Estate Planning part 2 - Fair is not always equal. How to keep the farm farming.

Passing down a farm is rarely as simple as splitting everything equally. The land, equipment, and other assets may need to stay together to keep the operation going, while farming and non-farming heirs may have very different needs and expectations.

In this episode of Straight Talk with NDFB, the Harvesting Legal Knowledge series continues with NDFB CEO Jeffrey Missling and Ohnstad Twichell attorneys Tiffany Findlay and Jenna McPherson.

The conversation focuses on farm succession planning and the decisions families face as they prepare to transfer the operation to the next generation. The attorneys discuss what happens when there is a clear farming successor, what families can do when there is not, and how a plan can help keep the farm farming.

They also explain why fair does not always mean equal, why knowing the true value of land and equipment matters, and how co-ownership between siblings or other heirs can create challenges down the road.

Whether you are preparing to bring the next generation into the operation or simply starting the conversation, this episode offers practical guidance for building a plan that works for both the family and the future of the farm.

Watch the entire episode on our Harvesting Legal Knowledge page here.

Contact our host Emmery Mehlhoff at emmery@ndfb.org

Disclaimer: The statements made and information provided in this podcast are for educational and informational purposes only. The statements do not constitute legal advice, nor are they intended to create an attorney-client relationship. Every situation is unique, so you should not rely on any statements in this podcast as a substitute for personalized legal counsel. Before taking action or making any decisions that may affect your legal rights and obligations, you should consult with an attorney licensed in your jurisdiction.

Transcript

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[00:10] Emmery: Does fair always mean equal? Welcome to Straight Talk with NDFB. I am your host, Emmery Mehlhoff. Farming and ranching are tough businesses and legal issues can just complicate things. That's why this season features Harvesting Legal Knowledge, a conversation between NDFB and the Ohnstad Twichell Law Firm. NDFB CEO Jeff Missling and the attorneys at Ohnstad Twichell break down key legal topics affecting farmers, ranchers and ag businesses every day. 

In part two of our estate planning series, we turn specifically to farm and ranch succession. We discuss navigating both farming and non farming heirs, the importance of knowing the true value of your assets, and the challenges that can arise when siblings or other family members inherit property together. We also look at the decisions families should consider when there is or is not a clear successor for the operation. As always, if you have a specific legal question, be sure to consult an attorney who can address your situation. Let's get into part two.

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[01:18] Jeff: Welcome to another Harvesting Legal Knowledge. This is a collaboration between NDFB and Ohnstad Twichell Law Firm. And with us we have Tiffany Findlay and Jenna McPherson with Ohnstad Twichell. So who needs a trust? And is a trust always the answer?

[01:34] Jenna: I would say most often my clients who are utilizing a trust, own property in more than one state. They're trying to avoid probate, sometimes in their residential state or their primary domicile, but they're also trying to avoid probate. 

A lot of times we're seeing Minnesota and Arizona folks have a lake place, they've got a winter place, and they don't want to probate just one piece of property down there, so they'll put it into a revocable living trust. 

Or I oftentimes see a trust being utilized when we have a child we're trying to provide for that maybe shouldn't inherit outright and they want to set some terms up, provide some structure for how their inheritance will be distributed to them over time.

[02:14] Tiffany: I'll say trust planning maybe isn't for everyone because of how complex it can be. You know, a lot of different aspects of estate planning can be done without the use of a trust. You know, when we're thinking about just utilizing a will or a life estate deed or a transfer on death deed, those documents can accomplish a lot. But if there are more complex situations or you have that one family member that you just don't really know about yet, a trust can be something that we look at. 

So it is important to note there are a couple of different types of trusts. So we have A revocable trust which can be changed at any given point up until the trustor's death, typically. 

And then we have an irrevocable trust, which is really the other hand of the revocable trust, where the irrevocable trust cannot or at least should never be changed. The terms are set as soon as you sign that document. 

There are of course, reasons we're using both types of trusts. The most consistent one that my clients have had with irrevocable trust planning is when we're looking at the potential for long term medical care in the future. Again, going towards the planning, early year is absolutely better. If we know that there's going to be some sort of those types of situations, an irrevocable trust can become very handy for those future scenarios.

[03:38] Jeff: Sure.

[03:40] Jeff: See, I think the answer to this is no, but we'll try it. Does a trust always avoid probate?

[03:46] Tiffany: No, absolutely not, unfortunately.

[03:50] Jenna: Yeah, we have a lot of clients who, who utilize a revocable living trust in hopes to avoid a probate. But time and time again we find assets aren't titled correctly. Real property is sometimes inadvertently left out requiring a probate. And so oftentimes we're doing trust administration and a probate together.

[04:10] Jeff: Okay. And do probates get a bad name? I mean, is a probate a bad thing? And then a second secondary question. How expensive does this get when you go to probate?

[04:23] Tiffany: I wouldn't say that probates, particularly in North Dakota and Minnesota, are a bad thing. Compared to some of the other states, they are more on the inexpensive side and they don't take as long as maybe one may think. The typical probates that I've had with my clients has typically lasted anywhere from, you know, say about five months to a year. You know, it depends on the circumstances. The assets that are in the estate, if there are any, any issues that need to be dealt with before the property can actually be distributed out of the estate.

[05:00] Jenna: Certainly litigation puts a major pause on a lot of that too. So if we've got an estate where we've got fighting or different interpretations of things, that really puts a... slams the brakes on things. But it should be noted that that's not just exclusive to probates. It can happen in trusts, in both cases really.

[05:17] Tiffany: Yeah. Things take time, especially when you're trying to do them right. So although there might be some people who would prefer to see a probate done in a couple days or a couple weeks sometimes, that's just not, you know, the case. There are a lot of complications when you start having things like real estate go through a probate. You know, there are items that you need to check off before that property can be handed down according to the will or the trust distribution terms or however that person has prepared for that property to go down.

[05:50] Jeff: So when does a person need a probate? I guess what triggers.

[05:54] Jenna: Yeah, a probate in North Dakota is needed when an individual dies owning any interest in real property in their name alone, or if they have assets in the aggregate of $100,000 or more.

[06:06] Tiffany: And it should be noted too. So your real property interest, as long as it's held in your individual name, that can be something that is actually held in joint ownership. So like when we're talking about tenants in common types of ownership, if you and your brother own an undivided quarter as tenants in common, your 1/2 interest will need to go through probate to transfer, unless you plan for it otherwise. Just because you have someone else named on the title doesn't automatically transfer it to that person.

[06:37] Jeff: Okay.

[06:37] Jenna: Exactly. We get that all the time. They say, no, no, I own this with my brother. It's like, well, yes, but your own interest separate from your brother's. In together. So.

[06:47] Jeff: And what is the difference between a person's estate versus a person's probate?

[06:53] Tiffany: Those terms are very confusing sometimes. So the easy way that I like to delineate them is that an estate is always around you. Even right now, each of us has an estate. It's what we own. It's what debts we have. It's the persons who are helping us manage our affairs. Whether you have a power of attorney or a healthcare directive, that is all a part of your estate. And that continues on, of course, after death. The probate only happens when you have to go through the court process when you own real property or when you have that a hundred thousand dollars in other assets that you have to actually commence a probate. Do you want to explain sort of what a probate maybe means?

[07:37] Jenna: Sure. Probate is really just the formal proceeding to appoint a personal representative, someone to take charge of the estate. They go out and they gather asset information. We typically publish a notice to a creditor, shortening the period by which a creditor could come forward. We value the property. We might liquidate the property, or we might just distribute it outright. Farmland being an example of something that gets distributed outright. We value everything, provide an inventory to all the heirs or beneficiaries, and then just do a final report and account of what came in and what Went out of the estate.

[08:11] Jeff: Okay.

[08:13] Tiffany: And I should note too, one thing we haven't discussed yet is a payable on death or transfer on death designations. Those are items that will not have to go through probate. So if you own an account either with a person, like say a bank account or an investment, or you've named a beneficiary as a payable on death or transfer on death beneficiary, those types of assets will flow outside of probate and will automatically be distributed.

[08:41] Jenna: They trump a will, they trump a trust, and so they'll go to those beneficiaries directly.

[08:48] Jeff: Okay. I see the phrase farm succession planning here next. And I think people, a lot of people confuse that with like your an estate plan or something like that, or just they seem co-mingled a little bit. But what is farm succession?

[09:01] Jenna: Tiffany? I laughed about this when we were building our presentation. Farm succession is a term that gets used a lot. And farm succession, I think to us is just how do we move the farming operation to the next generation? How do we keep the farm farming? Which seems kind of funny, but with, with buyouts, prices, the way that they are right now, you really have to have a designated plan to keep that farming heir, farming.

[09:26] Jeff: Yeah, exactly.

[09:27] Tiffany: There are a lot of different considerations that come into play when you do have a farm as part of your estates. So there's a lot of different specific planning techniques that we can use both while someone is alive and after death to make sure that, you know, the goal is that the farm does continue. So the more that we can make sure that happens, the better.

[09:48] Jenna: And I think there's two broad categories here. It's if we have a farm successor, someone who's going to continue farming, and when we don't, and how does that work and how, how is the real estate going to be titled when they're gone? Are they going to co-own it? Are they going to split it up? Are they going to sell it? Do they need to offer it to someone else specifically? Are there terms by which that person gets to buy it? All those things are considerations we make.

[10:12] Jeff: I see the, the phrase here down below, fair doesn't mean equal. Can somebody talk about that a little bit more? (laughs)

[10:18] Tiffany: Yeah, I mean, we talked a little bit about this with our partition talk earlier on. Really what this means is that especially when we do have a client who has a farm, you know, a lot of the times if they have more than one person they want to give their estate to, we have to come to terms with, there's not a lot of liquidity when there are farming assets, you know, when you have quarters of quarters of land and you have expensive and new combines and other, you know, tractors, other equipment, 

There's not really a lot of wiggle room that we can keep the farm together while also giving an equal dollar value to those non-farming clients, you know. So there are different ways that we can plan to make sure that both of them are being compensated and given value. But they may not be equal in type of asset or even dollar value at some points.

[11:16] Jeff: I see another statement down below here. Know your fair market value, net worth or what it is, and that's a tough one. You have comparable sales I guess, and you can use things like that. But with an economy that's, you know, kind of doing a roller coaster ride at times, it's tough to know, "Where am I at?" And even with equipment's a little bit easier, I feel like you can get a, keep a handle on that. But land is always a great, it's a great question what somebody will pay for it.

[11:43] Tiffany: Right, Exactly.

[11:44] Jeff: And so it's really, that's a tougher one to, to try to sort out.

[11:49] Jenna: We utilize appraisals for the estate tax returns and inventories oftentimes to establish basis when someone has died, when that gets passed out to the heirs. But when we're planning and meeting with someone, especially a farmer, we want to know what the fair market value is. And that's kind of a difficult term to know. But undervaluing your assets doesn't help us plan. It certainly doesn't help us do tax planning if we don't actually know what the IRS is going to say your value is.

[12:18] Tiffany: Particularly when farmland is more and more expensive nowadays. I mean if we have land that would actually appraise for $10,000 an acre now, and you have on your balance sheet that it's only $1,000 an acre, you know, there's a little bit of a difference there that, you know, if we don't take the full value into account when we're on the planning side, we could end up having to do more work when that person passes away, which I don't think any of us really want.

[12:44] Jeff: Sure. I see co ownership at the bottom here can be, can be great, you know, in certain situations. But you might want to look at whether it's necessary, I guess, and whether you even need to co-own, whether it be land or assets. And what are your thoughts on that, I guess?

[13:03] Jenna: My preference is if it's possible split it out, you know, individual ownership to me almost always is better than co-ownership. But I also understand that that just doesn't always work. Like Tiffany said, we, we have a lot of estates that there's not a lot of liquidity there and so it's hard to kind of even those things out. And, and every quarter is, is valued differently. And so that's my, my thought on co-ownership.

[13:26] Tiffany: And it's important to know, you know, who are you putting up as co-owners? Will you, thinking in your mind, will they get along? Will they continue on the same path? Do they have the same goals? If they do now, will they in the future? You know that that's always the question. So you know, if, if you know of struggles but they're willing to work it out, if you are willing to put, you know, plans in place, you know, there are different types of things like more specific co-ownership planning or even looking into entities or partnerships, those types of structures that we can make it work. But again it's, it's coming in and talking about those things and planning for them.

[14:10] Jeff: Covered a lot of information here. What have we have we missed? Anything that you wanted to mention that we didn't get to, I guess, or the whole title of estate planning? If not, Tiffany, Jenna, thank you so much for your time. Did a great job. And if folks, I can imagine our members wanting to reach out to you in regard to a lot of these, these topics are huge with our membership base. So how do they get in touch with you? I guess if they want to connect with you.

[14:37] Tiffany: So we have a website ohnstadlaw.com that's o-h-n-s-t-a-d-l-a-w dot com. We have over five offices, three of which are fully staffed. So I'm located in the Hillsboro office. Our main phone number is 701-636-5700.

[14:56] Jenna: I'm in Casselton. Our number is 701-347-4652.

[15:00] Tiffany: We of course have our West Fargo office as well. We're both very reachable by email or if you want to stop in to either our Page office or our Maddock office as well.

[15:11] Jeff: Awesome. Thank you so much for your time, ladies and thank you for joining us.

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[15:17] Emmery: You've been listening to Straight Talk with NDFB, our Harvesting Legal Knowledge season. To watch the entire interview with Jeff and Ohnstad Twichell, please click the link below. If you have any questions, contact us at emmery@ndfb.org.

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