Is it possible to be fair and equal when equal isn’t fair?
Estate planning for farm families is much different from planning for most other people. The nature of their assets and the unique values associated with farm life combine to create special challenges.
Bill, 74, and Mary, 72 have four children, all married with children of their own. John moved to St. Louis for a career as an engineer. Julie and her husband are teachers in Iowa. Susan is a homemaker, her husband an autoworker. Tom, age 48, has devoted his adult life to working on the farm. He earns about half of his living working with Bill, the other half by farming ground rented from neighbors and his own 80 acres.
Bill & Mary own 480 acres worth $2,200,000, including their home with the grain facility and another building site where Tom’s family lives and where Bill & Tom feed livestock. They also have $425,000 in liquid investments.
Start At the End
Estate planning must “begin with the end in mind.” What is the result Bill & Mary hope to achieve?
Bill wants to assure that Tom inherits the farm and their equipment, “because he deserves it.” Mary insists that all four children receive an ‘equal’ inheritance. They want to pay as little estate tax as possible, and want whatever each heir inherits to be protected from divorces (“just in case”) and catastrophic creditors (i.e. lawsuits: “one of them is bound to be sued someday!”)
No will or living trust that says “divide our estate equally among our children” will meet these goals, so what should we do, throw up our hands? Of course not. Its time to sit down with experienced professionals and look at the planning alternatives.
A Possible Plan Design
So that’s what Bill, Mary and Tom do. Here is one way they could proceed. First, they reconsider the way Tom is paid, so what might have been his retirement money is kept by the folks to help fund his eventual acquisition of the farm. Next they form a “Land Acquisition Trust” (LAT) and start contributing $40,000 per year to it, $25,000 of their own funds plus $15,000 of what Tom used to earn. They ask the LAT trustee to invest the funds to be entirely tax free, with a guaranteed that it will grow to $2,000,000 by the time Bill & Mary both die; then the LAT says the proceeds will go to Tom.
Finally, they create Living Trusts stating that upon death, $25,000 times the number of years they contributed money to the LAT will be given to the three non-farming children; everything else, including their land, will be divided equally among the four children with the stipulation that the non-farm children must sell their share of the land to Tom for market value.
Measuring the Results
Say they live 14 more years, earning $110,000 per year from farm and investment income. During these years they review the plan and update the details yearly. Of their liquid investments, they deplete $100,000 to cover the gifts to the LAT during lean years. The land appreciates to $3,000,000. After their deaths, Tom receives the $2,000,000 from the LAT and inherits one-fourth of the land. The non-farm kids get three quarters of the land and $350,000 (what the parents put in the LAT). The small remaining funds are split equally, after funerals and administration expenses. Tom uses the LAT money plus $200,000 he can easily borrow to buy the land from the other three.
The purchase of the land from his siblings causes no capital gain tax. The investment in the LAT is free of any taxes. If the estate tax exemption at the folks’ death is at least $2,000,000 (as in 2006) there will be no estate tax to pay. Everything that goes to the children can be protected from divorce or lawsuits by terms included in the LAT and Living Trusts.
In recent articles we addressed the importance of getting started on estate planning, finding the right professionals to help you, and the protections available by transferring assets to heirs in trust. This month’s case study is very general and overly simplified, only intended to illustrate one possible plan design. It won’t quite fit anyone as is! Let this example get you started, but work with counselling oriented professionals to tailor the plan to your unique family.
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Article authored by Curt W. Ferguson and originally published in the Prairie Farmer magazine, April 2006 issue
