“You’ve got to be very careful if you don’t know where you’re going, because you might not get there.” That’s one of those mixed-up bits of wisdom attributed to the late Yogi Berra. You know what he meant.
Have you ever been driving, perhaps on a summer vacation, and discovered that where you were headed was not, in fact, where you really wanted to end up? Going very far down the wrong road can be a waste of a lot of precious vacation time, not to mention energy and money.
Developing an estate plan is like deciding the ultimate “destination” for your estate. Deciding who you want to receive it is only the beginning, sort of like deciding what state you want to visit.
How do you want them to receive it? In counseling my clients, we explore their options to help them decide how they want their heirs to receive the farm. Equally or unequally? What is fair? Particular tracts to each heir, or must they share ownership of everything?
This is like narrowing down the destination to a city. But it would not be much of a vacation if you stopped there. What sort of conditions and personal protections do you want to include in your plan? Insulate the property from estate taxes, perhaps for multiple generations? Limit sale of the land? Assure the farming heir the opportunity to rent land from all heirs? Include lawsuit protections? Divorce protections? Long-term care protections? Now you are identifying specific sights you want to see and museums you want to visit.
A good estate planning attorney will help you think through these issues before you commit anything to a written plan. Then the choices you make about how your heirs will receive your estate will be spelled out thoroughly and unambiguously so as to prevent misunderstandings and hard feelings.
One challenge I often face as an estate planning attorney is taking an existing farm operation that has been on a certain route for some time and trying to reroute it to the ultimate destination the clients decide upon. The problems arise because someone recommended short-cut estate planning while the client was engaged in business planning.
Your farm is a business that consists of land, equipment and related inventory. Your business also includes the ability to control all those assets. Many farmers are advised by their accountant or attorney to form some kind of business entity, such as a limited liability company. Properly using such an entity complicates your life, but the benefits can make it worthwhile. In some contexts, the entity will reduce your risk of a lawsuit. Strategically used, the entity may lower your self-employment taxes.
But such an entity is simply part of your estate. Instead of owning land, equipment and the control of how they are used together, you own an LLC. That LLC owns land, equipment and the control of how those assets are used. The LLC is part of your estate, not a destination to which your estate is going.
The difficulties begin when the business adviser tries to dabble in estate transfer planning. They propose, “You obviously want to give your estate to your kids, so give a small percentage of your entity to them each year.” If you follow such advice, within a few years, you’ll have started toward a destination — the “state”— without really knowing where you want to end up. You’ve given a quarter of your business entity to your children.
What’s the problem?
At some point you see that one son is going to be the successor-farmer, and in your estate transfer plan, you feel the fair thing would be to leave him your equipment. You figure out which parcels of land would be best given to that son, and specify different parcels to leave to each of your other children. The trouble is, you have already given a fraction of the ownership of the LLC that owns all of those assets to each of the children. You can no longer give away specific assets, because you don’t own specific assets.
As you counsel further with an estate planning attorney, you decide what conditions and protections you want for your heirs. You spell them out, only to learn that such conditions and protections can never apply to the quarter of your estate you’ve already given to them. No lawsuit, divorce or nursing home protection. No long-range estate tax avoidance.
Estate planning and business planning can cooperate, but don’t start down the road until you are sure you know where you are going.
Ferguson is an attorney who owns The Estate Planning Center in Salem, Ill. Learn more at thefarmersestateplanningattorneys.com.