Dear Michael: We had heard that using a life estate is the best way to protect our property from long-term care costs. We have three children who are currently not farming; however, our son recently had his hours cut due to COVID-19 and now he wants to come back to the family farm and farm with us. We are reaching the age where we have paid some debt down and we can afford to have two families on the farm; however, we would like to put the farmland into a deed for all three of our children. How do we handle this situation – split three ways?
Dear Split Three Ways – Over the years in my writing this column, I have never advocated putting your children into a joint ownership – especially with regards to land. If I could lock them in a room and have them make decisions, without talking to their spouse, it may work. However as soon as the spouses become involved, inevitably, there will be disagreement. One wants land to own the land, one will want to sell the land, and it can become a mess.
For your son coming back to the family farm, you want to make certain that his heart is in farming. If he is just coming back to make up wages, then keep him as a hired hand for his time there. If you discover that he and his family (spouse and children) absolutely love farming, then we need to come up with different ways to protect the family farm operation into the future.
Of course, this will not get the five-year Medicaid look back clock ticking if you must wait five years to determine if your son genuinely loves farming. You want to make a change now, so the property is protected in five years.
You can set up a conditional remainder deed for your children subject to your conditions. Or you can set up a life estate with you as the primary life estate owner and your son as the secondary life estate owner subject to certain conditions. He, of course, must still be farming at the time of your second death.
If this is his only asset needed for retirement, then we will have to work out an agreement where he can buy the other farmland shares from his siblings. In some cases, we have set up an agreement whereby all rents paid to you, during your lifetime, go towards the purchase price of farmland from his siblings.
In this agreement, at the time of your second death, all your children will receive their one third share however your son has the option of buying out the other children – subject to the fact that he or one of his children continues to farm. All rents paid to you during your lifetime would then go towards the predetermined value of the farmland at the time of your second death. If he cannot afford to buy the land at that time, he may still pay rent to the other two until such time as he can afford to buy the property.
To accommodate all of this, you can either write this into the quit claim deed at the time of transfer to your children. As this is a conditional gift, they will have to sign the deed at the time of transfer to them agreeing to these conditions.
Another option is to create a partnership agreement between the three children as to how they will handle this property in the future that is a separate freestanding legal document. The children can meet and discuss how they want to handle things in the future, then have an attorney draft an agreement today, but they would all have to abide by it in the future.
Of course, this agreement would have to handle all kinds of different scenarios. It also needs to be set up before you transfer the deed, because you will not have any leverage on your children after the deed is already in their name.
What happens if your son stops farming? What happens if none of his children are interested in farming? What happens if he creates enough farm assets on his own due to low rents charged by the parents during his farming career and now has sufficient assets to retire comfortably?
It is best in these cases that the entire family meet with a qualified farm estate counselor who can explain all the different avenues towards coming up with an agreement that benefits everyone. This is often a difficult discussion between family members, but it needs to happen.
The conflict that might arise now is nothing compared to the conflict at the time of your death without an agreement. Set up an appointment now.
Michael Baron provides estate planning guidance at Great Plains Diversified Services in Bismarck, North Dakota. Email him at KeeptheFamilyFarm@gmail.com.