Estate blunder #1: Leaving business assets to individuals who are not in the business.
When dad died, the majority of his assets were held in a C-type corporation. Since he wanted the family to stay together, he left 51 percent of the stock to the two farming heirs and 49 percent to the other family members not involved in the business. Dad assumed that giving control of the corporation to the farming heirs meant they would be able to run the ship and make the decisions that were necessary to preserve the farm.
However, what he failed to consider is that the non-farming heirs had an investment that yielded no return unless their brothers decided to declare dividends. The end result? After a lengthy court battle, the two sides finally negotiated a settlement for the farming heirs to buy out the non-farming heirs. However, the battle destroyed the family.
How could this blunder have been avoided? Two options come to mind:
Convert the C-type corporation to an S-corporation before or at death. This would allow income to flow to the non-farming heirs. While the farming heirs would still have to deal with the non-farming heirs, the non-farming heirs would at least be receiving a return on their investment.
Leave all of the corporate stock to the farming heirs, but require payment of a specified amount to the non-farming heirs over a period of time. This approach provides cash to the non-farming heirs for their inheritance, but avoids having the non-farming heirs in the business structure. This alternative would work for any type of business structure.
Estate blunder #2: Giving one person control of the business without accountability.
In this case, Mom and Dad left the farm to their three sons. In addition, they gave the farming son a long-term lease on the operation in order to protect him from losing the ground through the forced sale of real estate by the non-farming heirs. The farming son also was made the executor of the parents’ estate.
Unfortunately, the brother who operated the farm was an incompetent farmer. When I reviewed the business records, I discovered that the family had more than $100,000 in certificates of deposit and more than 1,000 acres of land without any debt when the parents died. Ten years later, the certificates of deposit were gone and the farm had acquired some substantial debt.
The end result? The two non-farming heirs filed suit. They successfully terminated the brother’s tenancy to save what was left of the farm. The farm was divided into three separate sections. The farming son received less land because his poor management practices had cost the entire family a great deal of money.
One of the basic rules of agricultural estate planning has always been to protect the farming heir. However, that must be balanced to protect the financial interests of the rest of the family, too.
Here are two possible solutions:
Stipulate that the lease will terminate if a certain chain-of-events were to occur.
Require a minimum rate of return be paid to the non-farming heirs.
Take some time to review your estate plan. The problems mentioned here occur all too often and can easily be avoided. If you really want your family to stay together, put together a fair plan and have that plan reviewed by competent advisers.
Darrell Dunteman is an agricultural financial consultant and accountant with offices in Bushnell, Ill.