Over the years, we have had many clients make the comment that they want to accomplish their estate planning goals but not to the extent that they would be “ruling from the grave.”
It can be difficult to define how much control would be considered “ruling from the grave” and how much control is simply good business planning to accomplish the goal of the estate owner.
Implementing a plan that is fair to both farm heirs who have made sacrifices by choosing to continue a difficult lifestyle and the non-farm heirs who may or may not be entitled to an inheritance of equal value can be a daunting task.
We feel like a family is on the right track if their goals are adequately addressed and the family has explored with an open mind (and heart) the process to implement a “fair” distribution plan for their family.
Ruling from the grave
Putting significant restrictions on an heir’s inheritance is what we mean by “ruling from the grave.” This situation occurs most often when farm land is left in a trust for an extended period of time.
Some folks have a negative opinion of this concept. The reality is that there may be legitimate situations when “ruling from the grave” is appropriate. These situations require thought and careful consideration that could have unintended consequences.
This week alone we had six separate cases where keeping assets in trust for management purposes served a client’s goals.
The cases included a daughter dependent on drugs and alcohol, a daughter who already was independently wealthy and additional inheritance meant additional estate tax, a son who was in the process of a divorce and already risking a force sale of a century farm, a spouse who was already in the nursing home, two children who have needed specialized care for 20 plus years, and two children who do not have children and were only to receive income for life with principal to go to their nieces and nephews.
Leaving a farm in trust can guarantee that your instructions will be carried out by your trustee. It is extremely important to work with your attorney, accountant and other advisors to look at as many possible issues and solutions for maximum flexibility.
You are sending a message ahead to a time you will never see and you want your plan to avoid as many future pitfalls as possible.
A trust that owns farmland for an extended period would be well suited currently to have lease options for family members (children, grandchildren and maybe even great grandchildren) actively engaged in farming at the Iowa State Extension Average CSR2 rate for the respective county.
It is wise to have a good definition of what “actively engaged in farming” is and an alternative to the CSR2 rate when CSR2 changes to CSR3 (or CSR6).
A trust that owns farmland should also allow flexibility for the trustee to pay up to 10 percent of the gross revenue each year (as an example) for maintenance and upkeep such as tile.
If the goal is not to sell the land, the language of the trust should say so. If not, the children and the grandchildren should have an option to buy the land from the trust, either during administration, or when the term of the trust is over.
This purchase option could have family terms such as a method of pricing and contract terms that would make the acquisition affordable if the goal is to keep the land in the family.
The longer the land is in trust seems to increase the probability of selling the land when the trust dissolves because the heirs have not had a chance to experience ownership of the land.
In the spirit of the current Lenten season, this may be like gorging yourself with candy (or coffee as my mother does) on Easter Sunday morning after going without for 40 days.
Guiding from the grave
A recent popular strategy in contrast to leaving the farm land in trust is to put it an entity, like a Limited Liability Company (LLC) or a Family Limited Partnership (FLP).
This strategy keeps the family land together as a unit with rules for how you would like to see the land managed as if you were still around to manage it.
We have termed this “guiding from the grave.” Unlike an irrevocable trust where the rules can’t be changed and the heirs don’t have ownership, the LLC or FLP would be owned by the heirs. They can change the rules in the future under certain circumstances.
This strategy allows you to give guidance to your children on how to manage the land. Like the trust, the LLC or FLP should have lease and purchase options with family terms.
Unlike the trust the heirs (with a super majority vote) can change your original rules.
If there is a member of each generation who would like to continue with your original rules, they would be allowed a “veto vote.” This ensures the opportunity to farm under your terms can be preserved if there is a farmer in each generation.
The LLC allows a natural evolution of ownership to transition to your heirs who want to be land owners. The heirs who do not want to own land can sell out under the terms you set for your specific family circumstances in the original agreement.
As an example, if an LLC required a super majority of 85 percent vote of its members to change the rules and there were five children owners of the LLC units (each of them owning an equal 20 percent) four of them would have only have 80 percent vote. In that example, it would take all five equal owners to agree to change away from your original rules.
This concept gives the landowner the ability to set parameters for the future owners of their land, but the flexibility for those owners to change their parent’s rules with their guidance from the grave.
Rolling over in the grave
When we do a first-meeting fact-finder for a farm estate, we typically identify the names the family uses for each parcel of land. This allows us to effectively communicate throughout our planning process.
Using the name of the previous owner as identification is a reminder for me that there is an unwritten goal for most families to not have a farm named after them.
If one of our neighbor families owned a farm they called the “Bohr Farm”, that would mean that my family would have failed in our goal to keep our land in the family.
My sincere hope is that each of you will have the time and opportunity to adequately explore farm continuation plans that will accomplish whatever your goals may be.
Land divided and sold without a good continuation plan that either “rules from the grave” or “guides from the grave” might have the unintended consequence of you rolling over in your grave.
For 24 years, Steve Bohr has been a partner in the farm continuation firm of Farm Financial Strategies, Inc. For additional information on farm continuation issues or if you have a question please contact Steve via email at Bohr@FarmEstate.com or by phone at 800-375-4180.