Adding Value

Written by BooAdmin on . Posted in Uncategorized

Dear Michael: I have been working on my parent’s farm since I got out of college. At the time I returned, my dad was still using old farming methods and his crop production showed it. I learned in school about no-till farming and other methods of bringing up his crop production. Because of this, the land he owned – and the land that was added since then – has doubled in production and, of course, doubled in value. Actually, it’s gone up fourfold since then. My parents still hem and haw about what to do with their will and I’m still not sure if they even have a will. If they should die now, I’d have to buy out my four brothers and sisters. With the price of land the way it is, I’m not certain I could do that? Was helping them out the worst decision I ever made? – My Own Worst Enemy. 
 
Dear My Own Worst Enemy: The cryptic answer to your question of ‘could I even afford to buy them out?’ is ‘No, you couldn’t’. 
 
In order to buy them out, lenders will require you to have at least a forty-five percent ownership stake in what you own versus what you are buying. In other words, if you are buying one million dollars’ worth of property, you’d better have four hundred and fifty thousand dollars net worth to put on the line with this purchase. 
 
If you are buying out an eighty percent share from your siblings with no offsetting equity, it’s going to be a short visit with your lender. 
 
Many young people fail to see this upcoming disaster looming in the future due to their parents’ inability or unwillingness to deal with this situation. In most cases, because parents don’t really have a handle on what they should be doing, they put it off and wait to see if the answers become clearer down the road. 
 
Some questions they may have are ‘Will you ever get married?’ If you are married ‘Is the woman our son married to invested in the farm’. ‘What happens if they have a divorce?’ ‘Is our son committed to farming the way we are (were) committed to farming?’ ‘If he should die, where does the farm go then?’ 
 
Other questions rolling around are ‘How can we be fair and equitable to the other children in our estate plan?’ Many people today are absolutely frozen waiting to see what land values do in the future. Many believe they will drop. Historically, this would be an unusual event unless we see a repeat of the eighties – eighteen percent interest, crop prices at record lows, embargos, a national fuel crisis, inadequate crop insurance – all rolled into a five year period of time.
 
We are a far, far cry from eighteen percent interest as this was brought on by run-away inflation during the early eighties. It was an unprecedented event and our government handled it poorly by raising interest rates to unbelievable highs. They learned a valuable economic lesson. 
 
Land prices will always be a function of profitability and with crop prices decreasing (inevitably the seven year drought was going to break which occurred through the breadbasket of our country) we will see stabilization of land values across the country. 
 
In your specific case, however, it really doesn’t matter what the FMV of land is or is going to be. It will be whatever your parents will states you will pay for the land – or pay to your siblings. With no will or an old, outdated will, this will be the auction value of the land as an auction is the only true way to establish the value of land on any given day. Unless you have millions of dollars in equity – as will other buyers who will be there have – you’re not even going to make it to the second round of bidding. 
 
Let’s take a lesson from our government. Right now, they are stuck with two very radically different viewpoints refusing to cooperate and run our government efficiently. Stuck in limbo, we all suffer the consequences. 
 
You, stuck in your parent’s limbo, have the same issues and the same dire consequences ahead of you. You should be rewarded for coming back and increasing the value of your parents estate – and being a part of increasing the holdings of the estate with your labor and knowledge. 
 
But if your parents refuse or procrastinate on working with you, their partner in the operation, you better start building your own estate – land, machinery, buildings, and/or livestock – outside your parents estate to make certain you have the equity necessary to buy what you can at the time of their deaths. 
 
Sometimes you’re given a long time to accomplish this – sometimes not. I’ve always said the average farm career is about forty-five years (age twenty to sixty-five – give or take). If you’re now forty, your opportunities for income are now down to twenty-five years and each progressive year without planning, the margin gets thinner and thinner for success. 
 
“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

Failing to Plan is a Choice Too!

Written by BooAdmin on . Posted in Uncategorized

Dear Michael:

We are long-time readers and appreciate your opinions on farm and ranch estate planning. It seems like every time we sit down and get serious about putting together a plan or putting things down in writing, for example, a will, something appears about ready to change or has changed and we haven’t had time to see the outcome of these changes. For example, our son just moved back home, but we don’t know if farming is the life for him. So, we just sit on our hands or put it off until another time. Perhaps this isn’t the right thing to do, but what else can we do? – Procrastinating to a Clearer Future.

Dear Procrastination: I looked on Google about famous quotes on ‘procrastination’ to find one that was appropriate and, to my amazement, there are millions of them online. So, although no one seems to find time in their days to finish their work, or planning, in this case, they seem to have the time to think about it. I did find the one: What may be done at any time will be done at no time. ~Scottish Proverb

If there was ever a perfect year for procrastination – and reasons for procrastination – this year would qualify. Rains came early in the planting season and lasted until late June. Then, it started raining at harvest time and every day of rain is two days of waiting for it to dry.

On the other hand, we’ve had 260 traffic fatalities in North Dakota in the past eight months, which is about a two hundred percent increase from six years ago.

Reading the paper lately makes one wonder about all the other weird and, oftentimes not so wonderful stuff occurring in our state since the boom. If I were driving north of Dickinson or west of Minot, it may be appropriate to wear a helmet – while you’re in your car.

When I drive around Bismarck these days, I notice most drivers are doing everything but actually driving the car these days. Close calls used to happen to me once or twice a year – now it’s more like once a week.

In any case, back to your question, planning for any big event seldom has a perfect day to start. If you waited for the perfect person and situation to get married, you likely would never have gotten married. If you had waited for the perfect time to have children, financially, emotionally, etc. you likely wouldn’t have any children. If you waited for the perfect time to acquire the first piece, or second piece or whatever piece of property you’re working on now, you never would have started in farming or ranching.

One of the main reasons people put things off in estate planning is waiting for a clearer picture of the future. You likely didn’t do this when you got married, or had children, or bought into the family farm, or added on to it, etc. but now that it’s time to actually sit down and plan for it, you’re unsure what to do.

The perfect estate plan covers all the ‘what if’s’ of estate planning. ‘What if’ your spouse should die? What things should they be doing? The answers are quite different whether it’s the farming husband who dies and the non-farming wife is left? This is one of the first questions I ask people and about ninety percent of these couples have never had this conversation and you’d be amazed at how differently they think about what they ‘guess’ should happen. You’d swear these are two strangers who just met on the street when you listen to the answers.

Your estate plan should also include ‘what if one of the children should decide to farm?’ Some families have candidates – other’s do not – some have too many.

Answers to these should be worded very carefully. For example, ‘if my farming child has taken over the family farm, and is ‘actively participating’ in farming for a  minimum period of at least five years, then s/he can rent or buy the land from their siblings at such and such a rate or valuation. The terms may be (contract for deed, cash within six months, etc.).

In other words, if we focus on the family farm as a business and have the proper verbiage to meet all and any considerations for the family farm to continue, we’ve just removed a big reason for you not to complete your farm estate planning. We maybe don’t know who or when or how, but we can put the verbiage in there so they can survive.

One thing is certain, if you put nothing in your plan about how the family farm will survive, you fall under the old saying ‘people don’t plan to fail, they just fail to plan’ and fail your family farm will.

It’s a simple question – if you could plan for a successful future or you could choose not to plan and guarantee failure, which would you choose?

“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

Dividing the Farm Equitably

Written by BooAdmin on . Posted in Uncategorized

Dear Michael:

We read with some interest about your booklet your developing to help families determine how much of the farm should go to the farming child – their sweat equity in the operation – and what goes, then, to the other children.

We don’t have a current will. In fact, we don’t have a will at all. Will this booklet help us to understand our current situation and where we need to be in the future? How hard it is to fill out? – Back in School?

Dear Back in School? – Let’s just say, for the time being, this booklet will be a patient process. You’ll need to remember what you had before your farm heir started and what you’ve added since that time when s/he participated in the growth of the farm.

We then get into three different equations in the booklet. The first part of the booklet gets into situations – such as yours – where either you have no will or you have an outdated will from when the kids were young. You probably have the old standby ‘everything goes to my spouse and if they pre-decease me, then shared equally between all of my children’.

You use this section to fill in what happens when you die with this type of will – or no will. The farm assets will be divided equally between all of the children and the non-farm assets – such as savings, life insurance, and non-farm real estate – will also be divided equally between all of the children.

The question then asks ‘If your farm heir only receives this amount in farm assets and has to use his or her share of the non-farm assets to buy back the non-farming children’s share of the farm assets from the non-farm assets, what are his or her chances of making it?’ Many people, when they see these numbers, realize it’s impossible for the farming heir to make a go of it.

Oftentimes, I will then see a swing to other side and my clients will say ‘What happens if I give all of the farm assets to our farming child and the non-farming assets to our non-farming children divided equally between them?’

We then have a section to fill out where you can do just that. You put all of the farm assets into the farming child’s name and divide the non-farm assets between the other children.

For some people, they have sufficient non-farm assets to provide for the non-farming children. In other cases, due to the high inflation of farmland and other assets in farming in the past decade, the amount the farming child receives dwarfs the amount the non-farming children receive. Oftentimes, the non-farming children are getting less than five percent of the entire estate while the farm child receives eighty, eighty-five, ninety percent or more of your entire family estate. Most couples would look at this and say ‘That’s not fair to the other children!’

As usual, the answer always lies somewhere in between these two extremes – the farm child getting all of the farm assets or sharing equally with his or her siblings. Now we have the two extremes in black and white – extremes eighty percent of farm families already have in their wills.

In the first section of the booklet, we have some formulas to use such as how many years has your farm child worked with you and does s/he deserve a portion of the total value today, or a portion of the value added since s/he started, or various formulas you’d like to use. You’ll come up with a number as to what you feel the farming heir rightfully earned from his or her participation in the farming operation over the years.

We then have a third box – and this one accounts for the share earned by the farming heir. It takes the total amount of assets – puts the farm assets earned by the farm heir into his or her column – and then you can divide the remaining farm and non-farm assets equally. Some people might find the farm heir needs to prepare to buy out the percentage his siblings receive. You can then play with the formulas to determine the right balance.

The next section is the solution section – whether your farm child uses a contract for deed, outright purchase, rents, etc. We’ll get into that the next article.

The good news is this booklet is almost ready for mail use. The really good news is that it will soon be on our website where you can just log in, put in your farm and non-farm asset values, and it will fill out the rest automatically. The bad news is this on-line version is about two weeks away yet from the time of this article. It should be ready right around Halloween – we hope.

For those of you who like to fill stuff out on the computer and have the computer do the work for you, send us your email at info@greatplainsdiversifiedservices.com and we’ll let you know when we have this functioning. For those who prefer to fill things out by hand and do your own math, either email us at this same address or call and we’ll mail one out to you.

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

Welcome

Written by Michael Baron on . Posted in Uncategorized

Welcome to Great Plains Diversified Services On-line version of Michael Baron’s Column, Keeping the Family Farm in the Family. Create your own user name and password in order to ask questions or leave a post if you desire to comment. All posts will be reviewed before being added to the website.

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.