In the February issue of Wheat Life, I discussed what kind of entity farm ground should be held in. I have had several people follow up, asking how to transition their farm ground without setting up an entity like an LLC. While I believe an LLC has several advantages, it is also still possible to accomplish a smooth transition through one’s estate plan. In Washington, a person’s estate plan should consist primarily of a last will and testament, but some people could set up a revocable living trust; both documents can contain all of the following common scenarios.
“I don’t want my kids to ever sell the ground!”
Option A. Devalue the ground to disincentivize a future sale. In this scenario, a parent with multiple children can give the ground to their children equally with options to purchase each other’s interests at below market value rates. This could be accomplished in one’s will by 1) actually picking a price per acre; 2) using county assessed value or 3) having it appraised and setting a discount of 40 percent of the appraised value, for example. The positive outcomes to this include kids not fighting or expressing their anger at each other over the discounted value (as you set the price, and you now are dead). It also allows a sibling to potentially justify buying a sibling out and keeping the ground in the family.
Some negative consequences of these include “the last one wins concept.” When the last child buys his or her siblings out at a reduced rate and then sells it all to the neighbor at market value, the siblings may not show up for Thanksgiving and may not visit your gravesite as much as you would have liked.
Option B. Give it to the grandkids. Many people will give only a “life estate” or income interest to their children and then the remaining interest to their grandchildren. The positive outcomes to this is that the kids get a guaranteed income for their lives and the land is protected for at least one more generation. The negative consequences are that the kids end up with a much smaller benefit than their own kids who maybe never even lived on the property. The grandkids could be pressured by their parents to sell their interest during their parent’s lifetime and thus cause unintended strife in their own families.
“What happens if my kids get divorced?”
Divorce in Washington can be complicated, and there is not enough room in this article to discuss all the finer points. It should be noted that in many cases, family farm ground is treated as a separate property asset and is kept in the family line to the best of a court’s ability.
Option A. Put the ground in an LLC. An LLC, as mentioned previously, can provide very specific buyout provisions for ex-in-laws. This can be set up in a way that can help mitigate many, but not all, potential issues in a divorce. It is important to make sure you understand what your LLC agreement says, and how potential scenarios would work out.
Option B. Don’t give the ground to your children outright. Similar to Option B in the first scenario, this could protect the ground from a divorce but probably not at the following generation.
Option C. Embrace arranged marriages. If you have significant farm ground holdings, I have three young children that are currently not spoken for…
“I don’t want the government to get my ground.”
Typically this is fear on two opposite sides of the spectrum. One is having an estate tax issue (for 2022, it’s $2,193,000 per person). Or the opposite concern of running out of money and needing long-term care.
As to the first concern of estate taxes, while it is never fun to pay estate taxes, it is important to note that Washington does have an estate tax deduction for farms. There are several requirements that have to be met, but the general requirements are as follows:
- The farm property must pass or be acquired by a qualified heir.
- The farm property must have been used for farming purposes at the time of the decedent’s death.
- The decedent or a member of the family must have used the farm property at the time of the decedent’s death.
- The farm property must make up at least 50 percent of the total estate’s adjusted gross value.
Obviously, there are several more considerations, and the farm deduction is not something that should just be assumed in one’s estate plan. Finally, long-term care planning is something that should be done with an advisor that deals with Medicaid planning on a regular basis. It is not something that should be done without an attorney who understands it.
Hopefully this article gives you something to think about when considering how to pass your farm ground to the next generation. Many other factors can and should be considered. The key is to start the process before it is too late.
John M. Kragt is an attorney with the law firm of McGuire, DeWulf, Kragt & Johnson, P.S. He and his partners work with farm families and other agricultural businesses for the majority of their needs throughout Eastern Washington. The firm has offices in Davenport, Odessa, Ritzville, Colfax, St. John, Rosalia and Fairfield.