We are getting up in years and we have a large farm – rented out – and none of our children are interested in farming. We are old enough now to have married grandchildren and realize how far and wide our estate might be spread someday with children, grandchildren and spouses, and now great grandchildren. We were also fortunate enough to have income from oil and we have been sharing this with our children, who in turn, have been sharing with their children. Right now, we are in charge of the farm income and the oil income. But who do we pass this torch onto when we are gone? It keeps me up at night thinking about all the possible issues after we die.
– Up All Night
Dear Up All Night:
Obviously, you two have lived a long and interesting life. How wonderful to see your union leading to children, grandchildren and great grandchildren. I'm sure you have stories to tell of times where you could barely make ends meet, and you had to do extraordinary things in order to keep family and farm together. Most success stories, like yours, have many instances where the 'average' person would have given up, but you persevered and it's all led to this.
For many people who have crossed the threshold of security with assets such as yours, this has led to new worries. Who do we leave in charge of this? Who do we trust will make objective decisions? How can we make certain our wishes are followed after our deaths?
The other thing to consider here are the class of assets. You have basically two types – land and oil income.
Most people are realizing farmland has been one of the finest investments to acquire and own over the last thirty years. It's an asset that produces six to seven percent income and lately has had capital growth of fifteen to twenty percent per year. Ultimately, in our paper world, people have finally realized paper profits and gains can disappear, while land survives.
As such, people would like to make certain this land doesn't get mishandled in the future. It's awfully hard to explain to a thirty-five year old heir that 'Yes, you can sell the quarter for four hundred thousand, but the twenty thousand a year in income you are receiving is far, far better than anything you can do with the money'. This heir is thinking 'I can buy this, and buy that, and have this, and I can't have all those things unless I get the whole four hundred thousand'. That's true, but ten years from now, my guess is all of the things he buys today will be gone and he'll have lost everything – not to mention the capital gains and income he lost on the land itself.
Oil income is another slippery slope – pardon the pun. Here you have an asset that does nothing but push out cash and this cash gets deposited in a main account until it is distributed to who you want to receive this money. Right now this is your account and you make the decisions.
What happens when this cash account passes on to the next generation? Who will be in charge of making these decisions? Who can I trust to handle this much money without being tempted?
If I name a child as a successor and put them in charge of all of this income, there is no oversight body who watches over this child or children to make certain they are making the proper decisions with this cash. There are no 'will' police who run around checking to make sure your successors are doing what they are supposed to be doing. When you put this much cash into the hands of a select few and charge them with the responsibility of doling out this money over years and years, without any oversight on the operation, one of three things is going to happen.
Either the child or children does everything perfectly, but someone is disappointed they are not in charge and feel things could be done 'better' – and the fight is on.
Two, the child who is in charge starts noticing all of this cash floating in and out with no checks and balances or people looking over their shoulder, and gives into temptation.
Three, the child or children you leave in charge either decide to quit, become unable to perform these duties or die – leaving these duties to someone else – someone else you may not like handling these duties.
Whether or not you have farm and oil income or just valuable farmland you don't want sold, you may want to consider a Legacy trust to handle your assets. In the next column, I'll cover some of the in's and out's of such a trust and some ideas of who should be left in charge of this trust after your death.