November 12, 2017
During a workshop, a woman came up to me to share her story. She was in her 40s with a 12-year-old son. Her husband had passed away a little over a year ago.
She had married into a farm family. People got along, there did not seem to be any major problems. Her husband had a sister who was not involved in farming. Their son was his Daddy’s little shadow. They were looking forward to having the farm continue for at least another generation and perhaps longer.
She had asked about life insurance off and on. Her husband assured her that he had plenty of coverage. It had been taken out before they got married, when he was much younger and premiums were low. He didn’t think they needed any more policies. Then he became ill and very quickly passed away.
At some point, she began going through papers and working with the attorney to settle her husband’s estate. Her mother-in-law was still living, but most of the land had been transferred into her husbands and her sister-in-law’s name after her father-in-law had passed away. (Are you still with me?)
Yes, there was indeed a large life insurance policy. However, since it had been taken out before he was married, his parents were the beneficiaries. The policy had never been reviewed and the beneficiaries were never updated. That meant the death benefit was paid out to the mother, leaving the widow and her young son without ready cash.
Then the sister-in-law decided to sell the land, considering that she no longer had any connection to the farm. The land was titled as tenants-in-common between the two siblings. The widow had first right of refusal, but no funds for buying the land. She was able to hold on to some of it, but enough acreage was sold that the farm was no longer a viable operation and her 12-year old son would not grow up to be the next farmer.
There are several take-home messages:
• Review policies every few years to make sure that owners and beneficiaries are set up correctly.
• Review current Wills and Trusts. Keep in mind that the beneficiary designation on life insurance policies, IRAs and annuities override the Will or Trust if there is a mismatch of beneficiary designations.
• Review how land is titled and make sure you understand who is going to be in business with you if one owner (or several) were to pass away.
Who is in business with you
July 27, 2017
Who is (potentially) in business with you?
Here is a scenario that could ruin a good night’s sleep. Father and son are in business together. It could be a farm or any other small business, it doesn’t really matter. Something happens to the son and the spouse inherits his assets. The grandchildren are small, so we are looking at a lot of years with the surviving parent in control.
A well crafted buy-sell agreement spells out what will happen in case of the 4 Ds (Death, Divorce, Disability and voluntary or involuntary Departure) as well as Retirement. The initial document review includes what-if scenarios. If something were to happen to one of the principals, would the business survive? How do we want to treat the spouses? Will they receive income only? Or will they be allowed to participate in management decisions? Will they be allowed to continue owning shares of the business, or will there be a mandatory buyback of the shares? Is life insurance in place to fund the buyback? Is the spouse allowed to hold on to the shares, but can only sell them back to the business if he or she wants to sell?
All this can seem overwhelming. It helps to get guidance from someone who has walked many families through the process before. It’s a team effort, so take heart. You will get through it and feel a great sense of relief that the uncertainty has been eliminated. After all, these buy-sell agreements are most likely to come into play when the family is already experiencing great stress. Good planning can make the difference between a business that continues for another generation and a business that’s up for sale.
Future daughter-in-law (son-in-law)
April 26, 2017
We love our future daughter-in-law (son-in-law), but…
This comment comes up nearly every time when I start working with a new farm family. If it doesn’t come up during the initial meeting, I will ask about it. More times than not, there is a sigh, followed by: Well, yes, it has been on our minds. We didn’t know how to bring it up and we don’t want to be unkind. We are excited about her; she seems like a nice girl. But what if the marriage doesn’t work out? How do we protect the farm?
Structuring the business entities correctly, offers the best chance of keeping the business intact. Parents and grandparents have the wisdom and life experience to know that sometimes things don’t work out the way we had hoped. The younger generation’s optimism gives them the courage to get involved in a high-risk business like farming. It also makes them reluctant to consider the possibility of divorce, meaning that it is up to the older generation to put safeguards in place. To be clear, this is not about freezing out the future spouse. He/she needs to be treated fairly while making sure that the business continues.
When is the best time to do this? Before it is needed and while everyone is getting along. Noah didn’t build the Ark when it was raining.
It is part of the planning process to look at the options and determine which one is best in any given situation. Families become familiar with the pros and cons of the various choices and are much more comfortable when they are meeting with the attorney to get his input.
We lost Dad yesterday……..
March 1, 2017
The call came during a conference; Matt, 26, was on the phone. His father George, 56, had been out mowing ditches. George had been mowing the same ditches for 40 years. No one will ever know what was different this time, but the tractor overturned, killing George instantly. The son went looking for him when he did not come home for supper.
I had started working with the family about 8 months earlier. Parents were in their 50s, son with a wife and a young daughter and another baby on the way. Matt had met his wife in college. You couldn’t ask for nicer people.
When the unthinkable happened, the framework of their estate plan was in place. Even though the final touches were still missing, the families were relieved that they had certainty about the way forward. They knew what George would have wanted: take care of his wife Chrystal; see the family farm go on, and make sure that both the farming son and the off-farm son were treated fairly and continued to have a good relationship.
Don’t wait. Even if everyone is relatively young and healthy. Eliminating uncertainty is one of the best things we can do for loved ones.
While every family is different and each scenario needs to be addressed individually, there is a method to the estate planning process. It always starts with a document review: Is there a Will and/or Trust? How old is it? How is the distribution of assets set up? It is not uncommon to look at a 30-year-old Will—surviving spouse inherits everything and after that, the assets will be split between the children in equal shares. That made perfect sense for a young couple with few assets. Today, it may not be the best approach. Things to consider: tax efficiency, fair vs. equal treatment of farming and non-farming children, special provisions for heirs who have trouble handling money, the list goes on. The process can seem overwhelming, so the easiest way is doing nothing.
With an experienced, professional financial planner by your side, the overwhelming prospect of creating an estate plan becomes far more manageable. Help those you love most have peace of mind when you are gone—create an estate plan now, no matter how much or how little you may leave behind.
Author’s note: Names have been changed to protect privacy.