Estate Planning – Help is Available

(click here to view PDF version)

We try to make money and build assets, invest instead of spend and build the farm business during our lifetime. But then when we think we have it made, the debt load is no longer burdensome, the kids are raised, and maybe even some have stayed on the farm and joined the business, we have to worry about how to transfer the farm business while treating equitably those kids who didn’t stay on the farm. Further, most don’t like to think about death, let alone plan for after death. So, estate planning isn’t easy, but for farmers is a necessity.

Two things make an estate plan more important for farmers than for others:

  1. Farmers live poor but die rich, usually land rich. The more assets you have the more important an estate plan, so that the farm won’t have to be liquidated to pay estate settlement costs.
  2. The government has a plan for you if you choose not to do estate planning. It used to be that the government’s plan minimized estate settlement costs. However, that has changed. Now the government’s plan maximizes estate settlement costs for well to do farmers who die rich.

The size of your estate where the federal government will take nearly half of your estate is indicated in the table below. For those that will die in 2005, $1.5 million dollars are sheltered from federal estate tax; in 2006 to 2008, $2 million; 2009, $3.5 million; 2010, no limit to dollars that can be passed to heirs federal estate tax free; but in 2011 and beyond, according to present law, only $1 million can be passed on without the federal government taking nearly half. The bottom line – if your estate is or may be worth over a million dollars in 7 years and you plan to live that long, you have 7 years to get your affairs in order.

Table 1

You also need an estate plan (at least a will) if your wishes are different than the plan that the State of Ohio has for your money if you die without a will. Before a recent law change without a will all assets were divided up between a surviving spouse and children. Now, if (but only if) all children are of the surviving spouse, that spouse gets all.

If there has been a divorce and not all children were adopted or of the surviving spouse, assets are still divided between spouse and children. If the surviving spouse is not the parent of any of the surviving children, the spouse first gets $20,000. If the surviving spouse is the parent of at least one, but not of all the surviving children, the spouse first gets $60,000.

If there is only one child and that child is not of the surviving spouse, the residual after the spouse’s $20,000 is divided equally between the spouse and child. If there are children and at least one is not of the surviving spouse, 1/3 of the residual plus the initial $20,000 or $60,000 goes to the surviving spouse. The remaining 2/3 of the residual is then divided equally between the children.

If there are no children or spouse, surviving parent(s) get all. If no surviving parent(s) assets are divided between brother(s) and/or sister(s) and to their descendent(s) if not alive. If no brother(s) or sister(s) or their descendant(s), assets are divided equally between the paternal and maternal sides, going to grandparent(s) if alive but then to descendants if deceased.

Following are some issues that need to be considered in an estate plan

  1. the need for dollars to cover retirement (including the second to die) plus estate settlement costs vs. passing on as much as possible
  2. treat children equally or equitably
  3. passing farm business, control and assets to children now vs. after death
  4. minimize estate settlement costs (taxes, attorney fees, etc.) vs. extra time, hassle and expense now to minimize costs later
  5. land preservation wishes vs. minimizing capital gain liability when and if the farm is sold.

With estate planning the objective is to settle the estate while keeping all heirs as happy as possible. In most situations children or heirs will be happier if involved in reviewing and reacting to the estate plan before implemented. If done, this should be done in a manner that treats all children equally while inviting suggestions and confirming the parents’ perceptions of the children’s preferences. However, seldom can all of the children’s preferences be accommodated, so it is the parents’ right and responsibility to make the allocation and then inform all the children at the same time, in the same manner and in the same way.

If you are interested in learning more about estate planning, help is available. A letter study course is available that allows you to proceed at your own pace and in the comfort of your home. The course is easy to understand, even for those not good in financial or legal matters. Both personal and financial aspects of estate planning are covered. The course has been developed by Dr. James Skeeles, Extension Educator of Ohio State University Extension in Lorain County and has been updated and added to by Russell N. Cunningham, Attorney and Ohio State Bar Association Certified Specialist in

Estate Planning, Trust and Probate Law with the firm of Barrett, Easterday, Cunningham & Eselgroth LLP in Dublin , Ohio . The letter study consists of 12 lessons. Each lesson contains the lesson (average length is 6 pages), 1-2 pages of questions on the lesson and an answer sheet for the previous lesson.

There are four different options to obtain the letter study. For as little as $15 you can receive the letter study as an attachment to an Email (or download it from the web if doing all at once is not possible because this is a large file containing 4,429 K), for $20 get it on CD, for $25 have the complete notebook mailed to you or for $30 have 12 lessons and notebook mailed to your home each week starting the first week in January. All options except the lesson per week are available now.

Topics of each lesson, in order are as follows:

Lesson 1 Consider not just $ but also human side, getting started on your estate plan
Lesson 2 Costs of settling an estate
Lesson 3 How you own your property affects estate planning and property transfer
Lesson 4 Wills, what if no will, Power of Attorney for Health Care and Living Wills
Lesson 5 Letter of Instruction
Lesson 6 Life Insurance
Lesson 7 Trusts
Lesson 8 Giving as estate planning tool, to heirs or charity
Lesson 9 Using equity in home/farm? – reverse mortgage, life estate
Lesson 10 Nursing Home Dilemma
Lesson 11 Medical Insurance, Medicare and Medicaid
Lesson 12 Generation Skipping Trust, Limited Liability Co., Conservation Easement

Any of the above will allow you to learn the details and gain valuable insights on estate planning in the comfort of your home.

To enroll, send your name, address (Email address if you choose the sending by Email option) and check to Russell Cunningham, Letter Study, 7269 Sawmill Road, Dublin, OH 43016. This course can save you money, but the main benefit is that you will be more at ease with estate planning, thus more willing to proceed with your plan.

Farmland Rental Agreement Guidelines

(click here to view PDF version)

In Ohio , the majority of farmland is rented according to the USDA Census of Agriculture. This means that the vast majority of farmers are renting to expand their operations and therefore, often times landlords have a huge investment in the success of their farmer/tenants. While this farmland is rented, it is often rented with non-formalized agreements. Many times the deal for the rent may be consummated over the backend of a pickup truck and a simple handshake in the farm yard. This arrangement, while being socially acceptable within the farming community often leads to significant misunderstandings when misfortune makes a change in either the landlord or tenant necessary. This often leaves the survivor/heirs of either party with a great deal of frustration, anxiety, hard feelings and, sometimes, litigation. Most of these problems could be easily avoided if the landlord and tenant had negotiated a formalized written rental agreement.

Written rental agreements form the foundation for clear understanding and expectations on the part of both landlord and tenant. The parties agree and formalize their agreement up front and in writing. The advantage to this, is that in the case of misfortune the survivors/heirs of either party know what the game plan has been because the written document survives and clearly defines the roles/expectations of each party. This clear understanding of the rental agreement means that often times the rental agreement can survive the change in either the landlord or tenant and move to the next generation of owners and tenants. This alleviates a lot of misunderstandings and allows for a smooth transition without sacrificing any particular business entity.

The written rental agreement should be recorded in the county recorder’s office and there are two ways to record this agreement. One is to actually file and record the original rental agreement. However, most landlords and tenants do not want all of the details of their rental agreement known as public knowledge. This leaves the other option as a “Memorandum of Lease” which can be filed at the county recorder’s office. A Memorandum of Lease will provide only enough information about the agreement to let a future buyer know that this land is under lease, the names of the parties involved, a legal description of the land and the lease period. The Memorandum of Lease should be notarized and recorded in the county where the land is situated and this will prove to be a definite asset to both landlord and tenant in the future.

This written lease and the recording of the lease forms the basis for developing a strong landlord/tenant relationship. It is in the best interests of both parties that the landlord/tenant relationship be a strong one based upon clear expectations and trust of both parties. Ohio State University Extension has a Fact Sheet entitled “Managing Landlord-Tenant Relationships: A Strategic Perspective” which is located at http://ohioline.osu.edu/fr-fact/pdf/0004.pdf . For further information and a better understanding of what it takes to develop these strong landlord/tenant relationships, please refer to this Fact Sheet.

While you may be new to writing a formalized lease agreement, once again Ohio State University Extension has a Fact Sheet entitled “Legal and Management Aspects of Ohio Farmland Leases.” This Fact Sheet covers many of the things that are needed in a written lease and is available at http://ohioline.osu.edu/fr-fact/pdf/0001.pdf . In addition Ohio State University Extension has a Fact Sheet entitled “Farm Rental Agreement Checklist” available at http://ohioline.osu.edu/fr-fact/pdf/0003.pdf . For those landlords who may be retired, it is important that you fully understand the tax implications of renting farmland. To help with that our Fact Sheet entitled “Tax Issues for Farm Rental Agreements” is available at http://ohioline.osu.edu/fr-fact/pdf/0006.pdf .

All of this leads us to the bottom line and that is how much should I charge or pay for cash rent? The answer to that is “It depends.” It depends on a whole host of variables that are different for each and every farm, landlord, and tenant. Those variables can be the desired income/expense the comfort with the landlord/tenant, what are the neighbors getting or paying for cash rent, and certainly the financial condition of the landlord and/or tenant affect cash rent figures. Obviously, there are many other variables that depend upon the individual situation. That being said, there are certainly customs and norms within a community that are fairly well known and that many people follow and adhere to.

Recently completed research by extension educators, Chris Bruynis, Bill Hudson and extension specialist, Matt Roberts has developed a cash rent calculator that includes five variables. Those variables are: 5-year olympic average corn yield, 5-year olympic average soybean yield, whether wheat is included in the rotation, the type of field drainage and the relationship of the tenant to the landlord. Those five factors can assist in determining the amount of cash rent at which the discussion concerning the final cash rent can start. That discussion will include many of the variables that are outside the cash rent calculator that was developed. The cash rent calculator is located at http://aede.osu.edu/people/moore.301/Rent%20Calculator/rent_calculator.htm . Please refer to this calculator as a way of determining whether or not you need to begin discussions concerning a change in the amount of cash rent either charged or paid. Information from Iowa , while not completely identical to Ohio , can possibly assist you in further refining your thoughts. The Iowa information is available at http://222.extension.iastate.edu/agdm/wholefarm/html/c2-20.html .

Your final determination of cash rent should be based upon the best information you can find relative to determining a fair cash rent and developing an agreement that is acceptable to both parties. One final note is that as a written rental agreement is developed, an attorney can not represent both parties and both parties should have legal representation. It is completely reasonable for one party to develop the rental agreement and the other party to have his/her attorney review the document before the final agreement is signed.

All of the documents sited with website addresses are available at local county extension offices. If you prefer a hard copy and do not have the internet connection, please consider going to your local county OSU Extension office and they will be glad to help you out.

What Alternative Energy Options are Available for Farms?

With increasing energy costs, questions about alternative energy have been increasing.  Unfortunately, there are not many easy answers.  In examining alternative energy for farm application, one first needs to assess what energy resources are available, where the energy is needed and how much energy is needed.  For stationary uses such as building, alternative energy is more practical than for non-stationary uses such as tractors.  If the energy need lends itself well to non-petroleum sources of energy and the time horizon is long enough to justify the investment, there are some choices available.  Check out the USDA Alternative Farming Systems Information Center ‘s web site at http://www.nal.usda.gov/afsic/altenergy/altenergy.htm and the links contained on their page.

AEDE Research Update – Pay for Better Weather Reports?

If farmers “believe” long-range weather reports, they might be willing to pay. Recent analysis suggests 47% of Ohio farmers would use weather forecasts they could be confident of for decision-making. Results suggest that farmers would gain from the improved forecasts, potentially by being better equipped to use existing risk reducing technology like crop insurance or genetically altered seeds. A report by Brent Sohngen, Mark Tucker and Ted Napier at Ohio State indicates that higher confidence in long-term forecasts of temperature and precipitation would mean wide-spread adoption for farm production decisions, but not be as wide-spread as the current use of short-term forecasts. The researchers’ models found farmers’ willingness to pay for improved weather information works out to a value of about 15-cents per acre of cropland in Ohio .  Link to the research report at http://aede.osu.edu/resources/docs/pdf/45D8ECD1-60F8-48E1-B5D8C49E0AA8FA46.pdf .

Soybeans receive good news: Start of a Rally or Dead Cat Bounce?

After falling mercilessly since the April peak at nearly $8.00, new crop soybeans received some welcome news that the USDA is projecting a smaller harvest than the market had been expecting, 2.877bn versus the average trade guess of 2.965bn bushels. Predictably, soybeans opened strongly, and closed up 30c for the day. But while soybean prices have had a rough spring and summer, does this 90m bushel revision lend enough fire power to turn around the negative attitudes toward soybeans, and the grains complex in general?  This market report was released on August 20, 2004 .  Read the full article and link Matt Roberts’ home page at http://aede.osu.edu/people/roberts.628/extension/GrainsNewsletters.htm

“From Bookkeeper to Chief Financial Officer” workshops to be held this Fall in Northeast Ohio

OSU Extension is pleased to announce that a three-day workshop series will be held in six locations in northeast Ohio during the fall of 2004.  Farm bookkeeping has traditionally been regarded as a process for calculating income tax liabilities with the goal of minimizing tax payments.  This workshop series will teach participants about different bookkeeping methods, income tax planning, enterprise budgets, balance sheets, credit card debt, income statements, and benchmarking.  By collecting and using minimal additional information, participants will be better equipped to make informed decisions which could positively affect the profitability and sustainability of their farm.

These sessions will be held during the week of November 15, December 6, and December 13.  Be watching for the October issue of the Ohio Ag Manager for complete registration details.  Don’t miss this chance to improve your management abilities!

Hogs: Huge Slaughter Levels Absorbed by Increased Foreign Sales

The volume of US hogs slaughtered during 2004 is well ahead of 2003 and, for only the second time in recorded history, weekly slaughter during August will eclipse the 2 million head threshold. As of mid-August the U.S. had slaughtered 1.7 million more hogs during 2004 than during the same period last year. And yet, the roof hasn’t collapsed (though there are a few soft spots). Why? See full report and link Brian Roe’s home page at http://aede.osu.edu/people/roe.30/livehome.htm .