job. However, no matter how well you, as a trustee, do things, some of the beneficiaries are going to disagree with what the trustee is doing – whether it’s the rent charged or how the property is managed, or ‘why isn’t it sold so I can take my money out?’ It’s a thankless, time consuming job and at best, you’re not going to make everyone happy all of the time, and you get paid nothing for doing it – in most cases. If you do get paid, then the other beneficiaries are questioning why you get more. It’s a no-win situation. One way to mitigate this grief for the trustee is to name co-trustees (two children) to your trust so as to ‘spread the blame’ if you have an issue with one of the beneficiaries.

Many people are setting up testamentary trusts in their will and leaving their children as trustees. However, with lifespans increasing, many trustees are well into their sixties and seventies when they take the the job of trustee on after the death of Dad and Mom. If you have a trust that spans a few generations, you know sooner or later this trustee may be incapable, unwilling or unable to perform the duties of a trustee. Most testamentary trusts created in wills have no backup plan in the event this happens and now we have mass confusion as to who is to be the trustee.

Then what? Do you name one or two of the grandchildren to act as trustee should your first line of trustees is now incapable of handling the duties? Are the grandchildren mature enough, seasoned enough or as attached to the family farm as your children were?

There’s a line in ‘The Godfather’ – ‘I’m gonna make him an offer he can’t refuse’ spoken by Marlon Brando. The reason I bring this up is farmland and minerals and other assets have now risen in value to the point in our area that there’s a lot people making ‘offers he’s not gonna refuse’. If someone comes to you – as a trustee – and tells you that he’s going to make you a multi-millionaire if you sell the property to him, how many grandchildren in this third generation are not going to bend to that pressure?

Here is the difference between a commercial trustee and a private or personal trustee. If you tell a commercial trustee they cannot sell the land, they cannot sell the land, period. If you make your children – and all the unknown trustees who fill in for your children as time marches on – as trustees, the chances your trust will stay intact are fifty/fifty.

Many people have a safe deposit box and they pay the fee for storing their valuables. A trust through a bank is a great big safe deposit box where you can store your land, your minerals, your most long-term valuables you own – and the key as to how they come out, when they come out, and to whom is held by a commercial trustee based on what you’ve told the trust department to do. You make the key!

Next issue, we’ll talk about mineral trusts and why minerals – as well as farmland – have become such valuable Legacy trust assets and in a cash business like minerals, you probably want professional management.

“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