In a presentation for Pennsylvania Farm Bureau, financial advisor Henry Mondschein, Connect Financial Group LLC, provided farmers with information on estate planning. Mondschein’s admonition was “a will does not make a transition plan.”
“Today, there are about two million family farms across the nation,” said Mondschein. “The average age of a farmer is 57.5 years old. About one-third of farms have a transition plan in place.”
He added that a transition plan is more than a will or a trust and involves the concepts of “fair vs. equal” and “family harmony.”
While farmers often think they have a transition plan, Mondschein said the typical estate plan yields poor results. “Here’s the typical plan people tell us they have,” he said. “Bill and Sue Jones are owners/operators of a third-generation farm. They have three children; one of them works on the farm and two work off the farm. Bill and Sue go to their attorney and want to treat their children equally. The wills they sign give everything to the surviving spouse, and when that spouse passes away, everything is divided equally among the three children. If a child predeceases, that child’s share goes to that child’s children. If there aren’t any children, everything is divided among the surviving children.”
Sounds good on paper, but there are holes in such a plan. What happens to the farm? In the Jones family, son David is running the farm, but siblings Joe and Lucy want a say in the matter.
“One wants a yak farm, one wants to farm and the other wants to sell it and cash out,” said Mondschein. “That creates a rift between the siblings because they all have different ideas about what can be done with the farm.”
Keep in mind the concept of fair vs. equal for the Jones family: one child is working on the farm, the other two are not. “Equal” splits the farm into thirds, but that may not be the fairest move for the son who is farming and to the farm itself.
If farm ownership is split three ways, farm income is also split three ways, making it close to impossible for the farm to survive. The farm disintegrates because there isn’t enough money for David to run the farm and make a living. His siblings don’t have an interest in the farm, so the farm is sold for development.
“If you aren’t sure what to do with kids, take it from the perspective of the farm,” said Mondschein. “If I was the farm and could talk, who would I want running it? That’s the answer. Depending on the assets, part of the estate plan is building in what’s fair, then figuring out how to make it equal.”
Mondschein believes family harmony is critical. “When money is involved, people do funky things,” he said. “People have ruined relationships in the family because they were trying to get more than their fair share or what was right. That ruins family dynamics faster than anything.”
Wills are popular because they’re basic and easy. “The problem is, when there’s a will, you have to go through probate,” said Mondschein. “It takes about six to nine months to get everything through probate.”
Avoiding probate means having beneficiary designations. If the farmer has assets such as a retirement account (401K, IRA) with the spouse named as beneficiary, all goes to the spouse. “If the spouse names the children as beneficiaries, whatever they dubbed the percentage of that beneficiary is how it’s going to go,” said Mondschein, “even if it conflicts with the will because the beneficiary designation supersedes the will.”
Some families implement a trust instead of a will. Mondschein explained the concepts of revocable and irrevocable trusts: “A trust is similar to having a named beneficiary. It bypasses probate. If you don’t want to go through probate for the farm, land or equipment, a revocable trust does a great job of naming who gets what and how they get it. If you have a large estate and there will be an estate tax, an irrevocable trust gets the assets out of your name and grants them to a trust so estate taxes aren’t paid on it upon your death.”
A trust supersedes a will, and anything that isn’t covered by the trust goes to the will.
Mondschein is not in favor of the older generation working on a plan then telling the younger generation about it afterward.
“I’ve seen too many times that the older generation has something in mind and the younger generation has something very different in mind,” he said. “It’s important to know what the older generation is giving or selling to the next generation, what they want to do with it and whether those match up.”
When Mondschein assists farmers in estate planning, he discusses goals, then gathers information. He analyzes the overall plan to be sure the farmer has considered everything they want to accomplish. After that, the family can discuss options, decide what makes the most sense and come up with solutions.
“Then we go to the attorney to implement the plan,” he said, “then review because things change through the years. Don’t miss any steps that would create a hole in the plan.”
Mondschein emphasized the importance of a bulletproof plan and suggested a transition checklist to help identify and prioritize goals.
Regarding the best time to make a transition plan to avoid unnecessary taxes, Mondschein explained the terms “basis” and “step up in basis.” “Basis is the acquisition cost property plus any improvements,” he said. “‘Step up in basis’ is the original cost plus the improvements stepped up for a new acquisition at time of death.”
Because farming comes with good and bad years, Mondschein suggested separating the farm business from the land. “If there’s a devastating year, you don’t want to lose the land,” he said. “If we can pull that off, now there’s an asset [the land], then the opportunities become basis, step up in basis, gifting, selling or inheriting.”
Many families use a team approach and consult an attorney, insurance rep, financial advisor, banker, accountants and CPAs for estate planning. All who are involved in the transition process should understand farming and have the family’s best interests in mind.
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