Articles

Old MacDonald Had a Farm, His Children Had a Fight

 JANUARY 7, 2014 

 

Nothing gives rise to a family fight as quickly as a family farm.  Even if none of the children farm, they will have different views about how to deal with their farm inheritance. If two or more children inherit a farm, some will want to sell it immediately, especially at today’s prices.   Some will agree to sell it but will only want to sell it to someone who will steward it carefully, like a long-time tenant or a family friend.  Some will want to keep it in the family, for economic reasons, emotional reasons or both.

 

Hopefully, the children can settle their differences, but sometimes they cannot.  Even if they settle their differences without resort to lawyers and litigation, the settlement process may affect their relationship with each other.  Without living parents to provide the glue, the family fabric may unravel as a result of the children’s shared farm inheritance.

 

Things can be even more complicated when one or more of the children do farm the land – or the land next door.  Often the farm child has put significant “sweat equity” into the farm, assuming that he will own it some day.  Sometimes the farm child and the parents share equipment or run their operations together, regardless of the fact that they each own different parcels.

 

If the farm parents die and have no Wills, all of their children will split their wealth. That means that each child will inherit the same interest in the land, whether the child actually farms it or whether the child lives inNew York Cityand doesn’t even come back toIowafor the Fair.

 

If theNew York Citychild wants to sell the land and gets his or her siblings to share that view, the land will be sold.  The farm child can buy it from his or her siblings, but he or she may not be able to afford it.  That could easily be the case if there are neighbors who want to bid on the land because it adjoins their own operations.  In another scenario, the farm child may buy the land but overreach to do it.  With a few bad crop years, the land could then be lost to foreclosure.  Under either scenario, the family relationship may already be lost.

 

A farmer with significant holdings can address these issues in a Will, but unfortunately, many farmers don’t.  In part, that is because there are no easy solutions.  It is natural to give the land to the child who has helped farm it – especially if that child has children of his own who may some day want to farm.  However, it takes a Will to make that happen.  If the parents have no Will, the farm child may end up with nothing to show for his hard work on the farm.

 

But, if the farm child gets the land, what do the other children get? Even if the children all love each other, family relationships can easily be strained if one child inherits millions of dollars of farmland and the others inherit little or nothing.  Similar strain can occur if the non-farm children inherit the equipment and decide to sell it, thereby crippling the farm child’s operation.

 

How about giving the farm child the right to rent the land from his siblings? That can work if the guidelines for setting the rent are clearly established.  If the parents say that the farm child is the only one who can rent the land, the farm child can rent it for $1 per acre since no one else would be eligible to rent the land at all.  That probably won’t play well around the Thanksgiving table!  On the other hand, the parent may want to give the farm child a somewhat reduced rent to reward that child for his sweat equity or to make sure the farm child can afford to farm the land.

 

The same issues arise if the farm child has the right to buy the land at a discount.  What if the farm child turns around and sells it, pocketing the difference between the discount price he paid and the real value of the land?  Again, that will not make for a happy Thanksgiving meal!

 

Maybe all of the children will get along, and the farm will stay in the family on terms that are acceptable to all of the children.  While that is ideal, it doesn’t always happen.  It is more likely to happen if the parent lays out a game plan in a Will and gets buy-in from the children.  But then what happens when the farm child gets divorced?   As you know the odds of that are about 50/50.

 

The non-farm siblings may be perfectly willing to let the farm child keep the farm, but they won’t be pleased to see it go to an ex-farm-spouse and her family.  In fact, the very idea might have the parents rolling in their graves, with the farm child and his siblings rolling (above ground) right beside them!

 

Again, there are ways to protect the family farm (as well as protecting family harmony), but they all start with a Will.  If you have a farm, you owe it to your family to make a Will so you can deal appropriately with that farm and prevent unpleasant surprises after your death.

 

While farms inheritances may be the biggest causes of family stress, the same scenarios arise with family businesses, with valuable collections and with vacation homes.  Which child will get the cabin inMinnesotaor the home on theLake of the Ozarks?  How will it be maintained after the parents’ deaths and how will the children share it? What happens if some of the children want to sell it or if some live inIowaand want to use it frequently while others live on the coasts and don’t really care about it?

 

There are no right answers for these questions because each family is different.  However, not answering the questions is the wrong answer.  Ask any lawyer who works in the probate area, and he or she can tell you horror stories about families fighting over farms or similar assets.  You owe it to your children to set them up to succeed, rather than leaving them to flounder and fail.

 


The IRS Might Be Your Next Farm Tenant

JANUARY 7, 2014

 

Everyone knows that farmland prices are at historic highs. The average per-acre price forIowafarmland is $8300.  That average is figured on both pasture land and crop land, so the average price is much higher for tillable ground. It is also much higher forIowa’s best land.  Sales have been recorded for at least twice that $8300 figure.

 

Based on that $8300 figure, a single farmer will pay federal estate tax if he has at least 600 acres of land.  600 acres is a lot of acres, but it leaves no room for any other assets.  If the farmer also has equipment or livestock or life insurance or bank accounts, he will pay estate tax with less than 600 acres.  What does that mean for his estate and his heirs?

 

Federal estate tax is assessed at a flat 40%.  So if the farmer has three children, his biggest heir will be the IRS.  That is because the IRS will get 40% of his estate while each of the children gets only 33% of what remains after the IRS takes its share “off the top.”  That is not the result most farmers want.

 

That result can be especially hard on non-farm heirs.  If the farmer plans to give his farm child the farmland and give his liquid assets to his other children in order to provide then with an inheritance, that plan won’t work if there is estate tax.  The estate tax will probably be paid from those liquid assets, eating up the inheritance of the non-farm children.  Under that scenario, they not only lose their inheritance but they lose it to protect the inheritance of their on-farm sibling.  In effect, the estate tax works a double whammy on those non-farm heirs.

 

Another problem is that the IRS wants its share within 9 months of death.  That is not a long time for a grieving family to settle post-death affairs.  The IRS also wants its share in cash.  It will not take equipment or grain or an interest in the land.

 

So how does the farm family pay the IRS if it has to?  Assuming there are no liquid assets available (or not enough liquid assets available), the family will have to sell or mortgage land.  Fortunately, both are fairly easy in this economic environment, but it may not be as easy years from now.  And for most farmers, selling land is never a good thing.

 

In addition, the IRS-induced sale is like a fire sale.  If a farm family sells some, but not all of its inherited land, savvy neighbors may figure out that the sale is estate tax-motivated.  They may still offer a fair price, either because they don’t want to get outbid or because they are fair-minded people.  But if they do not, the family may have to sell for less than top dollar.  They will not have the luxury of waiting for a better offer.

 

The IRS does have programs in place to help family farmers.  Farms are eligible for special reduced valuations, but the reduction in value may not be big enough to avoid the tax.  In addition, not all farms are eligible for that valuation benefit.

 

Farmers can also pay their estate tax in installments, and the installment plan is remarkably fair.  The interest rate is low, and the first five years are interest only.  The actual tax does not have to be paid for the first five years, and then it can be paid over the following 10-year period.  The result is 15 years to settle up with the IRS.

 

That solves the problem for a lot of large land holders, but who wants to partner with the IRS for 15 years?  And what if there is a bad crop year?  The IRS must be paid each year, regardless of the quality of the crops or the variances in commodity prices.  The IRS is not like the local banker. There is no way to talk to the IRS and devise an alternate payment plan.

 

Until recently very few farmers paid estate tax.  That may be due to historically lower farm prices, or it because a married couple gets twice as much tax latitude as a single farmer. That means that (with an $8300 average) a married couple needs more than 1200 acres of land before estate tax becomes an issue.  For most people, that solves the problem right there.

 

But it won’t solve the problem for an unmarried farmer or for any farmer whose wealth exceeds the applicable estate tax threshold.  The single farmer could marry or remarry to reduce his estate tax bill, but that is probably not the best or most romantic solution to the problem.

 

The possibility of paying estate tax is the downside of today’s historically high farm prices.  It is a contingent liability that farmers should plan for, and in many cases it can be eliminated with proper lifetime planning.

 

The essence of that planning is traditional estate planning.  In addition to a Will, the farmer will need advice on his exposure to estate tax liability and ways to reduce or eliminate it.  Estate tax is a solvable problem in many cases but it has to be solved while you are alive.  Putting your head in the sand won’t solve it.  Counting on Congress certainly won’t solve it.  The only one who can solve it is you!

 

 




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