Tri-State Neighbor: South Dakota Farm Newspaper

Dear Michael: We have been watching the financial crisis and wondering how this will affect our estate plan. We were intending to leave our non-farm investments to our four non-farming children and have our son buy some of the farmland from them to even up the inheritances. With the recent problems, we know our balance has gotten “out of whack” so to speak and our son is really going to have to struggle to make the buyout necessary to the non-farming children. What should we be doing right now to rebalance our life and our estate plan? - Out of Whack.

Dear Whack: If you are like most people, you do a profit and loss statement and a balance sheet with your lender perhaps once or perhaps more frequently, per year.

However, few farmers and ranchers ever take the time to do a farm estate balance sheet with the projections necessary to see where they'll be in five years, 10 years, etc.

Everybody is aware of the sudden increase in land values in farmland, but when you do estate and financial planning, you need to base your estate plan on a more objective source than fair market value. Fair market value, by definition, is the price a willing buyer is willing to pay for the property - in other words, the highest bidder. You don't want to put your farm child in the position of bidding against the richest person in the county, do you?

Next we need to do ratios. A ratio is the difference in a farm asset versus a non-farm asset. A farm asset, as you well know, requires a lot of labor, investment, planning and then a lot more labor to produce income from.

A non-farm asset does not require the inheritor to stop all other income producing activities. These assets can produce income in a variety of ways without any involvement by the inheritor. As such, it is unfair to give equal credence to farm assets versus non-farm assets.

You need to work with a qualified estate planner who can gather all of this information for you, put it into a quantifiable and understandable format, and help you decide the right ratio applicable for your specific situation for farm and non-farm assets.

Once this is completed, the next step is projections. If the land continues to inflate, if and when will your investments return to value, who will have to pay income taxes on their inheritance, will estate taxes be involved? What about retirement income?

How will income be derived - from the rent of farmland or will you be able to (or forced to, in the case of qualified IRAs or SEPs) take income from your non-farm assets? How will a long-term health condition or nursing home stay affect both farm and non-farm assets?

I would venture to say that 99.99 percent of farmers and ranchers have never taken the time to work with a qualified estate planning specialist to go through this process to answer the questions they need answered. As such, the same percentage of people will have an unsatisfactory outcome to their estate plan.

An estate plan, done in such an arithmetic manner, will provide answers - the same as your profit and loss and balance sheets provides answers to your lender. Once you see your entire estate financials laid out, as well as the projections for the future, then it becomes much simpler to come up with your roadmap to your goals.

Perhaps you need to be transferring debt from yourself to your son to avoid building a larger estate to be divided between non-farm heirs someday? Perhaps you need to be filling in gaps with different types of coverage to protect the assets you have?

Maybe you need to adjust your incomes and investments from taxable to non-taxable based on income taxes in the future - both to yourself and to your heirs? Perhaps you need to look at trusts, gifts or transfers of value today to avoid estate taxation or Medicaid attachment?

The point is, right now you really don't know, do you? How could you if you haven't taken time - the same time you take with your lender once, twice or more times a year - to spend with a qualified estate planner to answer these questions? The same applies if you've completed this once years ago, but haven't gone back again to see where you are today.

Things have changed so dramatically in the past year alone, with drop-offs in investments, tax laws, farmland values, attitudes of children, debts and lending - you need to know where you are today.

However, once you quantify this information, and more importantly, understand what you need to do to reach your goals, then life gets a whole lot simpler. The same as you study balance sheets and profit and loss statements to define your years you need to see where you're heading in your estate plan and what adjustments you need to make.

All the information you study year-to-year needs to be implemented into your overall estate plan - which entails retirement income planning, income tax planning, estate tax avoidance, a balance sheet between farming and non-farming heirs, etc.

Make certain all of your year-to-year planning results in the desired lifestyle you'd like and the equitable end result at death by taking the time to go through the process.

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